KANEB PIPE LINE PARTNERS L P, 424B1, 1995-09-19

KANEB PIPE LINE PARTNERS L P
424B1, 1995-09-19
PIPE LINES (NO NATURAL GAS)

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<PAGE> 1
Filed Pursuant to Rule 424(b)(1)
Registration No. 033-59373
PROSPECTUS
3,500,000 UNITS
KANEB LOGO
KANEB PIPE LINE PARTNERS, L.P.
REPRESENTING PREFERENCE LIMITED PARTNER INTERESTS

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

All 3,500,000 units representing preference limited partner interests
("Preference Units") in Kaneb Pipe Line Partners, L.P., a Delaware limited
partnership (the "Partnership"), offered hereby are being sold by KPP, L.P., a
Delaware limited partnership ("KPPLP"), of which wholly owned corporate
subsidiaries of Kaneb Pipe Line Company, a Delaware corporation ("KPL" or the
"General Partner"), are the sole partners. KPL is a wholly owned subsidiary of
Kaneb Services, Inc., a Delaware corporation ("Kaneb"). KPL serves as the
general partner of the Partnership. The Partnership will not receive any of the
proceeds from the sale of the Preference Units by KPPLP. The Preference Units
offered hereby will represent an approximate 21.4% interest as limited partner
in the Partnership. After the offering, KPL and its affiliates will own an
aggregate 32.4% interest as limited partners in the Partnership. The foregoing
percentages assume that the Underwriters' over-allotment option is not
exercised.
(Cover page continued on following page)

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

PURCHASERS OF PREFERENCE UNITS SHOULD CONSIDER EACH OF THE FACTORS
DESCRIBED UNDER "RISK FACTORS" BEGINNING ON PAGE 18 IN EVALUATING AN INVESTMENT
IN THE PARTNERSHIP. SUCH FACTORS INCLUDE BUT ARE NOT LIMITED TO THE FOLLOWING:

-- DISTRIBUTIONS OF AVAILABLE CASH TO THE HOLDERS OF THE PREFERENCE UNITS DURING
THE PREFERENCE PERIOD ARE SUBORDINATED TO THE RIGHT OF THE HOLDERS OF THE
SENIOR PREFERENCE UNITS TO RECEIVE THE MINIMUM QUARTERLY DISTRIBUTION, PLUS
ARREARAGES, IF ANY, IN SUCH DISTRIBUTIONS FOR PRIOR QUARTERS.

-- THE PARTNERSHIP'S INTERSTATE COMMON CARRIER PIPELINE OPERATIONS ARE SUBJECT
TO RATE REGULATION BY THE FERC.

-- THE PARTNERSHIP'S PIPELINE BUSINESS DEPENDS ON DEMAND FOR REFINED PETROLEUM
PRODUCTS IN THE MARKETS IT SERVES AND THE ABILITY AND WILLINGNESS OF SHIPPERS
TO SUPPLY SUCH DEMAND THROUGH ITS PIPELINES.

-- HOLDERS OF PREFERENCE UNITS HAVE LIMITED VOTING RIGHTS, AND KPL AND ITS
AFFILIATES WILL MANAGE AND CONTROL THE PARTNERSHIP.

-- KPL AND ITS AFFILIATES MAY HAVE CONFLICTS OF INTEREST WITH THE PARTNERSHIP
AND WITH HOLDERS OF PREFERENCE UNITS.

-- THE PARTNERSHIP AGREEMENT LIMITS THE LIABILITY OF THE GENERAL PARTNER AND
RELIEVES IT OF CERTAIN FIDUCIARY AND OTHER DUTIES IT WOULD OTHERWISE HAVE
UNDER DELAWARE PARTNERSHIP LAW.

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

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
=================================================================================================
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) KPPLP(2)
<S> <C> <C> <C>
-------------------------------------------------------------------------------------------------
Per Preference Unit $22.50 $1.13 $21.37
-------------------------------------------------------------------------------------------------
Total(3) $78,750,000 $3,955,000 $74,795,000
=================================================================================================
</TABLE>

(1) For information regarding indemnification of the Underwriters, see
"Underwriting".

(2) Before deducting expenses estimated at $340,000 payable by KPL.

(3) KPPLP has granted to the Underwriters a 30-day option to purchase up to
325,000 additional Preference Units solely to cover over-allotments, if
any. See "Underwriting". If such option is exercised in full, the total
Price to Public, Underwriting Discounts and Commissions and Proceeds to
KPPLP will be $86,062,500, $4,322,250 and $81,740,250, respectively.

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

The Preference Units are being offered by the several Underwriters named
herein, subject to prior sale, when, as and if accepted by them and subject to
certain conditions. It is expected that certificates for the Preference Units
offered hereby will be available for delivery on or about September 22, 1995, at
the offices of Smith Barney Inc., 388 Greenwich Street, New York, New York
10013.
------------------

SMITH BARNEY INC. PAINEWEBBER INCORPORATED

September 18, 1995
<PAGE> 2
(Continuation of Cover Page)

Distributions of Available Cash by the Partnership generally will be
made 98% to the limited partners and 2% to the General Partner. During the
Preference Period, quarterly distributions of Available Cash from Partnership
operations in the amount of $0.55 per unit (the "Minimum Quarterly
Distribution") will be made to the holders of the Senior Preference Units, of
which 7,250,000 are outstanding, before any such distributions are made to the
holders of Preference Units, Preference B Units or Common Units. During the
Preference Period, such distributions to the holders of Common Units will be
subordinated to the extent necessary to permit payment of the Minimum Quarterly
Distribution to the holders of each of the other classes of LP Units. The
Preference Period commenced upon the formation of the Partnership and, in
general, will continue indefinitely until the Minimum Quarterly Distribution
has been paid to holders of all LP Units for 12 consecutive quarters and
certain other conditions are met. The holders of the Common Units have not
been paid the full amount of the Minimum Quarterly Distribution in any quarter
since the formation of the Partnership. Therefore, such condition has not yet
been met in any quarter. Upon expiration of the Preference Period, all
distinctions between the Senior Preference Units, the Preference Units, the
Preference B Units and the Common Units will automatically cease. See "Cash
Distributions".

In addition, for each quarter through the quarter ending September 30,
1997, the holders of the Preference Units are entitled to receive the Minimum
Quarterly Distribution for such quarter, plus any arrearages in the payment of
the Minimum Quarterly Distribution for prior quarters, before any distribution
of Available Cash from Partnership operations is made to holders of Preference
B Units for such quarter. After such time, the Preference B Units will be
deemed to be Preference Units for purposes of determining the priority and
amount of distributions of Available Cash on the Preference Units and
Preference B Units.

Prior to this offering there has been no public market for the
Preference Units. The Preference Units have been approved for listing on the
New York Stock Exchange subject to official notice of issuance. For the
factors to be considered in determining the initial public offering price, see
"Underwriting".

___________________

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE
PREFERENCE UNITS OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK
STOCK EXCHANGE, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING,
IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE> 3
KANEB PIPE LINE PARTNERS, L.P.

PARTNERSHIP FACILITIES

[map]

Dallas, Texas is the headquarters for the Partnership and its
terminaling operations, and Wichita, Kansas is the headquarters for the
Partnership's pipeline operations.

2
<PAGE> 4
TABLE OF CONTENTS

<TABLE>
<S> <C>
AVAILABLE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

INCORPORATION OF CERTAIN DOCUMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

PROSPECTUS SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Kaneb Pipe Line Partners, L.P. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Business Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
The Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Partnership Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Summary Historical and Pro Forma Financial and Operating Data . . . . . . . . . . . . . . . . . . . . . . . . . 12
Cash Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Tax Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Considerations Relating to the Partnership's Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Considerations Relating to Partnership Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Tax Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

CAPITALIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

DISTRIBUTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

SELECTED HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . 34
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Pipeline Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Terminaling Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Liquidity and Capital Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

BUSINESS AND PROPERTIES OF THE PARTNERSHIP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Products Pipeline Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Liquids Terminaling Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Capital Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Safety Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

CASH DISTRIBUTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Quarterly Distributions of Available Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Distributions of Cash from Interim Capital Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Distribution Restriction on Preference Units, Preference B Units and Common Units . . . . . . . . . . . . . . . 65
Exchange of Preference Units and Preference B Units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Exchange of Preference Units and Preference B Units for Senior Preference Units . . . . . . . . . . . . . . . . 66
Status of LP Units at End of Preference Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
Adjustment of Minimum Quarterly Distribution and Target Distribution Levels . . . . . . . . . . . . . . . . . . . 67
Distributions of Cash Upon Liquidation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67

CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
Fiduciary Responsibility of the General Partner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72

DESCRIPTION OF THE PREFERENCE UNITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
Transfer of Preference Units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

DESCRIPTION OF THE PARTNERSHIP AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
Organization and Duration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
Power of Attorney . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
Restrictions on Authority of the General Partner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
Withdrawal or Removal of the General Partner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
Status as Limited Partner or Assignee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
Non-citizen Assignees; Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Issuance of Additional LP Units and Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Limited Call Right . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Amendment of Partnership Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Meetings; Voting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
Limited Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
Books and Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
Right to Inspect Partnership Books and Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
Termination, Dissolution and Liquidation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83

FEDERAL INCOME TAX CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
Partnership Status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
Partner Status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
Tax Consequences of Preference Unit Ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
Allocation of Partnership Income, Gain, Loss and Deduction . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
Tax Treatment of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
Uniformity of Preference Units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
Disposition of Preference Units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
Administrative Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98

STATE AND OTHER TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100

INVESTMENT IN THE PARTNERSHIP BY EMPLOYEE BENEFIT PLANS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101

SELLING UNITHOLDER AND LP UNITS ELIGIBLE FOR FUTURE SALE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102

UNDERWRITING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103

LEGAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105

EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105

GLOSSARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105

INDEX TO FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
</TABLE>

3
<PAGE> 5
AVAILABLE INFORMATION

The Partnership has filed with the Securities and Exchange Commission
(the "SEC") in Washington, D.C., a Registration Statement on Form S-3 (the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the securities offered by this Prospectus.
Certain of the information contained in the Registration Statement is omitted
from this Prospectus, and reference is hereby made to the Registration
Statement and exhibits and schedules relating thereto for further information
with respect to the Partnership and the securities offered by this Prospectus.
The Partnership is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the SEC.
Such reports, proxy statements and other information are available for
inspection at, and copies of such materials may be obtained upon payment of the
fees prescribed therefor by the rules and regulations of the SEC from, the SEC
at its principal offices located at Judiciary Plaza, 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549, and at the Regional Offices of the SEC
located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511; and at 7 World Trade Center, New York, New York 10048. In
addition, the Senior Preference Units of the Partnership are traded on the New
York Stock Exchange, and such reports, proxy statements and other information
may be inspected at the offices of the New York Stock Exchange, Inc., 20 Broad
Street, New York, New York 10005.

INCORPORATION OF CERTAIN DOCUMENTS

The Partnership's Annual Report on Form 10-K (Commission file No.
1-10311) for the fiscal year ended December 31, 1994, Current Report on Form
8-K dated March 13, 1995, Current Report on Form 8-K/A dated August 28, 1995
for the West Pipeline acquisition, Quarterly Report on Form 10-Q for the fiscal
quarter ended March 31, 1995, Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 1995, and Current Report on Form 8-K dated August 29,
1995 for the Steuart acquisition are hereby incorporated herein by reference.

All documents filed by the Partnership pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act, after the date of this Prospectus and
prior to the termination of the offering of the securities offered by this
Prospectus, shall be deemed to be incorporated by reference in this Prospectus
and be a part hereof from the date of filing of such documents. Any statement
contained in a document incorporated or deemed to be incorporated by reference
in this Prospectus shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained in this Prospectus, or
in any other subsequently filed document that also is or is deemed to be
incorporated by reference, modifies or replaces such statement.

The Partnership undertakes to provide without charge to each person to
whom a copy of this Prospectus has been delivered, upon written or oral request
of any such person, a copy of any or all of the documents incorporated by
reference herein, other than exhibits to such documents, unless such exhibits
are specifically incorporated by reference into the information that this
Prospectus incorporates. Written or oral requests for such copies should be
directed to: Kaneb Pipe Line Partners, L.P., 2435 North Central Expressway,
Richardson, Texas 75080, Attention: Sheila Turner, telephone (214) 699-4000.

4
<PAGE> 6

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more
detailed information and financial statements and notes appearing elsewhere in
this Prospectus. Unless the context otherwise requires, references herein to
the Partnership include the Partnership and its operating subsidiaries, and
descriptions herein of the interests of the partners in the Partnership and its
operating subsidiaries and in distributions by the Partnership are stated on a
combined basis. Unless otherwise indicated, all information in this Prospectus
assumes that the over-allotment option granted to the Underwriters is not
exercised. See "Underwriting". See "Glossary" for definitions of certain
terms used herein.

KANEB PIPE LINE PARTNERS, L.P.

GENERAL

Kaneb Pipe Line Partners, L.P. (the "Partnership") is a publicly held
Delaware limited partnership engaged through operating subsidiaries in the
refined petroleum products pipeline business and the terminaling of petroleum
products and specialty liquids. For the year ended December 31, 1994, the
Partnership's pipeline and terminaling businesses accounted for approximately
60% and 40%, respectively, of the Partnership's revenues and approximately 65%
and 35%, respectively, of the Partnership's operating income. For the year
ended December 31, 1994, on a pro forma basis giving effect to the acquisition
of the West Pipeline (as discussed below), the Partnership's pipeline and
terminaling businesses would have accounted for approximately 65% and 35%,
respectively, of the Partnership's revenues and approximately 70% and 30%,
respectively, of the Partnership's operating income. For the year ended
December 31, 1994, on a pro forma basis giving effect to the acquisition of the
West Pipeline and the proposed acquisition of Steuart Petroleum Company's
terminaling assets (as discussed below), the Partnership's pipeline and
terminaling businesses would have accounted for approximately 51% and 49%,
respectively, of the Partnership's revenues and approximately 55% and 45%,
respectively, of the Partnership's operating income. The closing of the
Steuart Petroleum acquisition is conditioned upon satisfactory completion of a
due diligence investigation, receipt of all necessary consents and approvals,
the execution of certain throughput agreements and certain other conditions.
There can be no assurance that the acquisition will be consummated or, if
consummated, that the terms of the acquisition will not vary materially from
those described herein. See "--Recent Developments", "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources" and "Business and Properties of the Partnership--Liquids
Terminaling Business--Recent Developments".

The Partnership's pipeline business consists primarily of the
transportation, as a common carrier, of refined petroleum products in Kansas,
Iowa, Nebraska, South Dakota, North Dakota, Wyoming and Colorado. The
Partnership owns a 2,075 mile integrated pipeline system (the "East Pipeline")
that extends through Kansas, Iowa, Nebraska, South Dakota and North Dakota and
a 550 mile integrated pipeline system (the "West Pipeline"), acquired in
February 1995, that extends through Wyoming, South Dakota and Colorado. The
East Pipeline and the West Pipeline are collectively referred to as the
"Pipelines". The Pipelines primarily transport gasoline, diesel oil, fuel oil
and propane. The products are transported from refineries connected to the
Pipelines, directly or through other pipelines, to agricultural users,
railroads and wholesale customers in the states in which the Pipelines are
located and in portions of other states. During 1994 on a pro forma basis
giving effect to the acquisition of the West Pipeline, the Partnership shipped
over 74.3 million barrels of refined petroleum products. Substantially all of
the Pipelines' operations constitute common carrier operations that are subject
to federal or state tariff regulation.

5
<PAGE> 7

The Partnership's business of terminaling petroleum products and
specialty liquids is conducted under the name ST Services ("ST"). ST is one of
the largest independent terminaling companies in the United States. ST
operates 23 terminals in 16 states with an aggregate tankage capacity of
approximately 7.7 million barrels at strategic points in the United States.
ST's three largest terminal facilities are located in Texas City, Texas,
Westwego, Louisiana and Baltimore, Maryland. The Texas City terminal is a
deep-water facility primarily serving the Gulf Coast petrochemical industry.
The Westwego terminal, purchased in June 1994 and located on the West bank of
the Mississippi River across from New Orleans, handles molasses, animal and
vegetable oil and fats, fertilizer, latex and caustic solutions. The Baltimore
terminal is the largest independent terminal facility in the Baltimore area and
handles asphalt, fructose, latex, caustic solutions and other liquids. ST also
operates 20 inland terminal facilities handling primarily petroleum products.

RECENT DEVELOPMENTS

On August 27, 1995, the Partnership signed definitive purchase
agreements (the "Asset Purchase Agreements") to acquire the liquids terminaling
assets of Steuart Petroleum Company and certain of its affiliates
(collectively, "Steuart"). It is anticipated that the acquisition price of
approximately $82 million will be financed by bank borrowings. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources". The Steuart terminaling assets
consist of seven petroleum products terminals located in the District of
Columbia, Florida, Georgia, Maryland and Virginia and the pipeline and
terminaling services to Andrews Air Force Base in Maryland. The terminals have
in the aggregate approximately 9 million barrels of storage capacity in 87
tanks. For the year ended December 31, 1994, on a pro forma basis giving
effect to the acquisition of the West Pipeline and the proposed acquisition of
Steuart's terminaling assets, revenues generated by the assets to be acquired
from Steuart would have accounted for approximately 22% of the Partnership's
revenues. Strategically, the Steuart acquisition would give the Partnership a
significantly increased presence in the East Coast of the United States.
Steuart's two largest facilities are the Piney Point, Maryland terminal located
near Washington, D.C. and the Jacksonville terminal located in Jacksonville,
Florida. The Piney Point, Maryland terminal is the closest deep water
petroleum storage facility to Washington D.C. The Piney Point Maryland terminal
has 30 tanks with approximately 5.5 million barrels of aggregate storage
capacity, which are currently used to store petroleum products, consisting
primarily of fuel oil. The Jacksonville terminal has 28 tanks with
approximately 2.1 million barrels of aggregate storage capacity, which are
currently used to store petroleum products including gasoline, No. 2 oil, No. 6
oil, diesel, jet fuel, kerosene and bunker fuel. The Partnership's strategy
will be to increase utilization of existing storage capacity of the Steuart
terminal facilities and redirect some of its capacity to the storage of higher
revenue liquids, although there can be no assurance that such strategy will be
successfully implemented. Steuart conducts its business under a mix of
long-term and short-term contracts. The Partnership intends to pursue
opportunities to cross-market Steuart's capacity to ST's existing customer
base.

The closing of the Steuart acquisition is conditioned upon
satisfactory completion of a due diligence investigation, receipt of all
necessary consents and approvals, the execution of certain throughput
agreements and certain other conditions. If all conditions to closing are
satisfied, it is anticipated that the Partnership would acquire the Steuart
terminals prior to October 31, 1995. There can be no assurance, however, that
the acquisition will be consummated or, if consummated, that the terms of the
acquisition will not vary materially from those described herein. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Business and Properties of
the Partnership--Liquids Terminaling Business--Recent Developments".

6
<PAGE> 8

The Partnership acquired the West Pipeline in February 1995 from Wyco
Pipe Line Company, a company jointly owned by GATX Terminals Corporation and
Amoco Pipeline Company, for $27.1 million. The acquisition was financed by the
sale of $27 million of first mortgage notes due February 24, 2002, which bear
interest at the rate of 8.37% per annum. The West Pipeline consists of
approximately 550 miles of refined petroleum product pipeline and four truck
loading terminals located in Wyoming, South Dakota and Colorado. On a pro
forma basis for the year ended December 31, 1994, revenues generated by the
West Pipeline would have accounted for approximately 15% of the Partnership's
revenue. Strategically, the West Pipeline gives the Partnership access to the
higher growth gasoline markets in Denver and northeastern Colorado.

The principal executive offices of the Partnership are located at 2435
North Central Expressway, Richardson, Texas 75080, and its telephone number is
(214) 699-4000.

RISK FACTORS

See "Risk Factors" for a discussion of certain competitive and other
factors that should be considered in evaluating an investment in the Preference
Units. Such considerations include, but are not limited to, the following:

o Distributions of Available Cash to the holders of the Preference Units
during the Preference Period are subordinated to the right of the
holders of the Senior Preference Units to receive the Minimum Quarterly
Distribution, plus arrearages, if any, in such distributions for prior
quarters.
o The Partnership's interstate common carrier pipeline operations are
subject to rate regulation by the FERC.
o The Partnership's pipeline business depends on demand for refined
petroleum products in the markets it serves and the ability and
willingness of shippers to supply such demand through its pipelines.
o Holders of Preference Units have limited voting rights, and KPL and its
affiliates will manage and control the Partnership.
o KPL and its affiliates may have conflicts of interest with the
Partnership and with holders of Preference Units.
o The Partnership Agreement limits the liability of the General Partner
and relieves it of certain fiduciary and other duties it would otherwise
have under Delaware partnership law.

BUSINESS STRATEGY

The Partnership's strategy is to continue its expansion through
acquisitions in its terminaling and refined petroleum products pipeline
businesses and to seek cost reductions, increased utilization and increased
operating fees, primarily with respect to its acquired businesses. The
Partnership is continually evaluating new acquisition opportunities,
particularly in its terminaling business, although no assurance can be given
that the Partnership will succeed in implementing its business strategy or that
further acquisitions will be completed.

7
<PAGE> 9

THE OFFERING

<TABLE>
<S> <C>
Securities offered . . . . . . . . . . . . 3,500,000 Preference Units are being offered by KPPLP (3,825,000
Preference Units if the Underwriters' over-allotment option is
exercised in full). The Preference Units offered by this
Prospectus will represent an approximate 21.4% interest as
limited partner in the Partnership (23.3% if the Underwriters'
over-allotment option is exercised in full).

Preference Units to be Outstanding after
the Offering . . . . . . . . . . . . Upon the closing of the offering made by this Prospectus, KPL will
exchange with the Partnership 1,000,000 Preference Units for
an equal number of Preference B Units, resulting in an
aggregate of 4,650,000 Preference Units outstanding. The
purpose of such exchange is to cause 1,000,000 of the
Preference Units currently owned by KPL to be subordinate
through the quarter ending September 30, 1997, for purposes of
determining the priority and amount of distributions of
Available Cash, to the rights of the holders of Preference
Units. After giving effect to the sale of the Preference
Units offered by this Prospectus and such exchange, KPL and
its affiliates will own 1,150,000 Preference Units (825,000
Preference Units if the Underwriters' over-allotment option is
exercised in full) and 1,000,000 Preference B Units. After
giving effect to the sale of the Preference Units offered by
this Prospectus, KPL and its affiliates will own an aggregate
32.4% interest as limited partners in the Partnership (30.4%
if the Underwriters' over-allotment option is exercised in
full).
</TABLE>

8
<PAGE> 10

<TABLE>
<S> <C>
Priority of Distributions . . . . . . . . . During the Preference Period (see "Glossary"), quarterly
distributions of Available Cash (see "Glossary") from
Partnership operations in the amount of $0.55 per unit (the
"Minimum Quarterly Distribution") will be made to the holders
of the Senior Preference Units (see "Glossary") before any
such distributions are made to the holders of Preference
Units, Preference B Units or Common Units. During the
Preference Period, such distributions to the holders of Common
Units will be subordinated to the extent necessary to permit
payment of the Minimum Quarterly Distribution to the holders
of each of the other classes of LP Units. The Preference
Period commenced upon the formation of the Partnership and, in
general, will continue indefinitely until the Minimum
Quarterly Distribution has been paid to holders of all LP
Units for 12 consecutive quarters and certain other conditions
are met. See "Cash Distributions".

In addition, for each quarter through the quarter ending
September 30, 1997, the Minimum Quarterly Distribution will be
made to the holders of Preference Units before any such
distributions are made to the holders of Preference B Units.
After such time, the Preference B Units will be deemed to be
Preference Units for purposes of determining the priority and
amount of distributions of Available Cash on the Preference
Units and Preference B Units.

Use of proceeds . . . . . . . . . . . . . . All of the Preference Units offered by this Prospectus are being
sold by KPPLP. The Partnership will not receive any of the
proceeds from the sale of the Preference Units.

New York Stock Exchange symbol . . . . . . KPU
</TABLE>

9
<PAGE> 11

PARTNERSHIP STRUCTURE

The following chart shows the organizational structure of the
Partnership and its operating subsidiaries, after giving effect to the offering
made by this Prospectus and KPL's exchange of Preference Units for Preference B
Units:

[organizational chart]

_________
* Includes Units owned by affiliates of KPL.

10
<PAGE> 12

The general partner of the Partnership is Kaneb Pipe Line Company, a
Delaware corporation ("KPL") and a wholly owned subsidiary of Kaneb Services,
Inc., a Delaware corporation ("Kaneb"). KPL owns a combined 2% interest as
general partner of the Partnership and of Kaneb Pipe Line Operating
Partnership, L.P., a Delaware limited partnership ("KPOP"). After giving
effect to the offering made by this Prospectus and KPL's exchange of 1,000,000
Preference Units for an equal number of Preference B Units, the Partnership
will have outstanding 7,250,000 Senior Preference Units, 4,650,000 Preference
Units, 1,000,000 Preference B Units and 3,160,000 Common Units, representing an
approximate 44.2%, 28.4%, 6.1% and 19.3%, respectively, limited partner
interest in the Partnership. KPL and its affiliates will own 1,150,000
Preference Units (825,000 if the Underwriters' over-allotment option is
exercised in full) and all of the outstanding Preference B Units and Common
Units.

The pipeline business of the Partnership is conducted through KPOP, of
which the Partnership is the sole limited partner and KPL is the sole general
partner. The terminaling business of the Partnership is conducted through (i)
Support Terminals Operating Partnership, L.P., a Delaware limited partnership
("STOP"), of which KPOP is the sole limited partner, (ii) Support Terminal
Services, Inc., a Delaware corporation and wholly owned subsidiary of KPOP
("STS"), and (iii) StanTrans, Inc., a Delaware corporation and wholly owned
subsidiary of STS ("STI"). STS is the sole general partner of STOP. KPOP and
STOP are collectively referred to as the "Operating Partnerships".

11
<PAGE> 13

SUMMARY HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA

The following tables set forth, for the periods and at the dates
indicated, summary (i) historical financial and operating data for the
Partnership, (ii) pro forma financial data for the Partnership after giving
effect to the acquisition of the West Pipeline and (iii) pro forma financial
data for the Partnership after giving effect to the acquisition of the West
Pipeline and the pending acquisition of the Steuart terminaling assets. The
data in the table is derived from and should be read in conjunction with the
historical financial statements of the Partnership included elsewhere in this
Prospectus. See also "Management's Discussion and Analysis of Financial
Condition and Results of Operations". The pro forma financial data is based on
the combination of the historical financial data of the Partnership, the West
Pipeline and the Steuart terminaling assets assuming certain adjustments to
reflect the acquisitions of the West Pipeline and the Steuart terminaling
assets at the balance sheet date and as of the beginning of the period for
income statement purposes and should be read in conjunction with the unaudited
pro forma financial statements of the Partnership included elsewhere in this
Prospectus.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
HISTORICAL PRO FORMA
-------------------------------------- ------------------------
1992 1993(A) 1994 1994(B) 1994(C)
---------- ---------- ---------- ---------- -----------
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues . . . . . . . . . . . . . . . $ 42,179 $ 69,235 $ 78,745 $ 92,439 $ 118,067
---------- ---------- ---------- ---------- -----------
Costs and expenses:
Operating costs . . . . . . . . . . . 14,507 29,012 33,586 40,721 49,977
Depreciation and amortization . . . . 4,124 6,135 7,257 7,961 13,626
General and administrative expenses . 2,752 4,673 4,924 5,705 6,455
---------- ---------- ---------- ---------- -----------
Total costs and expenses . . . . . . 21,383 39,820 45,767 54,387 70,058
---------- ---------- ---------- ---------- -----------
Operating income . . . . . . . . . . . 20,796 29,415 32,978 38,052 48,009
Interest income (expense), net . . . . (617) (2,045) (2,407) (4,667) (10,817)
Minority interest . . . . . . . . . . . (200) (266) (295) (322) (360)
---------- ---------- ---------- ---------- -----------
Income before income taxes . . . . . . 19,979 27,104 30,276 33,063 36,832
Income taxes (d) . . . . . . . . . . . -- (450) (818) (818) (818)
---------- ---------- ---------- ---------- -----------
Net income . . . . . . . . . . . . . . $ 19,979 $ 26,654 $ 29,458 $ 32,245 $ 36,014
========== ========== ========== ========== ===========
Allocation of net income and cash
distribu tions per Senior Preference
Unit (e) $ 2.20 $ 2.20 $ 2.20
========== ========== ==========
Allocation of net income and cash
distributions per Preference
Unit (e)(f) . . . . . . . . . . . . . $ 2.20 $ 2.20 $ 2.20
========== ========== ==========

BALANCE SHEET DATA (AT PERIOD END):
Property and equipment, net . . . . . . $ 66,956 $ 133,436 $ 145,646 $ 173,807 $ 256,657
Total assets . . . . . . . . . . . . . 86,409 162,407 163,105 193,313 276,163
Current portion of long-term debt . . . 1,177 3,850 1,548 1,548 1,548
Long-term debt, less current portion . 20,864 41,814 43,265 70,265 152,265
Partners' capital . . . . . . . . . . . 55,657 100,598 99,754 99,754 99,754

OTHER DATA:
Net cash provided by operating activities
before changes in working capital
components (g) . . . . . . . . . . . $ 24,303 $ 33,469 $ 37,636
Capital expenditures (g)(h) . . . . . . 3,183 8,132 7,147
Distributions to: (i)
Senior preference unitholders . . . . 11,000 13,475 15,950
Preference unitholders (f) . . . . . 12,430 12,430 12,430
Common unitholders . . . . . . . . . -- -- 2,686
---------- ---------- ----------
Total distributions to unitholders $ 23,430 $ 25,905 $ 31,066
========== ========== ==========
OPERATING DATA:
Volumes (j) . . . . . . . . . . . . . . 55,111 56,195 54,561
Barrel miles (k) . . . . . . . . . . . 14,287 14,160 14,460
</TABLE>

12
<PAGE> 14

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------------------------------
HISTORICAL PRO FORMA
-------------------------- ------------------------
1994 1995(L) 1995(B) 1995(C)
---------- ------------ ----------- ----------
<S> <C> <C>
INCOME STATEMENT DATA:
Revenues . . . . . . . . . . . . . . . . . . . . . . $ 37,207 $ 43,724 $ 45,439 $ 56,030
---------- ----------- ---------- ----------
Costs and expenses:
Operating costs . . . . . . . . . . . . . . . . . . 15,865 18,269 19,427 23,255
Depreciation and amortization . . . . . . . . . . . 3,511 4,161 4,267 7,100
General and administrative expenses . . . . . . . . 2,506 2,571 2,854 3,200
---------- ----------- ----------- ----------
Total costs and expenses . . . . . . . . . . . . . 21,882 25,001 26,548 33,555
---------- ----------- ----------- ----------
Operating income . . . . . . . . . . . . . . . . . . 15,325 18,723 18,891 22,475
Interest income (expense), net . . . . . . . . . . . (1,085) (2,590) (2,755) (5,830)
Minority interest . . . . . . . . . . . . . . . . . . (137) (157) (157) (163)
---------- ----------- ----------- ----------
Income before income taxes . . . . . . . . . . . . . 14,103 15,976 15,979 16,482
Income taxes (d) . . . . . . . . . . . . . . . . . . (435) (219) (219) (219)
---------- ----------- ----------- ----------
Net income . . . . . . . . . . . . . . . . . . . . . $ 13,668 $ 15,757 $ 15,760 $ 16,263
========== =========== =========== ==========
Allocation of net income and cash distributions per
Senior Preference Unit (e) . . . . . . . . . . . . $ 1.10 $ 1.10
========== ===========
Allocation of net income and cash distributions per
Preference Unit (e)(f) . . . . . . . . . . . . . . $ 1.10 $ 1.10
========== ===========

BALANCE SHEET DATA (AT PERIOD END):
Property and equipment, net . . . . . . . . . . . . . $ 143,815 $ 173,306 $ 173,306 $ 256,156
Total assets . . . . . . . . . . . . . . . . . . . . 162,033 191,434 191,434 274,284
Current portion of long-term debt . . . . . . . . . . 16,646 1,658 1,658 1,658
Long-term debt, less current portion . . . . . . . . 28,566 69,408 69,408 151,408
Partners' capital . . . . . . . . . . . . . . . . . . 100,055 99,259 99,259 99,259

OTHER DATA:
Net cash provided by operating activities before
changes in working capital components (g) . . . . . $ 17,780 $ 20,291
Capital expenditures (g)(h) . . . . . . . . . . . . . 2,248 4,721
Distributions to: (i)
Senior preference unitholders . . . . . . . . . . . 7,975 7,975
Preference unitholders (f) . . . . . . . . . . . . 6,215 6,215
Common unitholders . . . . . . . . . . . . . . . . -- 1,896
---------- -----------
Total distributions to unitholders . . . . . . . $ 14,190 $ 16,086
========== ===========

OPERATING DATA:
Volumes (j) . . . . . . . . . . . . . . . . . . . . . 27,210 34,549
Barrel miles (k) . . . . . . . . . . . . . . . . . . 7,019 7,568
</TABLE>
_________
(a) Includes the operations of ST since its acquisition on March 2, 1993.
(b) Gives effect to the acquisition of the West Pipeline. The pro forma
financial data may not be indicative of the results that would have
occurred if the Partnership had acquired the West Pipeline on the dates
indicated or that will be obtained in the future.
(c) Gives effect to the acquisition of the West Pipeline and the pending
acquisition of the liquids terminaling assets of Steuart. The pro forma
financial data may not be indicative of the results that would have
occurred if the Partnership had acquired the West Pipeline and the
liquids terminaling assets of Steuart on the dates indicated or that will
be obtained in the future.
(d) Subsequent to the acquisition of ST in March 1993, certain operations are
conducted in a taxable entity.
(e) Net income of the Partnership for each reporting period is allocated to
the Senior Preference Units and Preference Units in an amount equal to
the cash distributions to the holders thereof declared for that reporting
period.
(f) Allocation of net income and cash distributions declared per Preference
Unit exclude $0.45 and $1.20 attributable to the payment of arrearages in
1992 and 1993, respectively.

13
<PAGE> 15

(g) Under the Partnership Agreement, the Partnership is required to make
distributions to Unitholders and the General Partner with respect to each
calendar quarter in an amount equal to 100% of its Available Cash for
such quarter, except in connection with the dissolution and liquidation
of the Partnership. Distributions of Available Cash are characterized as
either distributions of Cash from Operations or Cash from Interim Capital
Transactions and, depending on the characterization of the Available Cash
distributed, different distribution priorities would apply. In addition,
Distributions of Available Cash that constitutes Cash from Interim
Capital Transactions result in reductions in the Minimum Quarterly
Distribution, First Target Distribution, Second Target Distribution and
Third Target Distribution. The Partnership's Available Cash, Cash from
Operations and Cash from Interim Capital Transactions are affected by
items in addition to "net cash provided by operating activities before
changes in working capital components" and "capital expenditures". See
"Cash Distributions" and "Glossary".
(h) Includes approximately $1.7 million, $5.5 million and $5.7 million of
maintenance capital expenditures and approximately $1.5 million, $2.6
million and $1.5 million of Expansive Capital Expenditures in 1992, 1993
and 1994, respectively, and approximately $1.3 million and $3.5 million
of maintenance capital expenditures and approximately $0.9 million and
$1.2 million of Expansive Capital Expenditures in the six months ended
June 30, 1994 and 1995, respectively. Such amounts exclude approximately
$62.7 million related to the acquisition of ST in March 1993,
approximately $12.3 million related to terminal acquisitions in 1994
($11.7 million through June 30, 1994) and approximately $27.1 million
related to the acquisition of the West Pipeline in the first quarter of
1995.
(i) Consists of distributions paid with respect to the periods shown,
excluding arrearages (see note (f) above). Payment of distributions with
respect to a calendar quarter is made in the next succeeding calendar
quarter.
(j) Volumes are expressed in thousands of barrels of refined petroleum
product.
(k) Barrel miles are shown in millions. A barrel mile is the movement of one
barrel of refined petroleum product one mile.
(l) Includes the operations of the West Pipeline since its acquisition on
February 24, 1995. Since such acquisition occurred prior to the end of
the period, the pro forma balance sheet data and the historical balance
sheet data are the same.

14
<PAGE> 16

CASH DISTRIBUTIONS

The Partnership makes quarterly distributions of 100% of its Available
Cash to holders (the "Unitholders") of LP Units (see "Glossary") and the
General Partner. "Available Cash" (see "Glossary") consists generally of all
the cash receipts of the Partnership less all of its cash disbursements and
reserves.

Distributions by the Partnership of its Available Cash are made 98% to
Unitholders and 2% to the General Partner, subject to the payment of incentive
distributions to the General Partner if certain target levels of cash
distributions to the Unitholders are achieved. The distribution of Available
Cash for each quarter within the Preference Period (see "Glossary") is subject
to the preferential rights of the holders of the Senior Preference Units to
receive quarterly distributions of $0.55 per LP Unit (the "Minimum Quarterly
Distribution") for such quarter, plus any arrearages in the payment of the
Minimum Quarterly Distribution for prior quarters, before any distribution of
Available Cash is made to holders of Preference Units, Preference B Units or
Common Units for such quarter. During the Preference Period, the distribution
of Available Cash to holders of Common Units is subject to the preferential
rights of the holders of the Senior Preference Units, Preference Units and
Preference B Units to receive the Minimum Quarterly Distribution for each
quarter within the Preference Period, plus any arrearages in the payment of the
Minimum Quarterly Distribution for prior quarters. The Common Units are not
entitled to arrearages in the payment of the Minimum Quarterly Distribution.
The Preference Period commenced upon the formation of the Partnership and, in
general, will continue indefinitely until the Minimum Quarterly Distribution
has been paid to the holders of the Senior Preference Units, the Preference
Units, the Preference B Units and the Common Units for 12 consecutive quarters.
The holders of the Common Units have not been paid the full amount of the
Minimum Quarterly Distribution in any quarter since the formation of the
Partnership. Therefore, such condition has not yet been met in any quarter.
Upon expiration of the Preference Period, all distinctions between the Senior
Preference Units, the Preference Units, the Preference B Units and the Common
Units will automatically cease.

In addition, for each quarter through the quarter ending September 30,
1997, the holders of the Preference Units are entitled to receive the Minimum
Quarterly Distribution for such quarter, plus any arrearages in the payment of
the Minimum Quarterly Distribution for prior quarters, before any distribution
of Available Cash is made to holders of Preference B Units for such quarter.
After such time, the Preference B Units will be deemed to be Preference Units
for purposes of determining the priority and amount of distributions of
Available Cash on the Preference Units and Preference B Units.

Any distributions by the Partnership of Available Cash remaining for
any quarter after payment of the Minimum Quarterly Distribution on all
outstanding LP Units (subject to the distribution and arrearage recoupment
priorities described above), will be made in the manner specified under "Cash
Distributions--Quarterly Distributions of Available Cash".

The Amended and Restated Agreement of Limited Partnership of the
Partnership (the "Partnership Agreement") generally prohibits distributions on
the Preference Units, Preference B Units and Common Units during the Preference
Period if the Partnership's consolidated indebtedness exceeds $45 million plus
80% of the aggregate Expansive Capital Expenditures (see "Glossary") of the

15
<PAGE> 17

Partnership since October 3, 1989 greater than $45 million. At June 30, 1995,
the Partnership's consolidated indebtedness was $71.1 million, and its
aggregate Expansive Capital Expenditures since October 3, 1989 were
approximately $116.8 million. Therefore, at June 30, 1995, the Partnership
could have borrowed an additional $156.9 million (approximately) for Expansive
Capital Expenditures without being restricted in the payment of distributions
to the holders of Preference Units. The General Partner does not currently
anticipate incurring debt that would prevent the distribution of the Minimum
Quarterly Distribution to the holders of Preference Units. See "Cash
Distributions".

The above percentages for Unitholder and General Partner distributions
describe the combined distribution percentages by the Partnership and KPOP.
Because the Partnership holds all of its assets and conducts all of its
operations through KPOP and subsidiaries of KPOP, all cash from operations is
generated by KPOP and such subsidiaries, and the distribution of such cash from
KPOP to the Partnership is the principal source of cash from which to make
distributions. Since the General Partner has a 1% interest in all
distributions of KPOP and a 1/99th interest in all distributions of the
Partnership, the holders of LP Units have a 98% interest in Partnership
distributions on a combined basis, subject to incentive distributions to the
General Partner if certain target levels of cash distributions to the
Unitholders are achieved. See "Cash Distributions -- Quarterly Distributions
of Available Cash".

Because past distributions have been, and future distributions are
anticipated to be, comprised solely of Cash from Operations (see "Glossary"),
the above paragraphs assume that Available Cash consists only of Cash from
Operations. The Partnership Agreement provides that Available Cash also can be
generated by Interim Capital Transactions (see "Glossary"), in which case
different distribution priorities would apply and the Minimum Quarterly
Distribution and target distribution levels would be reduced. Different
distribution priorities also would apply upon the dissolution and liquidation
of the Partnership. See "Cash Distributions".

The Minimum Quarterly Distribution and target distribution levels are
subject to adjustment as described under "Cash Distributions--Adjustment of
Minimum Quarterly Distribution and Target Distribution Levels".

The Partnership expects to make distributions of all Available Cash
within 45 days after the end of each calendar quarter to holders of record on
the applicable record date. The first distribution on the Preference Units to
which Unitholders acquiring Preference Units pursuant to this offering will be
entitled will be with respect to the quarter ending December 31, 1995. Such
distribution is expected to be made on or before February 15, 1996 to holders
of record of such LP Units as of January 31, 1996. All record holders of
Preference Units on such record date would be entitled to a full distribution.

16
<PAGE> 18

TAX CONSIDERATIONS

For a summary of the principal federal income tax considerations
associated with the operations of the Partnership and the ownership of
Preference Units, see "Federal Income Tax Considerations".

Based upon the assumptions described below, KPL estimates that holders
acquiring their Preference Units pursuant to this offering will be allocated
federal taxable income for the nine calendar quarters ending December 31, 1997,
in an amount averaging approximately 30% of the cash distributions with respect
to such period. KPL estimates that, if the Steuart acquisition is consummated
in accordance with the Asset Purchase Agreements, such percentage will be 29%.
The General Partner anticipates that, after 1997, such holders will be
allocated federal taxable income that will increase from year to year. The
foregoing estimates are based upon numerous assumptions regarding the business
and operations of the Partnership (including assumptions about capital
expenditures, cash flow and anticipated cash distributions). Such estimates
and assumptions are subject to, among other things, many business, economic and
competitive uncertainties which are beyond the control of KPL or the
Partnership. Further, the estimates are based on certain tax reporting
positions that KPL has adopted and with which the Internal Revenue Service
("IRS") could disagree. Accordingly, no assurance can be given that the
estimates will prove to have been correct. The actual amount of federal
taxable income could be higher or lower than as described above and such
differences could be material.

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RISK FACTORS

Prospective purchasers of the Preference Units should consider the
following matters in evaluating an investment in the Preference Units.

CONSIDERATIONS RELATING TO THE PARTNERSHIP'S BUSINESS

Uncertainties in Rate Making Methodologies. Tariff rates for the
Partnership's interstate common carrier pipeline operations are regulated by
the Federal Energy Regulatory Commission (the "FERC") under the Interstate
Commerce Act. To be lawful under that Act, tariff rates must be just and
reasonable and not unduly discriminatory. The lawfulness of new or changed
tariff rates may be protested by shippers and investigated by the FERC, which
can suspend such tariff rates for a period of up to seven months, and require
refunds of amounts collected under rates ultimately found to be unlawful.
Tariff rates that have become final and effective may also be challenged by
complaint in a court or before the FERC. Because of the complexity of rate
making, the lawfulness of any rate is never assured.

Order No. 561, issued by the FERC on October 22, 1993, established a
primary ratemaking methodology, which pipelines are required to utilize unless
they qualify and elect to use one of several alternative methodologies. The
primary ratemaking methodology is a rate indexing mechanism, which ties a
pipeline's rate increase or decrease to the Producer Price Index for Finished
Goods. Since the indexing mechanism is new, it is difficult to determine how
this will affect the Partnership's interstate pipeline operations. The intent
of Order No. 561 is to minimize the degree of rate scrutiny by the FERC, reduce
uncertainty to the carrier and promote uniformity in the rate making process.
However, it is uncertain if the use of indexing will always work in favor of
pipelines, and it is also unclear what exceptions to indexing will be
permitted. See "Business and Properties of the Partnership--Rate Regulation".

On June 15, 1995, the FERC issued a decision involving Lakehead Pipe
Line Company, Limited Partnership ("Lakehead"), an unrelated oil pipeline
limited partnership. In this decision, the FERC partially disallowed
Lakehead's inclusion of income taxes in its cost of service. Specifically, the
FERC held that Lakehead was entitled to receive an income tax allowance with
respect to income attributable to its corporate partners, but was not entitled
to receive such an allowance for income attributable to the partnership
interests held by individuals. Both Lakehead and representatives of its
customers have filed motions for rehearing. It is unlikely, however, that the
FERC will reverse itself on rehearing. It is possible that either Lakehead or
its customers may ultimately seek judicial review of the FERC decision, and it
is difficult to predict what position would be adopted by a reviewing court on
the income tax issue. In another FERC proceeding that has not yet reached the
hearing stage, involving a different oil pipeline limited partnership, various
shippers have challenged such pipeline's inclusion of an income tax allowance
in its cost of service. The FERC Staff has also filed testimony that supports
the disallowance of income taxes. If the FERC were to disallow the income tax
allowance in the cost of service of the Pipelines on the basis set forth in the
Lakehead order, the General Partner believes that the Partnership's ability to
pay the Minimum Quarterly Distribution to the holders of the Senior Preference
Units, Preference Units and Preference B Units would not be impaired; however,
in view of the uncertainties involved in this issue, there can be no assurance
in this regard.

The intrastate operations of the East Pipeline in Kansas are subject
to regulation by the Kansas Corporation Commission. In addition, intrastate
operations of the West Pipeline in Colorado and Wyoming are subject to
regulation by the Colorado Public Utility Commission and the Wyoming Public
Service Commission. For a description of such regulation, see "Business and
Properties of the Partnership--Regulation--Intrastate Regulation".

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Competition. While the FERC's current cost-based rate regulation caps
the Pipelines' maximum rates, competitive conditions sometimes require that the
Pipelines file individual rates that are less than the permissible maximum.
The East Pipeline's major competitor is an independent regulated common carrier
pipeline system owned by The Williams Companies ("Williams"), which operates
approximately 100 miles east of and parallel with the East Pipeline. This
competing pipeline system is a substantially more extensive system than the
East Pipeline. Furthermore, Williams and its affiliates have capital and
financial resources substantially greater than those of the Partnership.
Fifteen of the Partnership's 16 delivery terminals on the East Pipeline are in
direct competition with Williams' terminals located within 2 to 145 miles. The
West Pipeline competes with the truck loading racks of the Cheyenne and Denver
refineries and the Denver terminals of the Chase Pipeline Company and Phillips
Petroleum pipelines. A new Diamond Shamrock terminal in Colorado Springs at
the end of a Diamond Shamrock pipeline from their Texas Panhandle refinery is a
major competitor for the West Pipeline's Fountain terminal near Colorado
Springs. See "Business and Properties of the Partnership--Products Pipeline
Business--Competition and Business Considerations".

The independent liquids terminaling industry is fragmented and
includes both large, well-financed companies that own many terminal locations
and small companies that may own a single terminal location. Several companies
offering liquids terminaling facilities have significantly more capacity than
ST, particularly those used primarily for petroleum related products. ST also
faces competition from prospective customers that have their own terminal
facilities.

Reduced Demand Could Affect Shipments on the Pipelines. The
Partnership's pipeline business depends in large part on the level of demand
for refined petroleum products in the markets served by the Pipelines. Most of
the refined petroleum products delivered through the East Pipeline are
ultimately used in agricultural operations, including fuel for farm equipment,
irrigation systems, trucks transporting crops and crop drying facilities.
Demand for refined petroleum products for agricultural use, and the relative
mix of products required, is affected by weather conditions in the geographic
areas served by the East Pipeline. Although periods of drought suppress
agricultural demand for some refined petroleum products, particularly those
used for fueling farm equipment, during such times the demand for fuel for
irrigation systems often increases. The agricultural sector is also affected
by government agricultural policies and crop prices.

Unlike the East Pipeline's service area, which is predominantly
agricultural, the West Pipeline serves the growing Denver and northeastern
Colorado markets. The West Pipeline also supplies the jet fuel for Ellsworth
Air Force Base at Rapid City, South Dakota. The West Pipeline has a relatively
small number of shippers, who, with only a few exceptions, are also shippers on
the East Pipeline.

The Partnership cannot predict the impact of future fuel conservation
measures. Governmental regulation, technological advances in fuel economy and
energy generation devices could reduce the demand for refined petroleum
products in the Pipelines' market areas.

Dependence on Crude Oil Supplies. Seven refineries (the "Regional
Refineries") with aggregate crude oil refining capacity of approximately
587,000 barrels per day have historically produced most of the refined
petroleum products transported through the East Pipeline. The Regional
Refineries, the production from which accounted for approximately 85% of the
East Pipeline's total volumes shipped in 1994, are operated by both major
integrated and independent petroleum companies and by large farm cooperatives.
One of such refineries, the McPherson, Kansas refinery operated by National
Cooperative Refinery Association, accounted for approximately 54% of the
aggregate barrels of refined petroleum products shipped through the East
Pipeline in 1994. Through connections between the East Pipeline and other
pipelines, shippers on the East Pipeline also have access to refined petroleum
products produced by Gulf Coast and other refineries. All such refineries are
dependent on adequate supplies of suitable grades of crude oil. A material
decline in such supplies could adversely affect

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shipments of refined petroleum products on the East Pipeline. Historically,
the product shipped on the East Pipeline has been refined from crude oil from
producing fields located primarily in Kansas, Oklahoma and Texas, and, to a
much lesser extent, from other domestic or foreign sources.

The West Pipeline is connected to Sinclair's Little America refinery
in Casper, Wyoming. It also receives product at the Strouds station, a short
distance from Casper, through a connection with the Seminoe Pipe Line, which
provides the West Pipeline with access to refineries in the Billings, Montana
area. The West Pipeline's Rapid City, South Dakota terminal also receives
product from Wyoming Refining's Newcastle, Wyoming refinery through their
pipeline that enters the West Pipeline near the Wyoming/South Dakota border
near Mule Creek, Wyoming. The West Pipeline's Cheyenne, Wyoming terminal also
receives product from the Frontier Oil & Refining Company refinery, and the
Commerce City, Colorado station also receives product from the Total Petroleum,
Inc. ("Total Petroleum") and Conoco Oil refineries. Shipments of refined
petroleum products on the West Pipeline could be adversely affected by a
material decline in the availability to such refineries of suitable grades of
crude oil.

Possible Reduction of Business with the Department of Defense. The
storage and transport of jet fuel for the U.S. Department of Defense is an
important part of ST's business. Five of ST's 20 inland terminals are utilized
solely by the Department of Defense. Four additional inland terminals are
utilized by the Department of Defense and other users. Part of the storage at
one of ST's inland terminals served a base that was placed on the Department of
Defense's 1993 base closure list. The Partnership cannot predict whether
additional bases served by ST will be closed or whether other customers will
replace any loss of business with the Department of Defense. See "Business and
Properties of the Partnership--Liquids Terminaling Business--Description of
Terminals".

Risk of Environmental Costs and Liabilities. The operations of the
Partnership are subject to federal, state and local laws and regulations
relating to protection of the environment. Although the Partnership believes
that the operations of the Pipelines and ST are in general compliance with
applicable environmental regulations, risks of substantial costs and
liabilities are inherent in pipeline operations and terminaling operations, and
there can be no assurance that substantial costs and liabilities will not be
incurred. The Partnership currently owns or leases, and has in the past owned
or leased, numerous properties that have been used for terminaling or storage
of petroleum products or other chemicals for many years. Hydrocarbons or other
solid wastes may have been disposed of or released on or under the properties
owned or leased by the Partnership. Additionally, some of the sites operated
by the Partnership that are located near current or historical refining and
terminal operations may be at risk of experiencing contamination that has
migrated from such sites. It is possible that developments, such as
increasingly strict environmental laws, regulations and enforcement policies
thereunder, and claims for damages to property or persons resulting from the
operations of the Partnership or previous owners or operators, could result in
substantial costs and liabilities to the Partnership. See "Business and
Properties of the Partnership--Environmental Matters".

CONSIDERATIONS RELATING TO PARTNERSHIP STRUCTURE

Subordination of Preference Units. The distribution to Unitholders of
Available Cash that constitutes Cash from Operations (see "Glossary") with
respect to each quarter within the Preference Period is subject to the
preferential rights of the holders of the Senior Preference Units to receive
for such quarter the Minimum Quarterly Distribution, plus arrearages, if any,
in the payment of the Minimum Quarterly Distribution for prior quarters, prior
to any distribution of Available Cash that constitutes Cash from Operations to
holders of Preference Units with respect to such quarter. See "Cash
Distributions".

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Restrictions on Distributions on Preference Units. The Partnership
Agreement prohibits the Partnership from distributing Available Cash on the
Preference Units, Preference B Units or Common Units or acquiring Preference
Units, Preference B Units or Common Units with Available Cash in respect of any
calendar quarter if (i) the Preference Period continues in effect during the
quarter in respect of which the distribution or acquisition would be made and
(ii) after giving effect to such distribution or acquisition, the sum of (A)
plus (B) would exceed an amount equal to $45 million plus 80% of the aggregate
Expansive Capital Expenditures since the inception of the Partnership greater
than $45 million, where (A) is equal to the outstanding principal balance as of
the proposed distribution or acquisition date, as the case may be, of the
Partnership's consolidated indebtedness (excluding borrowings for working
capital purposes) and (B) is equal to the amount of revenues collected by the
Partnership that (x) are then subject to possible refund under a pending rate
case and (y) are not maintained by the Partnership in a separate reserve fund.
See "Cash Distributions--Distribution Restriction on Preference Units,
Preference B Units and Common Units".

Reliance Upon Distributions and Dividends from Subsidiaries. The
Partnership conducts all of its operations through direct and indirect wholly
owned corporate and partnership subsidiaries. Distributions and dividends of
cash generated by such subsidiaries are the principal source of Available Cash
of the Partnership available for the payment of distributions to the holders of
Units.

Absence of Arms' Length Negotiation of Contract Terms. Neither the
Partnership Agreements nor any of the other agreements, contracts and
arrangements between the Partnership, on the one hand, and the General Partner,
Kaneb and its affiliates, on the other hand, were or will be the result of
arm's length negotiations.

No Prior Public Market for Preference Units. Prior to this offering,
there has been no public market for the Preference Units. The initial public
offering price has been negotiated among KPL, KPPLP and the Underwriters. For
a description of the factors to be considered in determining the initial public
offering price of the Preference Units, see "Underwriting".

Risk of Dilution of Outstanding LP Units Through Issuance of Senior
Securities and Exchanges of Junior Securities. The Partnership Agreement
authorizes the General Partner to cause the Partnership to issue Additional LP
Units (additional limited partner interests and other equity securities of the
Partnership) for such consideration and on such terms and conditions as shall
be established by the General Partner including, without limitation, Preference
Units in addition to the Preference Units offered by this Prospectus and
Additional LP Units with rights to distributions or in liquidation ranking
prior or senior to or on a parity with Preference Units. During the Preference
Period, however, the Partnership may not issue (i) more than 7,750,000
additional Senior Preference Units (other than any Senior Preference Units
issuable upon exchange of Preference Units if certain conditions are met), (ii)
any other class of partnership interest of the Partnership on a parity with,
convertible into or exchangeable for Senior Preference Units or (iii) any other
classes of partnership interests of the Partnership ranking prior to or on a
parity with the Senior Preference Units, without the approval of the holders of
a majority of the outstanding Senior Preference Units (excluding for purposes
of such determination Senior Preference Units held by the General Partner and
its affiliates). After the Preference Period, there is no restriction on the
ability of the Partnership to issue Additional LP Units, including, without
limitation, Additional LP Units with rights to distributions or in liquidation
ranking prior or senior to any of the outstanding LP Units.

After the Record Date for distributions of Available Cash to the
holders of Preference Units with respect to the quarter ending September 30,
1997, the Preference B Units shall be deemed to be Preference Units for
purposes of determining the priority and amount of distributions of Available
Cash on the Preference Units and Preference B Units. Thereafter, the holders
of Preference Units will not have a right to receive distributions of Available
Cash that is senior in priority to the rights of the

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<PAGE> 23
holders of Preference B Units. In addition, any holder of Preference B Units
may, at its option exercisable from time to time after the record date for
distributions with respect to the quarter ending September 30, 1997, exchange
Preference B Units for an equal number of Preference Units. Each such exchange
shall be conditioned upon receipt by the Partnership of an opinion of counsel
that the intrinsic economic and federal income tax characteristics of the
Preference Units issuable upon such exchange are identical to the intrinsic
economic and federal income tax characteristics of the Preference Units
outstanding immediately prior to such exchange. The effect of any such
exchange will be to increase the number of Preference Units issued and
outstanding. Any such exchange will not affect the rights of the holders of
the Preference Units with respect to distributions of Available Cash (including
any distributions upon liquidation) because, as noted above, the Preference B
Units will be deemed to be Preference Units for purposes of determining the
priority and amounts of distributions of Available Cash on the Preference Units
and Preference B Units after the record date for distributions of Available
Cash to the holders of Preference Units with respect to the quarter ending
September 30, 1997. However, Preference Units acquired in any such exchange
may be sold from time to time by the holders thereof, either in transactions on
the New York Stock Exchange (the "NYSE") or otherwise, and such sales could
adversely affect the market price of the Preference Units. See "Selling
Unitholder and LP Units Eligible for Future Sale".

In addition, of the Preference Units and Preference B Units held by
KPL after the offering made by this Prospectus, after the record date for
distributions of Available Cash to the holders of Senior Preference Units with
respect to the quarter ending September 30, 1997, up to 2,650,000 may be
exchanged for an equal number of Senior Preference Units upon satisfaction of
certain conditions. One such condition is the distribution by the Partnership
of Available Cash that constitutes Cash from Operations to all Unitholders in
respect of each of the four full consecutive preceding calendar quarters
(including the calendar quarter with respect to which such distribution is
being made) in an amount at least equal to $.70 per LP Unit. See "Cash
Distributions--Exchange of Preference Units and Preference B Units for Senior
Preference Units". The Partnership has not had, and does not anticipate that
it will have in the foreseeable future, sufficient Available Cash to permit
distributions at such level for four full consecutive calendar quarters. Any
Preference Units or Preference B Units so exchanged will have the right to
receive distributions of Available Cash (including any distributions upon
liquidation) prior to the distribution of Available Cash on the Preference
Units and Preference B Units.

Limited Voting Rights; Management and Control. Unitholders will have
only limited voting rights on matters affecting the Partnership's business.
All amendments to the Partnership Agreement and major Partnership actions may
be proposed solely by, or otherwise require the consent of, the General
Partner. See "Description of the Partnership Agreements--Issuance of
Additional LP Units and Securities", "--Amendment of Partnership Agreements",
"--Meetings; Voting" and "--Termination, Dissolution and Liquidation".

The General Partner will manage and control the activities of the
Partnership. Holders of Preference Units will have no right to elect the
General Partner on an annual or other continuing basis. If the General Partner
withdraws or is removed, however, its successor may be elected by the holders
of a majority of the outstanding LP Units (including for purposes of such
determination LP Units owned by the departing General Partner and its
affiliates). The General Partner may not be removed as general partner of the
Partnership except upon approval by the affirmative vote of the holders of not
less than 85% of the outstanding LP Units and any other limited partner
interests, voting as a single class, and the affirmative vote of the holders of
not less than 85% of each class of LP Units and any other limited partner
interests outstanding, voting as separate classes, in each case including for
purposes of such determination LP Units and other limited partner interests
owned by the General Partner and its affiliates. KPL and its affiliates own
all of the outstanding Common Units and, following the completion of this
offering, will own all of the Preference B Units and approximately 25% of the
Preference Units (assuming the Underwriters' over-allotment option is not
exercised). Accordingly, the

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General Partner cannot be removed without its consent. Unitholders may not
remove the General Partner until after receipt of an opinion of counsel that
such action will not result in the loss of limited liability of the Unitholders
of any class or cause the Partnership to be taxable as a corporation or to be
treated as an association taxable as a corporation for federal income tax
purposes. The general partners of the Operating Partnerships may be removed
upon approval of the Partnership.

KPL has agreed not to withdraw voluntarily as general partner of the
Partnership or KPOP before January 1, 2000, unless such withdrawal is approved
by the vote of the holders of a majority of all of the outstanding LP Units,
including during the Preference Period the approval of the holders of a
majority of the Senior Preference Units (excluding for purposes of such
determination Senior Preference Units owned by KPL and its affiliates). The
withdrawal or removal of KPL as the general partner of the Partnership will
automatically result in the concurrent withdrawal or removal of KPL as the
general partner of KPOP. See "Description of the Partnership
Agreements--Withdrawal or Removal of the General Partner".

Conflicts of Interest. Certain conflicts of interest could arise as a
result of the General Partner's relationships with Kaneb, the parent company of
the General Partner, on the one hand, and the Partnership, on the other. Such
conflicts may include, among others, the following situations: (i) the General
Partner's determination of the timing and amount of cash expenditures,
borrowings and reserves; (ii) the General Partner's determination of which
portion of an expenditure constitutes a capital expenditure which increases the
throughput or deliverable capacity or terminaling capacity of the assets of the
Partnership; (iii) the issuance of additional LP Units or the purchase of
outstanding LP Units; (iv) the payment to Kaneb and its subsidiaries and
affiliates for any services rendered on behalf of the Partnership to KPL; (v)
the General Partner's determination of which direct and indirect costs are
reimbursable by the Partnership; (vi) the decision to liquidate the
Partnership; (vii) the decision to retain separate counsel, accountants or
others to perform services on behalf of the Partnership; and (viii) the General
Partner's and its affiliates' decision to engage in activities that might
compete with the Partnership. The Audit Committee of the Board of Directors of
the General Partner will review matters as to which such conflicts of interest
could arise. The Partnership has not adopted any guidelines, other than those
contained in the Partnership Agreement, that must be followed by the General
Partner in the event of a conflict of interest. In addition, the General
Partner will owe certain fiduciary duties to the Unitholders and will be liable
for all the debts other than nonrecourse debt of the Partnership to the extent
not paid by the Partnership. See "Conflicts of Interest and Fiduciary
Responsibilities".

Modification of Fiduciary Duties. The General Partner is generally
accountable to the Partnership and to the Unitholders as a fiduciary.
Consequently, the General Partner generally must exercise good faith and
integrity in handling the assets and affairs of the Partnership. The Delaware
Revised Uniform Limited Partnership Act (the "Delaware Act") provides that
Delaware limited partnerships may, in their partnership agreements, modify the
fiduciary duties that might otherwise be applied by a court in analyzing the
duty owed by general partners to limited partners. The Partnership Agreement,
as permitted by the Delaware Act, contains various provisions that have the
effect of restricting the fiduciary duties that might otherwise be owed by the
General Partner to the Partnership and its partners. For example, the
Partnership Agreement provides that (i) borrowings by the Partnership or the
approval thereof by the General Partner shall not constitute a breach of any
duty of the General Partner to the Partnership or the Unitholders whether or
not the purpose or effect thereof is to avoid subordination of Preference
Units, Preference B Units or Common Units, (ii) any actions taken by the
General Partner consistent with the standards of reasonable discretion set
forth in the definitions of Available Cash or Cash from Operations will be
deemed not to breach any duty of the General Partner to the Partnership or the
Unitholders and (iii) in the absence of bad faith by the General Partner, the
resolution of conflicts of interest by the General Partner shall not constitute
a breach of the Partnership Agreement or a breach of any standard of care or
duty. In addition, holders of

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<PAGE> 25
Preference Units are deemed to have consented to certain actions and conflicts
of interest that might otherwise be deemed a breach of fiduciary or other
duties under state law. Such modifications of state law standards of fiduciary
duty may significantly limit a Unitholder's ability to successfully challenge
the actions of the General Partner as being in breach of what would otherwise
have been a fiduciary duty. Provisions of the Partnership Agreement that
purport to limit the liability of the General Partner to the Partnership or the
Unitholders may not be enforceable under Delaware law. See "Conflicts of
Interest and Fiduciary Responsibilities".

Potential Liability of Unitholders. Unitholders will not be liable
for assessments in addition to their initial capital investment in the LP
Units. Under certain circumstances, however, Unitholders may be required to
repay to the Partnership amounts wrongfully returned or distributed to them.
See "Description of the Partnership Agreements-- Limited Liability".

If it were determined that the right of Unitholders as a group to
remove or replace the General Partner, or to take other action pursuant to the
Partnership Agreement, constituted "control" of the Partnership's business,
then Unitholders might be held liable for the Partnership's obligations to the
same extent as a general partner. See "Description of the Partnership
Agreements--Limited Liability".

Potential Reduction of the Minimum Quarterly Distribution and Target
Distribution Levels. Distributions of Cash from Interim Capital Transactions
result in an adjustment of the Minimum Quarterly Distribution, First Target
Distribution, Second Target Distribution and Third Target Distribution until
such distributions equal Unrecovered Capital, after which Available Cash is
distributed 70% to all Unitholders pro rata and 30% to KPL. See "Glossary" and
"Cash Distributions - Adjustment of Minimum Quarterly Distribution and Target
Distribution Levels". In order to preserve the fungibility of the LP Units,
the holder of a Preference Unit is deemed to have unrecovered capital of $22
per Preference Unit, regardless of the amount actually paid by such holder for
such Preference Unit. The Partnership has no current plans to enter into any
transactions that would result in the distribution of Cash from Interim Capital
Transactions.

Limited Call Right. If at any time after the Preference Period less
than 750,000 of the outstanding LP Units are held by persons other than the
General Partner and its affiliates, the General Partner will have the right,
which it may assign and transfer to any of its affiliates or to the
Partnership, on at least 10 but not more than 60 days' notice, to purchase all,
but not less than all, of the outstanding LP Units held by such nonaffiliated
persons at specified prices. See "Description of the Partnership
Agreements--Limited Call Right".

TAX CONSIDERATIONS

For a discussion of the expected federal and state income tax
consequences of acquiring, owning and disposing of Preference Units, see
"Federal Income Tax Considerations" and "State and Other Taxes".

Partnership Status. The availability to a Preference Unitholder of
the federal income tax benefits of an investment in the Partnership depends in
large part on the classification of each of the Partnership and the Operating
Partnerships as a partnership for federal income tax purposes. Based upon
certain representations of KPL, Fulbright & Jaworski L.L.P., counsel to the
Partnership, has rendered its opinion that under current law and regulations,
each of the Partnership and the Operating Partnerships will be classified as a
partnership for federal income tax purposes. However, no advance ruling from
the IRS as to such status has been or will be requested and the opinion of
counsel is not binding on the IRS. If the IRS were to challenge the federal
income tax status of the Partnership or the Operating Partnerships or the
amount of a Preference Unitholder's allocable share of the Partnership's
taxable income, such challenge could result in an audit of the Preference
Unitholder's

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entire tax return and in adjustments to items on that return that are unrelated
to the ownership of Preference Units. In addition, each Preference Unitholder
would bear the cost of any expenses incurred in connection with an examination
of his personal tax return.

One of the criteria involved in determining whether the Partnership or
an Operating Partnership is treated as a partnership for federal income tax
purposes is whether its general partner will have and maintain substantial
assets. The opinion of Fulbright & Jaworski L.L.P. that the Partnership is
classified as a partnership for federal income tax purposes is based upon KPL's
and STS' representations that they have and will maintain at all times while
serving as general partner of their respective partnerships a net worth of at
least $5.0 million each, exclusive of their interests in, and accounts and
notes receivable from, the Partnership and any other limited partnership in
which they are a general partner. In addition, Fulbright & Jaworski L.L.P.'s
opinion is based on the assumption that at least 90% of the Partnership's and
the Operating Partnerships' aggregate gross income for each taxable year will
constitute either (i) income from the exploration, development, mining or
production, processing, refining, transportation or marketing of oil, gas or
products thereof or (ii) other qualifying income within the meaning of Section
7704(d) of the Internal Revenue Code of 1986, as amended (the "Code"), and the
further assumption that the General Partner will act independently of the
Unitholders.

STOP earns fees from its terminaling operations for petroleum
products, specialty chemicals and other liquids. Fees relating to terminaling
of liquids that are not oil, gas, other natural resources or products derived
from oil or gas will not be qualifying income for purposes of Section 7704(d)
of the Code. Such fees, which consist primarily of revenues from the Westwego
and Baltimore terminals, were less than 7% of Partnership revenues in 1994, and
the Partnership believes that such fees will be less than 7% of Partnership
revenues in 1995. STOP received a ruling from the IRS in 1993 to the effect
that fees earned from its terminaling operations for petroleum and other
qualifying products will be qualifying income for purposes of Section 7704(d)
of the Code. Although that ruling was based on the facts as they existed in
1993, the Partnership believes that current operations continue to be in
conformity with the facts disclosed and representations made in STOP's request
for the ruling. For this purpose, the Steuart liquids terminaling operations
are not materially different from the Partnership's current terminaling
operations. The Partnership does not intend to request a similar ruling from
the IRS if such business is acquired.

If the Partnership or an Operating Partnership were taxable as a
corporation or treated as an association taxable as a corporation in any
taxable year, its income, gains, losses, deductions and credits would be
reflected only on its tax return rather than being passed through to Preference
Unitholders, and its taxable income would be taxed at corporate rates. In
addition, distributions made to Preference Unitholders would be treated as
dividend income (to the extent of current and accumulated earnings and
profits), and, in the absence of earnings and profits, as a nontaxable return
of capital (to the extent of the Preference Unitholder's basis in his
Preference Units), or as capital gain (after the Preference Unitholder's basis
in his Preference Units is reduced to zero). Furthermore, losses realized by
such Partnership would not flow through to Preference Unitholders.

Limited Deductibility of Losses. Losses generated by the Partnership,
if any, will be available to Preference Unitholders that are subject to the
passive activity loss limitations of Section 469 of the Code only to offset
future income generated by the Partnership and cannot be used to offset income
to a Preference Unitholder from other passive activities or investments or any
other source. Losses from the Partnership that are not deductible because of
the passive loss limitations may be deducted when the Preference Unitholder
disposes of all his Preference Units in a fully taxable transaction with an
unrelated party. Net passive income from the Partnership may only be offset by
a Preference Unitholder's investment interest expense and by unused Partnership
losses carried over from prior years.

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Risk of Challenge to Partnership Allocations. Investors should be
aware that certain aspects of the allocations contained in the Partnership
Agreement may be challenged by the IRS, and such challenges may be sustained.
If an allocation contained in the Partnership Agreement is not given effect for
federal income tax purposes, items of income, gain, loss, deduction or credit
will be reallocated to the Unitholders and the General Partner in accordance
with their respective interests in such items, based upon all the relevant
facts and circumstances. Such reallocation among the Unitholders and the
General Partner of such items of income, gain, loss, deduction or credit
allocated under the Partnership Agreement could result in additional taxable
income to the Preference Unitholders. Such reallocation of Partnership items
also could affect the uniformity of the intrinsic federal tax characteristics
of the Preference Units.

Section 754 Election. The Partnership has made the election permitted
by Section 754 of the Code. Such election will generally permit a purchaser of
Preference Units to adjust his share of the basis in the Partnership's
properties pursuant to Section 743(b) of the Code. The aggregate amount of the
adjustment computed under Section 743(b) is then allocated among the various
assets of the Partnership pursuant to the rules of Section 755. The Section
743(b) adjustment acts in concert with the Section 704(c) allocations
(including the curative allocations if respected) in providing the purchaser of
Preference Units with the equivalent of an adjusted tax basis in his share of
the Partnership's properties equal to the fair market value of such share.

Possible Unsuitability of Preference Units for Tax-Exempt Entities,
Regulated Investment Companies and Foreign Investors. All the gross income
attributable to an investment in the Partnership by tax-exempt entities
(including individual retirement accounts, Keogh and other retirement plans)
will constitute unrelated business taxable income ("UBTI") to such tax-exempt
entities. An investment in Preference Units, therefore, may not be suitable
for tax-exempt entities. An investment in Preference Units also may not be
suitable for regulated investment companies and foreign investors for the
reasons discussed in "Federal Income Tax Considerations--Tax Treatment of
Operations--Tax Exempt Entities, Regulated Investment Companies and Foreign
Investors".

Risk of Tax Liability Exceeding Cash Distributions or Proceeds from
Dispositions of Preference Units. Since the Partnership is not a taxable
entity and incurs no federal income tax liability, a Preference Unitholder will
be required to pay federal income tax and, in certain cases, state and local
income taxes on his allocable share of the Partnership's income, whether or not
he receives cash distributions from the Partnership. No assurance is given
that Preference Unitholders will receive cash distributions equal to their
allocable share of taxable income from the Partnership. Further, upon the sale
or other disposition of Preference Units, a Unitholder may incur tax liability
in excess of the amount of cash received. To the extent that a Preference
Unitholder's tax liability exceeds the amount distributed to him or the amount
he receives on the sale or other disposition of his Preference Units, he will
incur an out-of-pocket expense.

USE OF PROCEEDS

The net proceeds from the sale of the Preference Units are estimated
to be approximately $74.5 million ($81.4 million if the Underwriters'
over-allotment option is exercised in full). The Partnership will not receive
any of the proceeds from the sale of the Preference Units by KPPLP. After the
offering, KPL and its affiliates will own an aggregate 32.4% interest as
limited partners in the Partnership (30.4% if the Underwriters' over-allotment
option is exercised in full).

26
<PAGE> 28
CAPITALIZATION

The following table sets forth the capitalization of the Partnership
(i) as of June 30, 1995, (ii) as adjusted to give effect to the exchange by KPL
of 1,000,000 Preference Units for an equal number of Preference B Units and
(iii) on a pro forma basis to reflect the pending acquisition by the
Partnership of the Steuart terminaling assets. The table should be read in
conjunction with the historical financial statements and notes thereto included
elsewhere in this Prospectus.

<TABLE>
<CAPTION>
AS OF JUNE 30, 1995
------------------------------------------
PRO FORMA
HISTORICAL ASSADJUSTED (STEUART)
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Current portion of long-term debt . . . . . . . . . . . . . . . $ 1,658 $ 1,658 $ 1,658
============ ============ ============
Long-term debt:
First mortgage notes . . . . . . . . . . . . . . . . . . . . $ 60,000 $ 60,000 $ 60,000
Bank borrowing for Steuart asset acquisition . . . . . . . . -- -- 82,000
Obligations under capitalized leases,
including current portion . . . . . . . . . . . . . . . . 11,066 11,066 11,066
------------ ------------ ------------
Total long-term debt, including current portion . . . . . . . . 71,066 71,066 153,066
Less current portion of long-term debt . . . . . . . . . . . 1,658 1,658 1,658
------------ ------------ ------------
Total long-term debt, less current portion . . . . . . . . . . $ 69,408 $ 69,408 $ 151,408
============ ============ ============
Partners' capital:
Senior preference unitholders . . . . . . . . . . . . . . . $ 47,288 $ 47,288 $ 47,288
Preference unitholders . . . . . . . . . . . . . . . . . . . 45,247 37,239 37,239
Preference B unitholders . . . . . . . . . . . . . . . . . . -- 8,008 8,008
Common unitholders . . . . . . . . . . . . . . . . . . . . . 5,739 5,739 5,739
General partner . . . . . . . . . . . . . . . . . . . . . . 985 985 985
------------ ------------ ------------
Total partners' capital . . . . . . . . . . . . . . . . . . . . $ 99,259 $ 99,259 $ 99,259
============ ============ ============

Total capitalization . . . . . . . . . . . . . . . . . . . . $ 170,325 $ 170,325 $ 252,325
============ ============ ============
</TABLE>

In 1994, the Partnership entered into a restated credit agreement (the
"Credit Agreement") that provides for a $15 million revolving credit facility
for working capital and general partnership purposes. The Credit Agreement is
secured by a mortgage on the East Pipeline and all the outstanding common stock
of STS and is guaranteed by KPOP, STS, STI and STOP. The Credit Agreement does
not contain a cross-default provision with indebtedness of the General Partner
except in the event the General Partner fails to pay its debts generally as
they become due or in the event of a bankruptcy of the General Partner.
Borrowings under the Credit Agreement bear interest at variable rates and are
due and payable in November 1997. No borrowings under the Credit Agreement
were outstanding at June 30, 1995.

The Credit Agreement contains various restrictive covenants applicable
to the Partnership, including (i) the requirement that current liabilities may
not exceed current assets (excluding current maturities of long-term debt and
partner distributions payable), (ii) the requirement that net worth may never
be less than $70 million plus the net proceeds of issuance of partner interests
and (iii) certain limitations on the incurrence of debt. The Credit Agreement
prohibits the Partnership from distributing amounts in any quarter in excess of
100% of Available Cash for such quarter and from making any distributions to
Unitholders if an event of default exists or would exist upon making such
distribution. Should an event of default under the Credit Agreement occur, the
lenders may foreclose upon the mortgaged assets, following the expiration of
any cure periods. Events of default include failure to pay

27
<PAGE> 29
principal or interest when due, failure to observe and perform any covenants,
breaches of representations and warranties, certain defaults by the Partnership
on other debt, failure of the General Partner to be the general partner of the
Partnership and certain events of bankruptcy (including that of the General
Partner).

In 1994, pursuant to note purchase agreements (the "Note Purchase
Agreements"), STI sold $33 million of notes to a group of insurance companies.
The notes bear interest at the rate of 8.05% and are due on December 22, 2001.
In 1995, KPOP sold $27 million of additional first mortgage notes to the same
insurance companies pursuant to the Note Purchase Agreements, which bear
interest at the rate of 8.37% and are due on February 24, 2002. Both series of
the notes are secured by a mortgage on the East Pipeline and all the
outstanding common stock of STS and are guaranteed by KPOP, STS and STOP.

The Note Purchase Agreements contain various restrictive covenants
applicable to the Partnership, including certain limitations on the incurrence
of debt. The Note Purchase Agreements prohibit the Partnership from
distributing amounts in any quarter in excess of 100% of Available Cash for
such quarter and from making any distributions to Unitholders if an event of
default exists or would exist upon making such distribution. Should an event
of default under the Note Purchase Agreements occur, the lenders may foreclose
upon the mortgaged assets, following the expiration of any cure periods.
Events of default include failure to pay principal or interest when due,
failure to observe and perform any covenants, breaches of representations and
warranties, certain defaults by the Partnership on other debt and certain
events of bankruptcy (including that of the General Partner).

The proposed acquisition of the Steuart terminaling assets will be
financed by a bridge loan from Texas Commerce Bank National Association ("TCB")
for a 120-day period. Such loan will bear interest at a variable rate based on
the LIBOR rate plus 50 to 100 basis points. See "Business and Properties of
the Partnership--Liquids Terminaling Business--Recent Developments". Should
the Partnership not refinance such loan within the 120-day period, it will be
syndicated with a group of lenders acceptable to the Partnership and TCB for a
two year revolving period followed by a four year, fully amortized term period.
Such loan will be secured, pari passu with the existing notes and credit
facility, by a mortgage on the East Pipeline and all of the outstanding common
stock of STS and will be guaranteed by KPOP, STS, STI and STOP.

DISTRIBUTIONS

The distribution to Unitholders of Available Cash that constitutes
Cash from Operations with respect to each quarter within the Preference Period
is subject to the preferential rights of the holders of the Senior Preference
Units to receive for such quarter $0.55 per Senior Preference Unit (the
"Minimum Quarterly Distribution"), plus any arrearages in the payment of the
Minimum Quarterly Distribution for prior quarters, prior to any distribution of
Available Cash that constitutes Cash from Operations to holders of Preference
Units, Preference B Units or Common Units with respect to such quarter. In
addition, for each quarter through the quarter ending September 30, 1997, the
distribution of Available Cash that constitutes Cash from Operations to holders
of Preference B Units is subject to the preferential rights of the holders of
the Preference Units to receive the Minimum Quarterly Distribution for such
quarter, plus any arrearages in the payment of the Minimum Quarterly
Distribution for prior quarters. After such time, the Preference B Units will
be deemed to be Preference Units for purposes of determining the priority and
amount of distributions of Available Cash on the Preference Units and
Preference B Units. During the Preference Period, the distribution of
Available Cash that

28
<PAGE> 30
constitutes Cash from Operations to holders of Common Units is subject to the
preferential rights of the holders of the Senior Preference Units, the
Preference Units and the Preference B Units to receive the Minimum Quarterly
Distribution for such quarter, plus any arrearages in the payment of the
Minimum Quarterly Distribution for prior quarters. The Common Units are not
entitled to arrearages in the payment of the Minimum Quarterly Distribution.

The Preference Period commenced upon the formation of the Partnership
and, in general, will continue indefinitely until the Minimum Quarterly
Distribution has been paid to holders of all LP Units for 12 consecutive
quarters and certain other conditions are met. The holders of the Common Units
have not been paid the full amount of the Minimum Quarterly Distribution in any
quarter since the formation of the Partnership. Therefore, such condition has
not yet been met in any quarter. Upon expiration of the Preference Period, all
distinctions between the Senior Preference Units, the Preference Units, the
Preference B Units and the Common Units will automatically cease.

The Partnership has paid the Minimum Quarterly Distribution on
outstanding Senior Preference Units for each quarter since the Partnership's
inception. The Partnership has paid the Minimum Quarterly Distribution on all
Preference Units with respect to all quarters since inception of the
Partnership, except for deficiencies in the payment of distributions on the
Preference Units with respect to the second, third and fourth quarters of 1991
totalling $9,323,000. All such arrearages were satisfied in 1992 and 1993.
Had the operations of the West Pipeline, ST and the other terminals acquired by
the Partnership since its inception been included in the Partnership's
operations from such date, the General Partner believes that such arrearages
would not have been incurred. Until 1994, no distributions were paid on the
outstanding Common Units, which are not entitled to arrearages in the payment
of the Minimum Quarterly Distribution thereon.

The Partnership Agreement generally prohibits distributions on the
Preference Units, Preference B Units and Common Units during the Preference
Period if the Partnership's consolidated indebtedness exceeds $45 million plus
80% of the aggregate Expansive Capital Expenditures of the Partnership since
October 3, 1989 greater than $45 million. At June 30, 1995, the Partnership's
consolidated indebtedness was $71.1 million, and its aggregate Expansive
Capital Expenditures since October 3, 1989 were approximately $116.8 million.
Therefore, at June 30, 1995, the Partnership could have borrowed an additional
$156.9 million (approximately) for Expansive Capital Expenditures without being
restricted in the payment of distributions to the holders of Preference Units.
The General Partner does not currently anticipate incurring debt that would
prevent the distribution of the Minimum Quarterly Distribution to the holders
of Preference Units. See "Cash Distributions".

The Credit Agreement and Note Purchase Agreements prohibit the
Partnership from distributing amounts in any quarter in excess of 100% of
Available Cash for such quarter and from making any distributions to
Unitholders if an event of default exists or would exist upon making such
distribution. The General Partner does not believe that the terms, covenants
and restrictions contained in the Credit Agreement and the Note Purchase
Agreements will adversely affect the conduct of the Partnership's business or
its ability to make distributions of the Minimum Quarterly Distribution on the
Preference Units.

29
<PAGE> 31
SELECTED HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA

The following table sets forth, for the periods and at the dates
indicated, selected (i) historical financial and operating data for the
Partnership, (ii) pro forma financial data for the Partnership after giving
effect to the acquisition of the West Pipeline and (iii) pro forma financial
data for the Partnership after giving effect to the acquisition of the West
Pipeline and the pending acquisition of the Steuart terminaling assets. The
data in the table is derived from and should be read in conjunction with the
historical financial statements the Partnership included elsewhere in this
Prospectus. See also "Management's Discussion and Analysis of Financial
Condition and Results of Operations". The pro forma financial data is based on
the combination of the historical financial data of the Partnership, the West
Pipeline and the Steuart terminaling assets assuming certain adjustments to
reflect the acquisitions of the West Pipeline and the Steuart terminaling
assets at the balance sheet date and as of the beginning of the period for
income statement purposes and should be read in conjunction with the unaudited
pro forma financial statements of the Partnership included elsewhere in this
Prospectus.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------
HISTORICAL PRO FORMA
------------------------------------------------------------ -----------------------
1990 1991 1992 1993(A) 1994 1994(B) 1994(C)
-------- --------- --------- ---------- ---------- --------- ----------
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues . . . . . . . . . $ 37,618 $ 39,415 $ 42,179 $ 69,235 $ 78,745 $ 92,439 $ 118,067
-------- --------- --------- ---------- ---------- --------- ----------
Costs and expenses:
Operating costs . . . . . . 12,588 14,337 14,507 29,012 33,586 40,721 49,977
Depreciation and
amortization . . . . . . 3,333 3,519 4,124 6,135 7,257 7,961 13,626
General and administrative
expenses . . . . . . . . 2,916 2,861 2,752 4,673 4,924 5,705 6,455
Legal expenses for tariff
protest . . . . . . . . . 400 2,172 -- -- -- -- --
-------- --------- --------- ---------- ---------- --------- ----------
Total costs and expenses 19,237 22,889 21,383 39,820 45,767 54,387 70,058
-------- --------- --------- ---------- ---------- --------- ----------
Operating income . . . . . 18,381 16,526 20,796 29,415 32,978 38,052 48,009
Interest and other income . 2,093 1,751 1,721 1,331 1,299 1,299 1,299
Interest expense . . . . . (2,321) (2,259) (2,338) (3,376) (3,706) (5,966) (12,116)
Minority interest . . . . . (183) (159) (200) (266) (295) (322) (360)
-------- --------- --------- ---------- ---------- --------- ----------
Income before income taxes 17,970 15,859 19,979 27,104 30,276 33,063 36,832
Income taxes (d) . . . . . -- -- -- (450) (818) (818) (818)
-------- --------- --------- ---------- ---------- --------- ----------
Net income . . . . . . . . $ 17,970 $ 15,859 $ 19,979 $ 26,654 $ 29,458 $ 32,245 $ 36,014
======== ========= ========= ========== ========== ========= ==========
Allocation of net income and
cash distributions per
Senior Preference
Unit (e) . . . . . . . . $ 2.20 $ 2.20 $ 2.20 $ 2.20 $ 2.20
======== ========= ========= ========== ==========
Allocation of net income and
cash distributions per
Preference Unit (e)(f) . $ 2.20 $ 2.20 $ 2.20 $ 2.20 $ 2.20
======== ========= ========= ========== ==========
Arrearages (created) paid
per Preference Unit . . . $ -- $ (1.65) $ 0.45 $ 1.20 $ --
======== ========= ========= ========== ==========
BALANCE SHEET DATA
(AT PERIOD END):
Property and equipment, net $ 67,045 $ 68,255 $ 66,956 $ 133,436 $ 145,646 $ 173,806 $ 256,657
Total assets . . . . . . . 88,610 88,530 86,409 162,407 163,105 193,313 276,163
Current portion of
long-term debt . . . . . 895 1,027 1,177 3,850 1,548 1,548 1,548
Long-term debt, less
current portion . . . . . 15,368 16,941 20,864 41,814 43,265 70,265 152,265
Partners' capital . . . . . 60,310 61,918 55,657 100,598 99,754 99,754 99,754
</TABLE>

30
<PAGE> 32
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
HISTORICAL
--------------------------------------------------------------
1990 1991 1992 1993(A) 1994
--------- ---------- ---------- --------- ----------
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<S> <C> <C> <C> <C> <C>
OTHER DATA:
Net cash provided by operating activities before
changes in working capital components (g) . . $ 21,486 $ 19,537 $ 24,303 $ 33,469 $ 37,636
Capital expenditures (g)(h) . . . . . . . . . . . 4,137 4,747 3,183 8,132 7,147
Distributions to: (i)
Senior preference unitholders . . . . . . . . . 11,000 11,000 11,000 13,475 15,950
Preference unitholders (f) . . . . . . . . . . 12,430 12,430 12,430 12,430 12,430
Common unitholders . . . . . . . . . . . . . . -- -- -- -- 2,686
--------- ---------- ---------- --------- ----------
Total distributions to unitholders . . . . . $ 23,778 $ 14,396 $ 23,430 $ 25,905 $ 31,066
========= ========== ========== ========= ==========
OPERATING DATA:
Volumes (j) . . . . . . . . . . . . . . . . . . . 53,087 51,635 55,111 56,195 54,561
Barrel miles (k) . . . . . . . . . . . . . . . . 13,165 13,245 14,287 14,160 14,460
</TABLE>

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-----------------------------------------------------
HISTORICAL PRO FORMA
--------------------------- -------------------------
1994 1995(L) 1995(B) 1995(C)
----------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues . . . . . . . . . . . . . . . . . . . . $ 37,207 $ 43,724 $ 45,439 $ 56,030
----------- ----------- ---------- -----------
Costs and expenses:
Operating costs . . . . . . . . . . . . . . . . 15,865 18,269 19,427 23,255
Depreciation and amortization . . . . . . . . . 3,511 4,161 4,267 7,100
General and administrative expenses . . . . . . 2,506 2,571 2,854 3,200
----------- ----------- ---------- -----------
Total costs and expenses . . . . . . . . . . . 21,882 25,001 26,548 33,555
----------- ----------- ---------- -----------
Operating income . . . . . . . . . . . . . . . . 15,325 18,723 18,891 22,475
Interest and other income . . . . . . . . . . . . 656 447 632 632
Interest expense . . . . . . . . . . . . . . . . (1,741) (3,037) (3,387) (6,462)
Minority interest . . . . . . . . . . . . . . . . (137) (157) (157) (163)
----------- ----------- ---------- -----------
Income before income taxes . . . . . . . . . . . 14,103 15,976 15,979 16,482
Income taxes (d) . . . . . . . . . . . . . . . . (435) (219) (219) (219)
----------- ----------- ---------- -----------
Net income . . . . . . . . . . . . . . . . . . . $ 13,668 $ 15,757 $ 15,760 $ 16,263
=========== =========== ========== ===========
Allocation of net income and cash distributions per
Senior Preference Unit (e) . . . . . . . . . . $ 1.10 $ 1.10
=========== ===========
Allocation of net income and cash distributions per
Preference Unit (e)(f) . . . . . . . . . . . . $ 1.10 $ 1.10
=========== ===========
Arrearages (created) paid per Preference Unit . . $ -- $ --
=========== ===========
BALANCE SHEET DATA (AT PERIOD END):
Property and equipment, net . . . . . . . . . . . $ 143,815 $ 173,306 $ 173,306 $ 256,156
Total assets . . . . . . . . . . . . . . . . . . 162,033 191,434 191,434 274,284
Current portion of long-term debt . . . . . . . . 16,646 1,658 1,658 1,658
Long-term debt, less current portion . . . . . . 28,566 69,408 69,408 151,408
Partners' capital . . . . . . . . . . . . . . . . 100,055 99,259 99,259 99,259
</TABLE>

31
<PAGE> 33
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
HISTORICAL
-------------------------
1994 1995(L)
----------- -----------
<S> <C> <C>
OTHER DATA:
Net cash provided by operating activities before changes in working
capital components (g) . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,780 $ 20,291
Capital expenditures (g)(h) . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,248 4,721
Distributions to: (i)
Senior preference unitholders . . . . . . . . . . . . . . . . . . . . . . . . . 7,975 7,975
Preference unitholders (f) . . . . . . . . . . . . . . . . . . . . . . . . . . 6,215 6,215
Common unitholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 1,896
----------- -----------
Total distributions to unitholders . . . . . . . . . . . . . . . . . . . . . $ 14,190 $ 16,086
========== ===========
OPERATING DATA:
Volumes (j) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,210 34,549
Barrel miles (k) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,019 7,568

</TABLE>
_________
(a) Includes the operations of ST since its acquisition on March 2, 1993.
(b) Gives effect to the acquisition of the West Pipeline. The pro forma
financial data may not be indicative of the results that would have
occurred if the Partnership had acquired the West Pipeline on the dates
indicated or that will be obtained in the future.
(c) Gives effect to the acquisition of the West Pipeline and the pending
acquisition of the liquids terminaling assets of Steuart. The pro forma
financial data may not be indicative of the results that would have
occurred if the Partnership had acquired the West Pipeline and the
liquids terminaling assets of Steuart on the dates indicated or that will
be obtained in the future.
(d) Subsequent to the acquisition of ST in March 1993, certain operations are
conducted in a taxable entity.
(e) Net income of the Partnership for each reporting period is allocated to
the Senior Preference Units and Preference Units in an amount equal to
the cash distributions to the holders thereof declared for that reporting
period.
(f) Allocation of net income and cash distributions declared per Preference
Unit exclude $0.45 and $1.20 attributable to the payment of arrearages in
1992 and 1993, respectively.
(g) Under the Partnership Agreement, the Partnership is required to make
distributions to Unitholders and the General Partner with respect to each
calendar quarter in an amount equal to 100% of its Available Cash for
such quarter, except in connection with the dissolution and liquidation
of the Partnership. Distributions of Available Cash are characterized as
either distributions of Cash from Operations or Cash from Interim Capital
Transactions and, depending on the characterization of the Available Cash
distributed, different distribution priorities would apply. In addition,
Distributions of Available Cash that constitutes Cash from Interim
Capital Transactions result in reductions in the Minimum Quarterly
Distribution, First Target Distribution, Second Target Distribution and
Third Target Distribution. The Partnership's Available Cash, Cash from
Operations and Cash from Interim Capital Transactions are affected by
items in addition to "net cash provided by operating activities before
changes in working capital components" and "capital expenditures". See
"Cash Distributions" and "Glossary".
(h) Includes approximately $1.7 million, $5.5 million and $5.7 million of
maintenance capital expenditures and approximately $1.5 million, $2.6
million and $1.5 million of Expansive Capital Expenditures in 1992, 1993
and 1994, respectively, and approximately $1.3 million and $3.5 million
of maintenance capital expenditures and approximately $0.9 million and
$1.2 million of Expansive Capital Expenditures in the six months ended
June 30, 1994 and 1995, respectively. Such amounts exclude approximately
$62.7 million related to the acquisition of ST in March 1993,
approximately $12.3 million related to terminal acquisitions in 1994
($11.7 million through June 30, 1994) and approximately $27.1 million
related to the acquisition of the West Pipeline in the first quarter of
1995.

32
<PAGE> 34
(i) Consists of distributions paid with respect to the periods shown,
excluding arrearages (see note (f) above). Payment of distributions with
respect to a calendar quarter is made in the next succeeding calendar
quarter.
(j) Volumes are expressed in thousands of barrels of refined petroleum
product.
(k) Barrel miles are shown in millions. A barrel mile is the movement of one
barrel of refined petroleum product one mile.
(l) Includes the operations of the West Pipeline since its acquisition on
February 24, 1995. Since such acquisition occurred prior to the end of
the period, the pro forma balance sheet data and the historical balance
sheet data are the same.

33
<PAGE> 35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

This discussion should be read in conjunction with the financial
statements of the Partnership and notes thereto and the summary historical and
pro forma financial and operating data of the Partnership included elsewhere in
this Prospectus.

GENERAL

In September 1989, KPL, a wholly owned subsidiary of Kaneb, formed the
Partnership to own and operate its refined petroleum products pipeline
business. The Partnership operates through KPOP, a limited partnership in
which the Partnership holds a 99% interest as limited partner and KPL owns a 1%
interest as general partner. The Partnership is engaged through operating
subsidiaries in the refined petroleum products pipeline business and the
terminaling of petroleum products and specialty liquids.

The Partnership's pipeline business consists primarily of the
transportation through the East Pipeline and the West Pipeline, as common
carriers, of refined petroleum products. The Partnership acquired the West
Pipeline in February 1995 from Wyco Pipe Line Company, a company jointly owned
by GATX Terminals Corporation and Amoco Pipeline Company, for $27.1 million.
The acquisition was financed by the sale of $27 million of first mortgage notes
due February 24, 2002, which bear interest at the rate of 8.37% per annum. The
East Pipeline and the West Pipeline are collectively referred to as the
"Pipelines". The Pipelines primarily transport gasoline, diesel oil, fuel oil
and propane. The products are transported from refineries connected to the
Pipelines, directly or through other pipelines, to agricultural users,
railroads and wholesale customers in the states in which the Pipelines are
located and in portions of other states. Substantially all of the Pipelines'
operations constitute common carrier operations that are subject to federal or
state tariff regulation. The Partnership has not engaged, nor does it
currently intend to engage, in the merchant function of buying and selling
refined petroleum products.

The Partnership acquired ST In March 1993 for approximately $65
million (including $2 million in acquisition costs). In connection with the
acquisition, the Partnership borrowed $65 million from a group of banks. In
April 1993, the Partnership completed a public offering of 2.25 million Senior
Preference Units at $25.25 per unit. The bank loan was partially repaid with
$50.8 million of the proceeds from the offering, and the balance was refinanced
in December 1994. The Partnership continually evaluates other potential
acquisitions.

34
<PAGE> 36
PIPELINE OPERATIONS

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------- -------------------------
1992 1993 1994 1994 1995
------------ ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues . . . . . . . . . . . $ 42,179 $ 44,107 $ 46,117 $ 21,853 $ 26,125
Operating costs . . . . . . . . 14,507 16,453 17,777 8,570 9,592
Depreciation and amortization . 4,124 4,055 4,276 2,126 2,488
General and administrative . . 2,752 3,132 2,908 1,540 1,503
------------ ----------- ------------ ----------- -----------
Operating income . . . . . . . $ 20,796 $ 20,467 $ 21,156 $ 9,617 $ 12,542
============ =========== ============ =========== ===========
</TABLE>

The Pipelines' revenues are based on volumes shipped and the distances
over which such volumes are transported. Revenues increased 5% in both 1994
and 1993. KPOP implemented a tariff increase of approximately 5.5% in April
1994, which accounted for more than one-half of its increase in revenues in
1994 over 1993, and approximately 5.6% in July 1992, which accounted for
substantially all of its increase in revenues in 1993 over 1992. KPOP does not
expect to increase its tariffs in 1995. Because tariff rates are regulated by
the FERC, the Pipelines compete primarily on the basis of quality of service,
including delivering products at convenient locations on a timely basis to meet
the needs of its customers. Barrel miles increased 2% to 14.5 billion barrel
miles in 1994 from 14.2 billion barrel miles in 1993. The increase in barrel
miles was primarily due to increased long-haul shipments related to product
pricing advantages for shippers to western area terminals served by the East
Pipeline and a decrease in short-haul shipments.

Operating costs, which primarily include fuel and power costs,
materials and supplies, maintenance and repair costs, salaries, wages and
employee benefits, and property and other taxes, increased 8% in 1994 and 13%
in 1993. Property taxes increased $300,000 and $900,000 in 1994 and 1993,
respectively. The 1994 property tax increase was primarily due to tax rate
adjustments in Kansas and Nebraska and the 1993 property tax increase was
primarily due to non-recurring refunds received in 1992 and tax rate
adjustments in Nebraska in 1993. Power costs increased by $600,000 in 1994 due
to increased barrel miles, utility rates and increased usage of drag reducers
to increase throughput on portions of the East Pipeline. Material, supplies
and outside services increased $400,000 in 1994 primarily due to unusually high
repair and maintenance expenditures. General and administrative costs include
managerial, accounting and administrative personnel costs, office rental and
expense, legal and professional costs and other non-operating costs.

The West Pipeline reported revenues of $4.8 million, operating costs
of approximately $1.5 million and depreciation and amortization of
approximately $0.3 million, which resulted in operating income of approximately
$3.0 million for the period from February 24, 1995 (date of acquisition) to
June 30, 1995. Such amount accounts for substantially all of the Partnership's
increase in operating income for the six months ended June 30, 1995 as compared
with the same period in 1994.

35
<PAGE> 37
TERMINALING OPERATIONS

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------- -------------------------
1992 1993 1994 1994 1995
---------- ----------- ------------ ----------- -----------
PRO FORMA* HISTORICAL HISTORICAL
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues . . . . . . . . . . . $ 26,852 $ 29,921 $ 32,628 $ 15,354 $ 17,599
Operating costs . . . . . . . . 13,500 15,064 15,809 7,295 8,677
Depreciation and amortization . 2,242 2,496 2,981 1,385 1,673
General and administrative . . 1,442 1,949 2,016 966 1,068
---------- ----------- ------------ ----------- -----------
Operating income . . . . . . . $ 9,668 $ 10,412 $ 11,822 $ 5,708 $ 6,181
========== =========== ============ =========== ===========
</TABLE>
_________
* Represents the operations of ST Services, Inc., which was acquired by the
Partnership in March 1993.

The increases in revenues are attributable to increases in prices
charged for storage and tankage volumes utilized. Revenues increased 9% in
1994 and 11% in 1993. Average annual tankage utilized increased 200,000
barrels to 6.1 million barrels compared to 5.9 million barrels in 1993 as a
direct result of terminal acquisitions in 1994. Average annual revenues per
barrel of tankage utilized increased by $0.26 in 1994 to $5.33 per barrel.
Total tankage capacity (7.7 million barrels at June 30, 1995) has been, and is
expected to remain, adequate to meet existing customer storage requirements.
Customers consider factors such as location, access to cost effective
transportation and quality of service in addition to pricing when selecting
terminal storage.

For the six months ended June 30, 1995, revenues and operating costs
increased 15% and 19%, respectively, primarily as a result of the acquisition
of the Westwego terminal in June 1994. The average barrels of tankage utilized
increased 8% to 6.4 million barrels while the average annualized revenue per
barrel stored increased to $5.51 in the six months ended June 30, 1995 compared
to $5.21 for the same period in 1994.

LIQUIDITY AND CAPITAL RESOURCES

The ratio of current assets to current liabilities decreased to 0.8 to
1 at June 30, 1995 and December 31, 1994 from 1.29 to 1 at December 31, 1993.
The decrease was primarily the result of terminal acquisitions in 1994 funded
from the Partnership's cash balances. Cash provided by operating activities
was $37.9 million, $37.2 million and $26.6 million for the years 1994, 1993 and
1992, respectively. Cash provided by operating activities was $20.0 million
and $18.1 million for the six months ended June 30, 1995 and 1994,
respectively. The increase in cash flow from operating activities in 1993 was
due to the acquisition of ST, and the first six months 1995 increase was a
direct result of the West Pipeline and Westwego terminal acquisitions.

Capital expenditures were $19.5 million, $8.1 million and $3.2 million
for the years 1994, 1993 and 1992, respectively, and $4.7 million and $13.9
million for the six months ended June 30, 1995 and 1994, respectively.
Included in capital expenditures for the year 1994 were three terminal
acquisitions by ST that totalled $12.3 million. During all periods, adequate
pipeline capacity existed to accommodate volume growth, and the expenditures
required for environmental and safety improvements were not, and are not
expected in the future to be, material. Environmental damages caused by sudden
and accidental occurrences are included under the Partnership's insurance
coverage. Kaneb, which had an unaudited consolidated net worth of
approximately $21.3 million at June 30, 1995, has indemnified the Partnership
against liabilities for environmental damages resulting from operations of the
East Pipeline prior to October 3, 1989; however, amounts expended by the

36
<PAGE> 38
Partnership, and reimbursed by Kaneb, have been immaterial and are not expected
to be material in the future. Capital expenditures of the Partnership
(including ST but excluding the West Pipeline) for maintenance of existing
operations during 1995 are expected to be approximately $7.0 million. Capital
expenditures for expansionary purposes during 1995 are expected to be
approximately $1.0 million, excluding acquisition costs of the West Pipeline.
The Partnership expects capital expenditures in 1995 on the West Pipeline to
range from approximately $1.5 million to $2.0 million.

The Partnership makes distributions of 100% of its Available Cash to
Unitholders and the General Partner. Available Cash consists generally of all
the cash receipts less all cash disbursements and reserves. A distribution of
$2.20 per unit was paid to Senior Preference Unitholders in 1994, 1993 and
1992. During 1994, 1993 and 1992, the Partnership paid distributions of $12.3
million, ($2.20 per unit), $19.3 million ($2.20 per unit and $1.20 per unit in
arrearages) and $15.0 million ($2.20 per unit and $0.45 per unit in arrearages)
to the holders of Preference Units. During 1994, the Partnership paid
distributions of $1.7 million ($0.55 per unit) to the holders of Common Units.

The Partnership expects to fund future cash distributions and
maintenance capital expenditures with existing cash and cash flows from
operating activities, and expansionary capital expenditures and some
environmental expenditures are expected to be funded through additional
Partnership borrowings.

In 1994, STI sold $33 million of notes to a group of insurance
companies. Proceeds from these sales were used to refinance existing debt of
the Partnership that was incurred in connection with the ST acquisition in 1993
and the terminal acquisitions in 1994. The notes bear interest at the rate of
8.05% per annum and are due on December 22, 2001. In 1994, the Partnership
entered into the Credit Agreement with a group of banks that provides a $15
million revolving credit facility for working capital and general partnership
purposes. Borrowings under the Credit Agreement bear interest at variable
rates and are due and payable in November 1997. The Credit Agreement has a
commitment fee of 0.2% per annum of the unused credit facility. No amounts
were drawn under this credit facility at June 30, 1995. The notes and credit
facility are secured by a mortgage on the East Pipeline and all the outstanding
common stock of STS and are guaranteed by KPOP, STS, STI and STOP.

The proposed acquisition of the Steuart terminaling assets will be
financed by a bridge loan from TCB for a 120-day period. Such loan will bear
interest at a variable rate based on the LIBOR rate plus 50 to 100 basis
points. See "Business and Properties of the Partnership--Liquids Terminaling
Business--Recent Developments". Should the Partnership not refinance such loan
within the 120-day period, it will be syndicated with a group of lenders
acceptable to the Partnership and TCB for a two year revolving period followed
by a four year, fully amortized term period. Such loan will be secured, pari
passu with the existing notes and credit facility, by a mortgage on the East
Pipeline and all of the outstanding common stock of STS and will be guaranteed
by KPOP, STS, STI and STOP.

In the FERC's Lakehead decision issued June 15, 1995, the FERC
partially disallowed Lakehead's inclusion of income taxes in its cost of
service. Specifically, the FERC held that Lakehead was entitled to receive an
income tax allowance with respect to income attributable to its corporate
partners, but was not entitled to receive such an allowance for income
attributable to the partnership interests held by individuals. Both Lakehead
and representatives of its customers have filed motions for rehearing. It is
possible that either Lakehead or its customers may ultimately seek judicial
review

37
<PAGE> 39
of the FERC decision. It is difficult to predict what position would be
adopted by a reviewing court on the income tax issue. In another FERC
proceeding that has not yet reached the hearing stage, involving a different
oil pipeline limited partnership, various shippers have challenged such
pipeline's inclusion of an income tax allowance in its cost of service. The
FERC Staff has also filed testimony that supports the disallowance of income
taxes. If the FERC were to disallow the income tax allowance in the cost of
service of the Pipelines on the basis set forth in the Lakehead order, the
General Partner believes that the Partnership's ability to pay the Minimum
Quarterly Distribution to the holders of the Senior Preference Units,
Preference Units and Preference B Units would not be impaired; however, in view
of the uncertainties involved in this issue, there can be no assurance in this
regard.

BUSINESS AND PROPERTIES OF THE PARTNERSHIP

The Partnership is engaged, through its operating subsidiaries, in the
refined petroleum products pipeline business and the terminaling of petroleum
products and specialty liquids business.

PRODUCTS PIPELINE BUSINESS

Introduction

The Partnership's pipeline business consists primarily of the
transportation, as a common carrier, of refined petroleum products in Kansas,
Nebraska, Iowa, South Dakota, North Dakota, Colorado and Wyoming. The
acquisition of the West Pipeline in February 1995 increased the Partnership's
pipeline business in South Dakota and expanded it into Wyoming and Colorado.
None of the results for 1994 or prior years include the West Pipeline.

The East Pipeline is an integrated pipeline transporting refined
petroleum products, including propane, received from refineries in southeast
Kansas, or from other connecting pipelines, to terminals in Kansas, Nebraska,
Iowa, South Dakota and North Dakota and to receiving pipeline connections in
Kansas. Shippers on the East Pipeline obtain refined petroleum products from
refineries connected to the East Pipeline directly or through other pipelines.
Such refineries obtain crude oil primarily from producing areas in Kansas,
Oklahoma and Texas. Five connecting pipelines deliver propane from gas
processing plants in Texas, New Mexico, Oklahoma and Kansas to the East
Pipeline for shipment.

The Pipelines' revenues are based on volumes shipped and the distances
over which such volumes are transported. The following table reflects the
total volume and barrel miles of refined petroleum products shipped and total
operating revenues earned by the East Pipeline for each of the periods
indicated and by the West Pipeline since its acquisition on February 24, 1995.

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
-------------------------------------------- -----------------------------
1990 1991 1992 1993 1994 1994 1995
-------- -------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Volume (1) . . . . . . . 53,087 51,635 55,111 56,234 54,546 27,210 34,549
Barrel miles(2) . . . . . 13,165 13,245 14,287 14,160 14,460 7,019 7,568
Revenues (thousands) . . $ 37,618 $ 39,415 $ 42,179 $ 44,107 $ 46,117 $ 21,853 $ 26,125
</TABLE>
_________
(1) Volumes are expressed in thousands of barrels of refined petroleum
product.
(2) Barrel miles are shown in millions. A barrel mile is the movement of
one barrel of refined petroleum product one mile.

The increase in barrel miles from 1993 to 1994 was primarily due to
increased long-haul shipments related to product pricing advantages for
shippers to western area terminals served by the East Pipeline. However,
aggregate volumes transported decreased from 1993 to 1994 because of a

38
<PAGE> 40
reduction in short-haul shipments resulting primarily from the closing of three
Coastal refineries in 1993.

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

The following table sets forth, in thousands of barrels, the volumes of
gasoline, diesel and fuel oil, propane and other refined petroleum products
transported by the East Pipeline during the periods indicated and by the West
Pipeline since its acquisition on February 24, 1995.

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
----------------------------------------------------------- ----------------------
1990 1991 1992 1993 1994 1994 1995
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Gasoline . . . . . . . 26,841 24,152 24,816 25,407 23,958 12,312 17,655
Diesel and fuel oil . . 18,991 20,047 23,374 25,269 26,355 12,063 14,647
Propane . . . . . . . . 4,703 4,441 4,676 4,153 4,204 1,921 1,497
Other . . . . . . . . . 2,552 2,995 2,245 1,366 44 914 750
---------- ---------- ---------- ---------- ---------- ---------- ---------
Total . . . . . . . . 53,087 51,635 55,111 56,195 54,561 27,210 34,549
========== ========== ========== ========== ========== ========== =========
</TABLE>

In October 1991, two single-use pipelines were acquired from Calnev
Pipe Line Company for $2.65 million. Each system, one of which is located in
Umatilla, Oregon and the other in Rawlins, Wyoming, supplies diesel fuel to
Union Pacific Railroad Company's fueling facilities under contracts expiring in
October 1996. Such contracts are renewable thereafter for successive two year
terms unless canceled by either party. The Oregon line is fully automated and
the Wyoming line requires minimal start-up assistance, which is provided by the
railroad. In May 1993, KPOP began operating a newly constructed single-use
pipeline near Pasco, Washington. For the year ended December 31, 1994, the
three systems combined transported a total of 2.8 million barrels of diesel
fuel, representing an aggregate of $1.2 million in revenues.

West Pipeline Acquisition

Effective February 24, 1995, KPOP acquired the West Pipeline from Wyco
Pipe Line Company for $27.1 million in cash. The West Pipeline consists of
approximately 550 miles of pipeline and four truck loading terminals located in
Wyoming, South Dakota and Colorado. On a pro forma basis for the year ended
December 31, 1994, the West Pipeline would have accounted for approximately 15%
of the Partnership's revenues.

Unlike the East Pipeline's service area, which is largely
agricultural, the West Pipeline serves the growing Denver and northeastern
Colorado markets. The West Pipeline also supplies the jet fuel for Ellsworth
Air Force Base at Rapid City, South Dakota. The West Pipeline has a relatively
small number of shippers, who, with only a few exceptions, are also shippers on
the East Pipeline.

Pipeline Operations

The East Pipeline and the West Pipeline are integrated pipeline
systems of approximately 2,075 miles and 550 miles, respectively. The
Pipelines primarily transport gasoline, diesel oil, fuel oil and propane.
Products are transported primarily for refiners, marketers and distributors of
such products. The Pipelines have been constructed and are maintained
consistent with applicable federal, state and

39
<PAGE> 41
local laws and regulations, standards prescribed by the American Petroleum
Institute and accepted industry practice.

Except for the three single-use pipelines (see "Glossary") and certain
ethanol facilities, all of the Partnership's pipeline operations constitute
common carrier operations and are subject to federal tariff regulation. Also,
certain of its intrastate common carrier operations are subject to state tariff
regulation. Common carrier activities are those under which transportation
through the Pipelines are available at published tariffs filed with the FERC in
the case of interstate shipments, or the relevant state authority in the case
of intrastate shipments in Kansas, Colorado and Wyoming, to any shipper of
refined petroleum products who requests such services and satisfies the
conditions and specifications for transportation. For a description of the
federal and state tariff regulations applicable to the common carrier
transportation activities of the Partnership, see "--Regulation".

The Partnership has not engaged, nor does it currently intend to
engage, in the merchant function of buying and selling refined petroleum
products.

In general, a shipper on one of the Pipelines acquires refined
petroleum products from refineries connected to such Pipeline, or, if such
shipper already owns the refined petroleum products, delivers such products to
such Pipeline from those refineries or through pipelines that connect with such
Pipeline. Tariffs for such transportation are charged to shippers based upon
transportation from the origination point on such Pipeline to the point of
delivery. Such tariffs also include charges for terminaling and storage of
product at such Pipeline's terminals. Pipelines are generally the lowest cost
method for intermediate and long-haul overland transportation of refined
petroleum products.

Each shipper is required to supply KPOP with a notice of shipment
indicating sources of products and destinations. All shipments are tested to
ensure compliance with KPOP's specifications. Shippers are usually invoiced by
sight draft by KPOP immediately upon the product entering one of the Pipelines.

The operations of the Pipelines also include 20 truck loading
terminals through which refined petroleum products are delivered to petroleum
transport trucks. The following table shows, with respect to each of such
terminals, its location, number of tanks owned by the Partnership, storage
capacity in barrels and truck capacity. Except as indicated in the notes to
the table, each terminal is owned by KPOP.

40
<PAGE> 42
<TABLE>
<CAPTION>
NO. OF STORAGE CAPACITY TRUCK
LOCATIONS OF TERMINALS TANKS (BARRELS) CAPACITY(1)
-------------------------- ---------- ---------------------- --------------
<S> <C> <C> <C>
KANSAS:
Hutchinson . . . . . 9 161,690 1
Concordia(2) . . . . 7 79,339 2
NEBRASKA:
Superior. . . . . . . 11 192,027 1
Geneva . . . . . . . 39 678,128 8
North Platte . . . . 22 197,914 5
Osceola . . . . . . . 8 79,444 2
Columbus . . . . . . 12 191,417 2
Norfolk . . . . . . . 16 186,981 4
IOWA:
LeMars . . . . . . . 9 102,914 2
Rock Rapids . . . . . 12 366,081 2
Milford(3) . . . . . 11 171,937 2
SOUTH DAKOTA:
Yankton . . . . . . . 25 245,473 4
Mitchell . . . . . . 8 71,450 2
Wolsey . . . . . . . 21 148,499 4
Aberdeen . . . . . . 12 181,450 2
Rapid City . . . . . 13 256,352 2
NORTH DAKOTA:
Jamestown . . . . . . 13 188,178 2
WYOMING:
Cheyenne . . . . . . 15 345,009 2
COLORADO:
DuPont . . . . . . . 17 689,269 6
Fountain . . . . . . 13 365,920 5
-------- -----------
Totals . . . 293 4,899,472
======== ===========
</TABLE>
_________
(1) Number of trucks that may be simultaneously loaded.
(2) The Concordia terminal is situated on land leased through the year 2060
for a total rental of $2,000.
(3) The Milford terminal is situated on land leased through August 7, 2007 at
an annual rental rate of $2,400. KPOP has the right to renew such lease
upon its expiration for an additional term of 20 years at the same annual
rental rate.

The East Pipeline includes intermediate storage facilities consisting
of 13 storage tanks at El Dorado, Kansas and 10 storage tanks at McPherson,
Kansas with aggregate capacities of 388,041 and 534,135 barrels, respectively.
During 1994, approximately 53% and 93% of the deliveries of the East Pipeline
and the West Pipeline, respectively, were made through their terminals, and
approximately 47% and 7% of the respective deliveries of such lines were made
to other pipelines and customer owned storage tanks. Storage of product at
terminals pending delivery is considered by the Partnership to be an integral
part of the product delivery service of the Pipelines. Shippers generally
store refined petroleum products for less than one week. Ancillary services,
including injection of shipper-furnished and generic additives, are available
at each terminal.

41
<PAGE> 43
Demand for and Sources of Refined Petroleum Products

The Partnership's pipeline business depends in large part on (i) the
level of demand for refined petroleum products in the markets served by the
Pipelines and (ii) the ability and willingness of refiners and marketers having
access to the Pipelines to supply such demand by deliveries through the
Pipelines.

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

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

The Pipelines are dependent upon adequate levels of production of
refined petroleum products by refineries connected to the Pipelines, directly
or through connecting pipelines. The refineries are, in turn, dependent upon
adequate supplies of suitable grades of crude oil. The refineries connected
directly to the East Pipeline obtain crude oil from producing fields located
primarily in Kansas, Oklahoma and Texas, and, to a much lesser extent, from
other domestic or foreign sources. The major refineries connected directly to
the West Pipeline are located in Casper and Cheyenne, Wyoming and Denver,
Colorado. Refineries in Billings and Laurel, Montana are connected to the West
Pipeline through other pipelines. These refineries obtain their supplies of
crude oil primarily from Rocky Mountain sources. If operations at any one
refinery were discontinued, the Partnership believes (assuming unchanged demand
for refined petroleum products in markets served by the Pipelines) that the
effects thereof would be short-term in nature, and the Partnership's business
would not be materially adversely affected over the long term because such
discontinued production could be replaced by other refineries or by other
sources. Three refineries connected directly to the East Pipeline, located at
El Dorado, Wichita and Augusta, Kansas, and operated by Coastal Refining and
Marketing, Inc., were closed during 1993.

The majority of the refined petroleum product transported through the
East Pipeline is produced at three refineries in southeast Kansas located at
McPherson, El Dorado and Arkansas City, Kansas and operated by National
Cooperative Refinery Association ("NCRA"), Texaco, Inc. ("Texaco") and Total
Petroleum, respectively. These refineries, which are connected directly to
the East Pipeline, shipped an aggregate of 29.7 million barrels of refined
petroleum products through the East Pipeline in 1994. One of such refineries,
the McPherson, Kansas refinery operated by NCRA, accounted for approximately
54% of such amount.

The East Pipeline also has direct access by third party pipelines to
four other refineries in Kansas, Oklahoma and Texas and to Gulf Coast supplies
of products through a connecting pipeline that receives products from a
pipeline originating on the Gulf Coast. Five connecting pipelines deliver
propane from gas processing plants in Texas, New Mexico, Oklahoma and Kansas to
the East Pipeline for shipment.

42
<PAGE> 44
The majority of the refined petroleum products transported through the
West Pipeline is produced at the Frontier Oil & Refining Company refinery
located at Cheyenne, Wyoming, the Total Petroleum and Conoco Oil refineries
located at Denver, Colorado and Sinclair's Little America refinery located at
Casper, Wyoming. These refineries are connected directly to the West Pipeline.

Competition and Business Considerations

The Partnership provides common carrier transportation services
through the Pipelines at posted tariffs. Demand for transportation services by
the Pipelines arises, ultimately, from demand for refined petroleum products in
the markets they serve. See "--Demand for and Sources of Refined Petroleum
Products". The Partnership's business will, therefore, be subject to many
factors beyond its control.

The East Pipeline's major competitor is an independent regulated
common carrier pipeline system owned by Williams Pipeline Company ("Williams")
that operates approximately 100 miles east of and parallel with the East
Pipeline. This competing pipeline system is a substantially more extensive
system than the East Pipeline. Furthermore, Williams and its affiliates have
capital and financial resources substantially greater than those of the
Partnership. Competition with Williams is based primarily on transportation
charges, quality of customer service and proximity to end users although
refined product pricing at either the origin or terminal point on a pipeline
may outweigh transportation costs. Fifteen of the East Pipeline's 16 delivery
terminals are in direct competition with Williams' terminals located within two
to 145 miles.

Upon the expiration of a five year settlement agreement pursuant to
which its tariffs had been frozen, Williams filed a comprehensive new tariff on
January 16, 1990. The filing proposed a tariff design for the future that
would allow Williams substantial flexibility to raise or lower various rates
without regulatory review and specifically provided increases in rates to many
destinations, decreases in rates to other destinations, volume incentive rates
at some terminals and rebates for shipments into certain counties from
specified terminals. Some counties in which rebates would apply lie in the
traditional service area of the East Pipeline. The Partnership intervened in
the Williams tariff proceeding before the FERC and protested the rebates. Nine
shippers also intervened or protested the Williams filing.

On February 15, 1990, FERC suspended the Williams tariff for the
maximum statutory period of seven months. Williams chose a bifurcated
proceeding under the authority of the FERC's ruling in the Buckeye Pipeline
Company case (see "--Regulation"). Under the first phase of such a proceeding,
a determination was to be made whether Williams lacked significant market power
in its various markets. Discrimination issues were also scheduled to be
determined during the first phase. Ultimately Williams would be required to
prove that its tariff rates are just, reasonable and non-discriminatory. The
tariff became effective September 16, 1990 subject to refund depending on the
outcome of the FERC proceedings. A hearing was held before an administrative
law judge of the FERC from June 3 to August 9, 1991 on the first phase of the
proceeding. On January 24, 1992, the judge issued an initial decision which
determined that Williams had market power in 10 of 32 markets in which it
operated and deferred most of the other issues involved to the second phase of
the case on the grounds that they involved cost issues. All active parties
have filed briefs and exceptions to the judge's initial decision. On July 27,
1994, the FERC issued its Opinion and Order on the Initial Decision. The FERC
determined that Williams had market power in 19 of 32 markets. The FERC also
denied Williams' motion proposing rate standards to apply to Phase II of the
proceeding and directed the administrative law judge to proceed with Phase II
for the purpose of establishing base rates in the 19 markets where Williams had
market power. All discrimination issues were also to be decided in Phase II.
Williams filed its direct testimony in Phase II on January 23, 1995. The
discovery phase of the proceeding is just starting. During the pendency of the
proceeding, Williams has instituted other tariff changes, which have been
permitted to go into effect subsequent to their suspension, subject

43
<PAGE> 45
to refund depending on the final outcome of the 1990 FERC tariff proceedings.
The Partnership has reached a settlement with Williams, and assuming that it is
completed, will be withdrawing from the case.

The West Pipeline competes with the truck loading racks of the
Cheyenne and Denver refineries and the Denver terminals of the Chase Pipeline
Company and Phillips Petroleum pipelines. A new Diamond Shamrock terminal in
Colorado Springs connected to a Diamond Shamrock pipeline from their Texas
Panhandle refinery is a major competitor for the West Pipeline's Fountain
terminal in Colorado Springs.

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

The costs associated with transporting products from a loading
terminal to end users limit the geographic size of the market that can be
served economically by any terminal. Transportation to end users from the
loading terminals of the Partnership is conducted principally by trucking
operations of unrelated third parties.

Trucks may competitively deliver products in some of the areas served
by the Pipelines. Trucking costs, however, render that mode of transportation
uncompetitive for longer hauls or larger volumes. The Partnership does not
believe that trucks are, or will be, over the long term effective competition
to its long-haul volumes.

Description of the Pipelines

East Pipeline

Construction of the East Pipeline commenced in the 1950's with lines
from southern Kansas to Geneva, Nebraska. During the 1960's, the East Pipeline
was expanded north to its present terminus at Jamestown, North Dakota. In
1981, the North Platte line was built and, in 1982, the 16" line from
McPherson, Kansas to Geneva, Nebraska was laid. In 1984, the Partnership
acquired a 6" pipeline from Champlin Oil Company. A portion of this 6" line is
the line running south through Superior, Nebraska, to Hutchinson, Kansas. The
other end of the line runs northeast approximately 175 miles crossing the main
pipeline at Osceola, Nebraska, through a terminal at Columbus, Nebraska, and
later crossing and interconnecting with the Yankton/Milford line to terminate
at Rock Rapids, Iowa.

KPOP owns the 2,075 mile East Pipeline except for the 203 mile North
Platte Line, which is held under a capitalized lease that expires at the end of
1998 and that provides rights to renew the lease for five years. KPOP has the
option to purchase the North Platte Line at the end of the lease term for
approximately $5 million. If such option is not exercised, the lessor can
require KPOP to purchase such line at a lower price. KPOP also owns 235
product distribution tanks with total storage capacity of approximately 3.2
million barrels located at 16 distribution terminals in Kansas, Nebraska, Iowa,
South Dakota and North Dakota and 23 product tanks with total storage capacity
of approximately 922,000 barrels at its tank farm installations at McPherson
and El Dorado, Kansas. The

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<PAGE> 46
East Pipeline further consists of six origin pump stations at refineries in
Kansas and 38 booster pump stations along the system in Kansas, Nebraska, Iowa,
South Dakota and North Dakota. The system uses distribution terminals, various
office and warehouse facilities, and an extensive quality control laboratory.
KPOP leases office space for its operating headquarters in Wichita, Kansas.

West Pipeline

The West Pipeline originates at Casper, Wyoming where it is connected
to Sinclair's Little America refinery. It also receives product at the Strouds
station, a short distance from Casper, through a connection with the Seminoe
Pipe Line, which provides the West Pipeline with access to three refineries in
the Billings, Montana area. From the Strouds station, the 8" main line
continues easterly to Douglas Junction, Wyoming, where a 6" lateral line
branches off to the Rapid City, South Dakota terminal approximately 190 miles
away. The Rapid City terminal also receives product from Wyoming Refining's
Newcastle, Wyoming refinery through their pipeline that enters the West
Pipeline near the Wyoming/South Dakota border near Mule Creek, Wyoming.

From Douglas Junction the main 8" line continues southward to a truck
loading terminal at Cheyenne. At Cheyenne, the West Pipeline can receive
product from the Frontier refinery and can deliver product to the Cheyenne Pipe
Line. From Cheyenne, an 8" line extends south into Colorado to the West
Pipeline's Dupont terminal near Denver. At Denver, through its Commerce City
station, the West Pipeline can receive and transfer product to the Total
Petroleum and Conoco Oil refineries and the Phillips Petroleum terminal. From
Commerce City, a 6" line continues south 90 miles to the final terminal at
Fountain, Colorado.

The West Pipeline is the nearest pipeline parallelling the East
Pipeline to the west. The East Pipeline's North Platte line that terminates in
western Nebraska is approximately 200 miles east of the West Pipeline's
Cheyenne terminal. The small Cheyenne Pipe Line that moves from west to east
connects the West Pipeline at Cheyenne, Wyoming with North Platte, Nebraska,
although that line has been deactivated from Sidney, Nebraska (approximately
100 miles from Cheyenne) to North Platte.

Maintenance and Monitoring

To prolong the useful lives of the Pipelines, routine preventive
maintenance is performed. Such maintenance includes cathodic protection to
prevent external corrosion and inhibitors for internal corrosion, periodic
internal inspection of the Pipelines and frequent patrols of the Pipelines'
rights-of-way. The Pipelines are patrolled at regular intervals to identify
equipment or activities by third parties, that, if left unchecked, could result
in encroachment of the Pipelines and other problems. Supervisory Control and
Data Acquisition ("SCADA"), a remote supervisory control software program,
continuously monitors the East Pipeline for operational control from the
Wichita office. The program monitors quantities of refined petroleum products
injected in and delivered through the East Pipeline, except at two continuously
manned locations, as well as pressure and temperature variations through the
East Pipeline, and automatically signals any deviation from normal operations
that requires attention. Portions of the systems can be shut down by remote
control. The program is fully operational throughout the East Pipeline.

A new, improved SCADA system is in the process of being installed.
This system will be installed first on the West Pipeline, which is currently
being controlled by Amoco Pipe Line Company's SCADA system, and then on the
East Pipeline. The new system is estimated to be in operation on the West
Pipeline by October 1, 1995 and on the East Pipeline in early 1996.

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<PAGE> 47
In addition to the maintenance described above, routine maintenance is
also performed on the terminal and storage facilities associated with the
Pipelines. Such terminal and storage facilities also include automatic tank
alarm systems.

LIQUIDS TERMINALING BUSINESS

Introduction

ST is one of the largest independent petroleum products and specialty
liquids terminaling companies in the United States. For the year ended
December 31, 1994, on a pro forma basis giving effect to the acquisition of the
West Pipeline, the Partnership's terminaling business would have accounted for
approximately 35% of the Partnership's revenues. ST operates 23 facilities in
16 states, with a total storage capacity of approximately 7.7 million barrels.
ST and its predecessors have been in the terminaling business for over 30 years
and handle a wide variety of products from petroleum products to specialty
chemicals to edible liquids.

ST's terminal facilities provide throughput and storage on a fee basis
for specialty chemicals, petroleum products and other liquids. ST's three
largest terminal facilities are located in Texas City, Texas, Westwego,
Louisiana and Baltimore, Maryland. These facilities accounted for
approximately 68% of ST's revenues and 48% of its tankage capacity in 1994.

The Texas City terminal is a deep-water facility primarily serving the
petrochemical industry along the Gulf Coast. The facility is the largest
independent terminal facility in Texas City and has the ability to handle a
wide range of specialty chemicals. The facility is located within 16 miles of
open water and has three deep-water loading docks with 36- to 40-foot drafts.
In 1994, the Texas City facility accounted for approximately 42% of ST's
revenues.

The Westwego terminal, purchased in June 1994, is a deep-water
facility on the Mississippi River at New Orleans that handles molasses,
fertilizer, animal and vegetable fats and oils, latex and caustic solutions.
In 1994, the Westwego facility accounted for approximately 5% of ST's revenues.

The Baltimore terminal is the largest independent terminal facility in
the Baltimore area and also has a deep- water loading dock with a 33-foot
draft. The Baltimore facility provides terminaling services for asphalt,
fructose, caustics, latex and other products. In 1994, the Baltimore facility
accounted for approximately 22% of ST's revenues.

In addition to the Texas City, Westwego and Baltimore terminaling
facilities, ST operates 20 other terminaling facilities in 14 states. These
inland terminaling facilities primarily handle petroleum products. Five of
these terminaling facilities are located on or near U.S. military bases and
have pipelines owned and operated by ST that deliver jet fuel directly to the
bases.

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<PAGE> 48
The following table outlines ST's terminal locations, capacities,
tanks and primary products handled.

<TABLE>
<CAPTION>
TANKAGE NO. OF PRIMARY
FACILITY CAPACITY TANKS PRODUCTS HANDLED
------------------------- ---------- --------- --------------------------------------
(IN MBBLS)
<S> <C> <C> <C>
PRIMARY TERMINALS:
Texas City, TX . . . 1,987 123 Chemicals
Westwego, LA(a) . . . 858 54 Molasses, Fertilizer
Baltimore, MD . . . . 826 50 Chemicals, Asphalt

INLAND TERMINALS:
Stockton, CA . . . . 314 18 Petroleum Products
Indianapolis, IN . . 410 18 Petroleum Products
Macon, GA(b) . . . . 307 10 Petroleum Products, Jet Fuel
Imperial, CA . . . . 124 6 Petroleum Products
Columbus, GA . . . . 187 35 Petroleum Products, Chemicals
Salina, KS(c) . . . . 65 9 Petroleum Products
Chillicothe, IL . . . 270 6 Petroleum Products
Alamogordo, NM(b) . . 120 5 Jet Fuel
Virginia Beach, VA(b) 40 2 Jet Fuel
Drumright, OK . . . . 315 4 Jet Fuel
Moundville, AL . . . 310 6 Jet Fuel
San Antonio, TX . . . 207 4 Jet Fuel
Winona, MN . . . . . 229 7 Fertilizer
Montgomery, AL(b) . . 162 7 Jet Fuel
Tucson, AZ(d) . . . . 90 7 Petroleum Products
Bremen, GA . . . . . 180 8 Petroleum Products, Jet Fuel
Peru, IL . . . . . 221 8 Petroleum Products, Jet Fuel
Homestead, FL(b) . . 72 2 Jet Fuel
Milwaukee, WI . . . . 308 7 Petroleum Products
Augusta, GA(e) . . . 110 8 Petroleum Products
---------- ---------
Totals . . . 7,712 404
========== =========
</TABLE>
_________
(a) Terminal purchased on June 8, 1994.
(b) Facility also includes pipelines to U.S. government military base
locations.
(c) Terminal purchased on January 18, 1994.
(d) Represents 50% interest in 181 MBbl terminal.
(e) Terminal purchased on July 7, 1994.

Description of Terminals

Texas City, Texas. The Texas City facility is situated on 39 acres of
land, leased from the Texas City Terminal Railway Company with long-term
renewal options. It is located in Galveston County near the mouth of the
Houston Ship Channel and is approximately 16 miles from open water. The eastern
end of the Texas City site is adjacent to three deep-water docking facilities,
which are also owned by Texas City Terminal Railway. The three deep-water docks
include two 36 foot draft docks and a 40 foot draft dock. ST is charged
dockage and wharfage fees on a per vessel and per unit basis, respectively, by
Texas City Terminal Railway, which it passes directly to the shipper or owner
of the incoming or outgoing products.

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<PAGE> 49
ST handles and stores a wide range of specialty chemicals, including
petrochemicals, at the Texas City facility. The facilities are designed to
accommodate a diverse product mix, and include (i) tanks equipped for the
specific storage needs of the various products handled; (ii) piping and pumping
equipment for moving the product between the tanks and the transportation
modes; and (iii) an extensive infrastructure of support equipment. The tankage
at Texas City is constructed of either mild carbon steel, stainless steel or
aluminum. Certain of the tanks, piping and pumping equipment are equipped for
special product needs, including among other things, equipment that can control
temperature, air pressure, air mixture or moisture. ST receives or delivers
the majority of the specialty chemicals that it handles via ship or barge at
Texas City. ST also receives and delivers liquids via rail tank cars and
transport trucks. Additionally, the terminal has direct pipeline connections
to refineries in Texas City.

The Texas City tank facility consists of 123 tanks with a total
capacity of approximately 1,987 MBbls. All recently built tanks are equipped
with "double bottoms", which provide a leak detection system between the
primary and secondary bottom. ST's facility has been designed with several
preventative structural measures to minimize the occurrence and level of damage
in the event of a spill or fire. All loading areas, tanks, pipes and pumping
areas are "contained" to collect any spillage and water run-off.

Westwego, Louisiana. Acquired in June 1994, the Westwego facility is
situated on 27 acres of owned land adjacent to the West bank of the Mississippi
River across from New Orleans. A new dock built in 1992 is capable of handling
ocean going vessels and barges. The terminal has numerous handling facilities
for receiving and shipping by rail and tank truck as well as vessels and
barges.

The Westwego terminal historically has been primarily a terminal for
molasses, and animal and vegetable fats and oils. The former owner, PM Ag,
Products, Inc., has contracted with ST for five years for terminaling in five
large molasses tanks. In recent years, the terminal has broadened its product
mix to include fertilizer, latex and caustic solutions. The facility includes
a blending plant for the processing of certain molasses-based feeds and a
laboratory for quality control and analysis.

The facility consists of 54 large tanks with a total capacity of
approximately 858 MBbls. There are also approximately 30 smaller tanks for
manufacturing and processing.

Baltimore, Maryland. The Baltimore facility is situated on 18 acres
of owned land, located just south of Baltimore near the Harbor Tunnel on the
Chesapeake Bay. ST also owns a 700-foot finger pier with a 33-foot draft
channel and berth. The dock gives ST the ability to receive and distribute
shipments of product by barge and ship.

Similar to the Texas City facility, Baltimore is a specialty liquids
terminal. The primary products handled at the Baltimore facility include
asphalt, fructose, latex, caustic solutions and chemicals. ST receives and
delivers a variety of products via ship, barge, rail, truck and a common
carrier pipeline.

The Baltimore tank facility consists of 50 tanks with a total capacity
of approximately 826 MBbls. All of the utilized tanks are dedicated to
specific products of customers under contract. Certain tanks are customized to
accommodate the requirements of different products.

Inland Terminals. In addition to ST's three major facilities, ST has
20 inland terminal facilities throughout the United States. These facilities
represented approximately 52% of ST's total tankage capacity and approximately
32% of its total revenue for 1994. Except for the facility in Columbus,
Georgia, which handles petroleum and specialty chemicals, and the facility in
Winona, Minnesota, which handles fertilizer solutions, these inland facilities
receive, store and deliver refined petroleum products for a variety of
customers.

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<PAGE> 50
In 1994, terminaling and pipeline transportation of jet fuel for the
U.S. Department of Defense represented 11% of ST's revenues. Nine of ST's 20
inland terminal sites are involved in the terminaling or transport (via
pipeline) of jet fuel for the Department of Defense. Five of the nine
locations are utilized solely by the Department of Defense. Five of the nine
locations include pipelines that deliver jet fuel directly to nearby military
bases.

The base closing list released by the Department of Defense on March
12, 1993 included the closure of the Naval Air Station in Glenview, Illinois
which was served by ST's terminal in Peru, Illinois. In addition, on May 10,
1995, the Defense Base Closure and Realignment Commission approved for further
analysis and consideration as potential candidates for closure or realignment
Homestead Air Reserve Station in Florida, which was served by an ST Pipeline
until the base became inactive following damage inflicted by Hurricane Andrew
in 1992, Kelly Air Force Base in Texas, which is supplied by transport truck
from ST's San Antonio terminal, and the Defense Distribution Depot
Warner-Robins in Georgia, which is served by ST's Macon terminal. ST does not
believe that, in the aggregate, the inland terminals serving the Department of
Defense will experience a significant decrease in cash flows for the
foreseeable future as a result of Department of Defense changes in activity.
However, the third party pipeline serving the Drumright, Oklahoma terminal
reversed the direction of product flow in 1994 causing jet fuel to become
unavailable at this location. The Drumright terminal accounts for
approximately four percent of ST's aggregate storage capacity. Jet fuel was
the only product handled at Drumright, and ST is exploring alternative uses for
this terminal. In the absence of an alternative use, this terminal may be
forced to close, which would not have a material effect on the Partnership's
results of operations.

Recent Developments

On August 27, 1995, the Partnership entered into Asset Purchase
Agreements to acquire the liquids terminaling assets of Steuart. It is
anticipated that the acquisition price of approximately $82 million will be
financed by bank borrowings. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources". The Steuart terminaling assets consist of seven petroleum products
terminals located in the District of Columbia, Florida, Georgia, Maryland and
Virginia and the pipeline and terminaling services to Andrews Air Force Base in
Maryland. The terminals have in the aggregate approximately 9 million barrels
of storage capacity in 87 tanks. For the year ended December 31, 1994, on a
pro forma basis giving effect to the acquisition of the West Pipeline and the
pending acquisition of Steuart's terminaling assets, revenues generated by the
assets to be acquired from Steuart would have accounted for approximately 22%
of the Partnership's revenues. Strategically, the Steuart acquisition would
give the Partnership a significantly increased presence in the East Coast of
the United States. Steuart's two largest facilities are the Piney Point,
Maryland terminal located near Washington, D.C. and the Jacksonville terminal
located in Jacksonville, Florida.

The largest Steuart terminal is located on approximately 400 acres on
the Potomac River at Piney Point, Maryland. The Piney Point terminal has
approximately 5.5 million barrels of storage capacity in 30 tanks and is the
closest deep water facility to Washington, D.C. The Piney Point terminal
competes with other large petroleum terminals in the East Coast, water-borne
market extending from New York Harbor to Norfolk, Virginia. The terminal
currently stores petroleum products, consisting primarily of fuel oil. The
terminal has a dock with a 36-foot draft for tankers and four berths for
barges. It also has truck loading facilities and product blending capabilities
and is connected to a residual fuel oil pipeline which supplies two power
generating stations. Piney Point's principal customers include Potomac
Electric Power Company ("PEPCO"), Sun Oil, major oil companies, independent oil
companies, and commodity trading houses. The Piney Point facility is connected
to PEPCO by a 52-mile PEPCO-owned pipeline.

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<PAGE> 51
The second largest Steuart terminal, located at Jacksonville, Florida,
is located on the St. John's River and consists of a main terminal and two
annexes with approximately 2.1 million barrels of storage capacity in 28 tanks.
The Jacksonville terminal is currently used to store petroleum products
including gasoline, No. 2 oil, No. 6 oil, diesel, jet fuel, kerosene and bunker
fuel. This terminal has a tanker berth with a 38-foot draft and six barge
berths. The facility also has three barges, which are used for the
transportation of bunker fuels and commercial/industrial residual fuel oils.
The Jacksonville terminal, located on approximately 86 acres, also offers truck
and rail car loading facilities and facilities to blend residual fuels for ship
bunkering. Approximately one third of the Jacksonville facility's revenues are
derived from Aectra Refining and Marketing ("Aectra") under a long term
contract which runs through 1999. Aectra's contract provides for annual
minimum throughput with renewals for up to 14 years.

Other smaller Steuart terminals are located in Brunswick, Georgia,
Dumfries, Virginia, Savannah, Georgia and Washington, D.C. (two terminals).
All of these terminals, except one in Washington, D.C., which is served by the
Colonial pipeline, have facilities to receive from barges or ships and
facilities to load tank trucks. Except for the Brunswick, Georgia terminal,
which is leased, and the Savannah, Georgia facility, which is co-owned with
Aectra, each of these facilities is owned by Steuart.

Steuart also owns, through Piney Point Industries, Inc. ("PPI"), an
11.3 mile pipeline, three 24,000 barrel double-bottomed tanks and an
administration building located at Andrews Air Force Base. PPI has provided
pipeline carrier and terminaling services to Andrews Air Force Base on a tariff
basis for the Defense Fuel Supply Center for the past 30 years.

The closing of the acquisition of the Steuart terminaling assets is
conditioned upon satisfactory completion of a due diligence investigation,
receipt of all necessary consents and approvals, the execution of certain
throughput agreements and certain other conditions. If all conditions to
closing are satisfied, it is anticipated that the Partnership would acquire the
Steuart terminaling assets prior to October 31, 1995. There can be no
assurance that the acquisition will be consummated or, if consummated, that the
terms of the acquisition will not vary materially from those described herein.

Competition and Business Considerations

The independent liquids terminaling industry is fragmented and
includes both large, well financed companies that own many terminal locations
and small companies that may own a single terminal location. ST is a member of
the Independent Liquid Terminals Association ("ILTA"), which, among other
functions, publishes a directory of terminal locations of its members
throughout the United States. Customers with specific location and facility
demands generally use the ILTA directory to identify the terminals in the
region available for specific needs, and then select the preferred providers on
the basis of service, specific terminal capabilities and environmental
compliance. Customers then seek competitive proposals to ultimately select the
terminal retained.

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

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<PAGE> 52
Independent terminal owners compete based on the location and
versatility of terminals, service and price. A favorably located terminal will
have access to various cost effective transportation modes both to and from the
terminal. Possible transportation modes include waterways, railroads, roadways
and pipelines. Terminals located near deep water port facilities are referred
to as "deep water terminals" and terminals without such facilities are referred
to as "inland terminals" (some inland facilities are served by barges on
navigable rivers).

Terminal versatility is a function of the operator's ability to offer
safe handling for a diverse group of products with complex handling
requirements. The service function typically provided by the terminal
includes, among other things, the safe storage of the product at specified
temperature, moisture and other conditions, as well as loading and unloading at
the terminal. An increasingly important aspect of versatility and the service
function is an operator's ability to offer product handling and storage in
compliance with environmental regulations. A terminal operator's ability to
offer competitive pricing is often dependent on the quality, specifications and
versatility of the facilities owned by the operator. Although many products
require modest terminal modification, operators with a greater diversity of
terminals with versatile storage applications typically require less
modification prior to usage, ultimately reducing the storage cost.

Several companies offering liquid terminaling facilities have
significantly more capacity than ST. However, the majority of ST's tankage can
be described as "niche" facilities that are equipped to properly handle
"specialty" liquids or provide facilities or services where management believes
they enjoy an advantage over competitors. Most of the larger operators,
including GATX Terminals Corporation, Williams, Northville Industries
Corporation, Petroleum Fuel & Terminal Company and Steuart Petroleum Company,
have facilities used primarily for petroleum related products. As a result,
most of Steuart's terminals will be competing against other large petroleum
products terminals rather than the specialty liquids facilities offered by the
majority of ST's tankage at ST's waterfront terminals. Such specialty or
"niche" tankage is less abundant in the U.S., and "specialty" liquids typically
command higher terminal fees than lower- price bulk terminaling for petroleum
products.

CAPITAL EXPENDITURES

Capital expenditures with respect to the East Pipeline were $3.2
million, $5.1 million and $2.2 million, respectively, for the years ended
December 31, 1992, 1993 and 1994, respectively. Approximately 66% of the
aggregate of these capital expenditures related primarily to maintenance of
existing operations and approximately 28% related to expansion projects. The
remaining 6% related primarily to environmental expenditures. During these
periods, adequate capacity on the East Pipeline existed to accommodate volume
growth.

Capital expenditures by ST were $6.0 million, $3.2 million and $17.3
million, respectively, for the years ended December 31, 1992, 1993 and 1994,
respectively. In 1994, capital expenditures related primarily to the
acquisition of terminals at Salina, Kansas, Westwego, Louisiana, and Augusta,
Georgia.

Capital expenditures of the Partnership (including ST but excluding
the West Pipeline) for maintenance of existing operations during 1995 are
expected to be approximately $7.0 million. Capital expenditures for
expansionary purposes during 1995 are expected to be approximately $1.0
million, excluding acquisition costs of the West Pipeline. Additional
expansionary capital expenditures will depend on future opportunities to expand
the Partnership's operations. The Partnership expects capital expenditures in
1995 on the West Pipeline to range from approximately $1.5 million to $2.0
million. The Partnership anticipates that capital expenditures in 1996 for the
Steuart terminals will range from approximately $2.5 to $3.5 million. Such
future expenditures, however, will depend on many factors beyond the
Partnership's control, including, without limitation, demand for refined
petroleum products

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<PAGE> 53
and terminaling services in the Partnership's market areas, local, state and
federal governmental regulations and 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 the Partnership will be able to finance such
expenditures through borrowings. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Capital Resources and
Liquidity".

REGULATION

Interstate Regulation

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

Under Title XVIII of the Energy Policy Act of 1992 (the "EP Act"),
rates that were in effect on October 24, 1991 that were not subject to a
protest, investigation or complaint are deemed to be just and reasonable. Such
rates are subject to challenge only for limited reasons, relating to (i)
substantially changed circumstances in either the economic circumstances of the
subject pipeline or the nature of the services, (ii) a contractual bar that
prevented the complainant from previously challenging the rates or (iii) a
claim that such rates are unduly discriminatory or preferential. Any relief
granted pursuant to such challenges may be prospective only. Because the
Partnership's rates that were in effect on October 24, 1991 were subject to
investigation and protest at that time, its rates were not deemed to be just
and reasonable pursuant to the EP Act. The Partnership's current rates became
final and effective in April 1994, and the Partnership believes that its
currently effective tariffs are just and reasonable and would withstand
challenge under the FERC's cost-based rate standards. Because of the
complexity of rate making, however, the lawfulness of any rate is never
assured.

In general, petroleum product pipeline rates are cost-based. Such
rates are permitted to generate operating revenues, based on projected volumes,
not greater than the total of the following components: (i) operating
expenses, (ii) depreciation and amortization, (iii) federal and state income
taxes (determined on a separate company basis and adjusted or "normalized" to
avoid year to year variations in rates due to the effect of timing differences
between book and tax accounting for certain expenses, primarily depreciation)
and (iv) an overall allowed rate of return on the pipeline's "rate base".
Generally, rate base is a measurement of the investment in, or value of, the
common carrier assets of a petroleum products pipeline.

In 1985, the FERC began issuing a series of Opinions ("FERC Opinions")
providing that oil pipeline rates would continue to be cost-based. The FERC
Opinions required that the rate base be calculated by the net depreciated
"trended original cost" ("TOC") methodology. Under the TOC methodology, after
a starting rate base has been determined, a pipeline's rate base is to be (i)
increased by property additions at cost plus an amount equal to the equity
portion of the rate base

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<PAGE> 54
multiplied or "trended" by an inflation factor and (ii) decreased by property
retirements, depreciation and amortization of rate base write-ups reflecting
inflation.

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

The Interstate Commerce Commission, which regulated oil pipelines
until 1978, had formerly determined rate base by using a current valuation
methodology. The FERC Opinions abandoned the valuation methodology and
required pipelines to establish a transition rate base for the pipeline's
existing plant. The transition rate base, called the "starting rate base", is
the sum of (i) the net depreciated original cost of the pipeline's property
multiplied by the ratio of debt to total capitalization and (ii) the net
depreciated reproduction portion of the valuation rate base as of 1983,
multiplied by the ratio of equity to total capitalization. The original cost
of land, rights of way less book depreciation, allowed working capital and
plant less book depreciation that were not included in the 1983 valuation may
be added to the starting rate base.

The actual capital structure as of June 28, 1985 of either the
pipeline or its parent is typically used to establish the starting rate base.
In general, the pipeline's structure is used if the pipeline issues long-term
debt to outside investors without any parent guarantee and the parent's
structure is used if the pipeline has no long-term debt, issues long-term debt
to its parent, or its long-term debt is guaranteed by its parent. In
individual cases, however, the FERC may determine that the actual capital
structure of the pipeline or its parent is inappropriate for rate regulation
purposes. The FERC may then impute to the pipeline the capital structure it
deems appropriate to the pipeline's risk.

In addition to the TOC methodology, the FERC has indicated a
willingness to consider departures from cost-of- service rates depending upon
whether a pipeline's individual markets are sufficiently competitive. In a
proceeding involving Buckeye Pipeline Company, the FERC invited jurisdictional
pipelines to demonstrate that they lack significant market power in all or some
of their markets. In Buckeye, the FERC accepted a three-year experimental
program of light- handed regulation of the pipeline's rates. Under the
program, the FERC permitted the use of the volume-weighted average of Buckeye's
actual rates in those markets where it lacked significant market power to
determine the price cap for rates in non-competitive markets.

The Partnership has not attempted to depart from cost-based rates.
Instead, it has continued to rely on the traditional, cost-based TOC
methodology. The TOC methodology has not been subject to judicial review.

Title XVIII of the EP Act required the FERC to issue a ruling
establishing a simplified and generally applicable rate making methodology for
oil pipelines no later than October 24, 1993. The FERC was also required to
issue a final rule to streamline procedures relating to oil and product
pipeline rates "in order to avoid unnecessary regulatory costs and delays" no
later than April 24, 1994.

On October 22, 1993, the FERC issued Order No. 561 implementing the EP
Act. Order No. 561, among other things, adopted a simplified and generally
acceptable rate making methodology for future oil pipeline rate changes in the
form of indexation. Indexation, which is also known as price cap regulation,
establishes ceiling prices on oil pipeline rates based on application of a
broad-based measure of inflation in the general economy to existing rates.
Rate increases up to the ceiling level

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are to be discretionary for the pipeline, and, for such rate increases, there
will be no need to file cost-of-service or supporting data. Moreover, so long
as the ceiling is not exceeded, a pipeline may make a limitless number of rate
change filings.

The pipeline rates in effect at December 31, 1994, which are
determined to be just and reasonable, become the "Base Rates" for application
of the indexing mechanism. This indexing mechanism calculates a ceiling rate.
The pipeline may increase its rates to this calculated ceiling rate without
filing a formal cost based justification and with limited risk of shipper
protests. Shippers may still be permitted to protest pipeline rates, even if
the rate change does not exceed the index ceiling, if the shipper can
demonstrate that the "increase is so substantially in excess of the actual cost
increases incurred by the pipeline" that the proposed rate would be unjust and
unreasonable. The index is cumulative, attaching to the applicable ceiling
rate and not to the actual rate charged. Thus, a rate that is not increased to
the ceiling level in a given year may still be increased to the ceiling level
in the following year. The pipeline may be required to decrease the current
rate if the rate being charged exceeds the ceiling level.

The index underlying Order No. 561 is to serve as the principal basis
for the establishment of oil pipeline rate changes in the future. As explained
by the FERC in Order Nos. 561 and 561-A, however, there may be circumstances
where the indexing mechanism will not apply. Specifically, the FERC determined
that a pipeline may utilize any one of the following three alternative
methodologies to indexing:

(i) A cost-of-service methodology may be utilized by a
pipeline to justify a change in a rate if a pipeline can demonstrate
that its increased costs are prudently incurred and that there is a
substantial divergence between such increased costs and the rate that
would be produced by application of the index;

(ii) A pipeline may file a rate change as part of a
settlement when it secures the agreement of all of its existing
shippers; and

(iii) Consistent with the Buckeye precedent, a pipeline may
base its rates upon a "light-handed" market-based form of regulation
if it is able to demonstrate a lack of significant market power in the
relevant markets.

The indexing mechanism does not apply to initial rates of a pipeline,
which will still generally be established using the traditional TOC
methodology. Order No. 561 provides, however, that a pipeline can file an
initial rate based upon the agreement of at least one non-affiliated shipper,
without an accompanying cost-of-service justification for such rate. Yet, if
this agreed-upon rate is protested by another shipper, the pipeline will be
required to justify the initial rate on a cost-of-service basis. The initial
rate that is established by the pipeline becomes the pipeline's "Base Rate",
and the indexing mechanism will be applicable to that rate in subsequent years.

On October 28, 1994, after hearings and public comment period, the
FERC issued Order Nos. 571 and 572, intended as procedural follow-ups to Order
No. 561. In Order No. 571, the FERC (i) articulated cost-of-service and
reporting requirements to be applicable to pipeline initial rates and to
situations where indexing is determined to be inappropriate; (ii) adopted rules
for the establishment of revised depreciation rates; and (iii) revised the
information required to be reported by pipelines in their Form No. 6, "Annual
Report for Oil Pipelines". Order No. 572 establishes the filing requirements
and procedures that must be followed when a pipeline seeks to charge
market-based rates.

On June 15, 1995, the FERC issued a decision involving Lakehead, an
unrelated oil pipeline limited partnership. In this decision, the FERC
partially disallowed Lakehead's inclusion of income taxes

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in its cost of service, and thereby reversed the previous December 1993 ruling
of the Presiding Administrative Law Judge on this issue. Specifically, the
FERC held that Lakehead was entitled to receive an income tax allowance with
respect to income attributable to its corporate partners, but was not entitled
to receive such an allowance for income attributable to the partnership
interests held by individuals. Both Lakehead and representatives of its
customers have filed motions for rehearing. It is unlikely, however, that the
FERC will reverse itself on this issue on rehearing. It is possible that
either Lakehead or its customers may ultimately seek judicial review of the
FERC decision, and it is difficult to predict what position would be adopted by
a reviewing court on the income tax issue. In another FERC proceeding that has
not yet reached the hearing stage, involving a different oil pipeline limited
partnership, various shippers have challenged such pipeline's inclusion of an
income tax allowance in its cost of service. The FERC Staff has also filed
testimony that supports the disallowance of income taxes. If the FERC were to
disallow the income tax allowance in the cost of service of the Pipelines on
the basis set forth in the Lakehead order, the General Partner believes that
the Partnership's ability to pay the Minimum Quarterly Distribution to the
holders of the Senior Preference Units, Preference Units and Preference B Units
would not be impaired; however, in view of the uncertainties involved in this
issue, there can be no assurance in this regard.

Intrastate Regulation

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

LEGAL PROCEEDINGS

The Partnership is a party to several lawsuits arising in the ordinary
course of business. Subject to certain deductibles and self-insurance
retentions, substantially all the claims made in these lawsuits are covered by
insurance policies.

ENVIRONMENTAL MATTERS

General

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

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Water

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

The Pipelines cross several navigable rivers and streams. The FWPCA
imposes strict controls against the discharge of oil and its derivatives into
navigable waters. The FWPCA provides penalties for any discharges of petroleum
products in reportable quantities and imposes substantial potential liability
for the costs of removing an oil spill. State laws for the control of water
pollution also provide varying civil and criminal penalties and liabilities in
the case of a release of petroleum or its derivatives in surface waters or into
the groundwater.

Contamination resulting from spills or releases of refined petroleum
products are not unusual within the petroleum pipeline industry. The East
Pipeline has experienced limited groundwater contamination at four terminal
sites (Milford, Iowa, Norfolk and Columbus, Nebraska, and Yankton, South
Dakota) resulting from spills of refined petroleum products. Regulatory
authorities have been notified of these findings and cleanup is underway using
extraction wells and air strippers. The Partnership estimates that
approximately $666,000 has been expended through June 30, 1995, for remediation
at these four sites and that ongoing remediation expenses at each site will be
less than $5,000 per year for the next several years. Groundwater
contamination is also known to exist at East Pipeline sites in Augusta, Kansas
and in Potwin, Kansas, but no remediation has been required. Although no
assurances can be made, if remediation is required, the Partnership believes
that the resulting cost would not be material.

The East Pipeline experienced a spill due to third party damage during
the first quarter of 1991. Remediation of the groundwater impacted by this
spill has been underway since the second quarter of 1991. The Partnership
estimates that on-going remediation expenses will be in the range of $10,000 to
$15,000 per year. Regulatory authorities have been notified. The Partnership
has filed suit against the third party seeking compensation for damages. The
case is currently scheduled for trial in October 1995.

During 1994, the East Pipeline experienced a seam rupture of its 8"
northbound line in Nebraska in January and another similar rupture on the same
line in April. As a result of these ruptures, KPOP reduced the maximum
operating pressure on this line to 60% of the Maximum Allowable Operating
Pressure ("MAOP") and, on May 24, commenced a hydrostatic test to determine the
integrity of over 80 miles of that line. The test was completed on the entire
80 miles on May 29, 1994, and the line was authorized to return to
approximately 80% of MAOP pending review by the Department of Transportation
("DOT") of the hydrostatic test results. On July 29, 1994, the DOT authorized
most of the line to return to the historical MAOP. Approximately 30 miles of
the line was authorized to return to slightly less than historical MAOP.
Although the Partnership has expended approximately $159,000 through June 30,
1995, for remediation at these rupture sites, the total amount of remediation
expenses that will be required has not yet been determined. These expenses are
not expected to have a material effect upon the results of the Partnership.

ST has experienced groundwater contamination at its terminal sites at
Baltimore, Maryland, and Alamogordo, New Mexico. Regulatory authorities have
been notified of these findings and cleanup is

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underway using extraction wells and air strippers. Groundwater contamination
also exists at the ST terminal site in Stockton, California and in the areas
surrounding this site as a result of the past operations of five of the
facilities operating in this area. ST has entered into an agreement with three
of these other companies to allocate responsibility for the clean up of the
contaminated area. Under the initial estimate of remedial costs, the parties
(including ST) at Stockton would pay in total approximately $752,000. However,
the remediation costs have not been finalized and could ultimately increase or
decrease. In addition, ST is responsible for up to two-thirds of the costs
associated with existing groundwater contamination at a formerly owned terminal
at Marcy, New York, which also is being remediated through extraction wells and
air strippers. The Partnership has expended approximately $477,000 through
June 30, 1995, to date for remediation at these four sites and estimates that
on-going remediation expenses will aggregate approximately $300,000 to $450,000
over the next three years.

Groundwater contamination has been identified at ST terminal sites at
Montgomery, Alabama and Milwaukee, Wisconsin, but no remediation has taken
place. Shell Oil Company has indemnified ST for any contamination at the
Milwaukee site prior to ST's acquisition of such facility. Star Enterprises,
the former owner of the Montgomery terminal, has indemnified ST for
contamination at a portion of the Montgomery site where contamination has been
identified prior to ST's acquisition of the facility. A remediation system is
in place to address groundwater contamination at the ST terminal facility in
Augusta, Georgia. Star Enterprises, the former owner of the Augusta terminal,
has indemnified ST for this contamination and has retained responsibility for
the remediation system. There is also a possibility that groundwater
contamination may exist at other facilities. Although no assurance in this
regard can be given, the Partnership believes that such contamination, if
present, could be remediated with extraction wells and air strippers similar to
those that are currently in use and that resulting costs would not be material.

In 1991, the Environmental Protection Agency (the "EPA") implemented
regulations expanding the definition of hazardous waste. The Toxicity
Characteristic Leaching Procedure ("TCLP") has broadened the definition of
hazardous waste by including 25 constituents that were not previously included
in determining that a waste is hazardous. Water that comes in contact with
petroleum may fail the "TCLP" procedure and require additional treatment prior
to its disposal. The Partnership plans to install totally enclosed wastewater
treatment systems at all East Pipeline terminal sites to treat such petroleum
contaminated water, especially tank bottom water. Previously, this waste water
was disposed of in evaporation ponds located at each site. The East Pipeline
has discontinued this practice and is installing onsite treatment systems.
These systems, the installation of which commenced in 1993, will be completed
in 1995.

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

Groundwater remediation efforts are ongoing at the West Pipeline's
Dupont, Colorado terminal and will be required at the three other West Pipeline
terminals and one pump station. Regulatory officials have been consulted in
the development of remediation plans. In the course of acquisition
negotiations, KPOP's regulatory group and its outside environmental consultants
agreed upon the extent and costs of these required remediations. In connection
with the purchase of the West Pipeline, KPOP agreed to implement the agreed
remediation plans at these specific sites over the next five years

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in return for the payment by Wyco Pipe Line Company of the estimated costs
thereof. At the closing, Wyco Pipe Line Company paid $1,312,000 to KPOP to
cover the discounted future costs of these remediations.

The Steuart terminals have experienced groundwater contamination at
the Piney Point, Maryland, Jacksonville, Florida and each of the Washington,
D.C. facilities. Foreseeable remediation expenses are estimated not to exceed
$1 million. The Partnership has agreed to assume the existing remediation and
the costs thereof up to $1 million. The Asset Purchase Agreements have
procedures for adjusting the purchase price should the amount of necessary
remediation expenses discovered prior to the closing exceed $1 million. The
Asset Purchase Agreements also provide, with respect to unknown environmental
damages that are discovered after the closing and that were caused by
operations conducted by Steuart prior to the closing of the Steuart terminals
acquisition, that the Partnership and Steuart will share expenses associated
with such environmental damages at a ratio of 20% for the Partnership and 80%
for Steuart until a total of $2.5 million has been expended. Thereafter, such
expenses will be the Partnership's responsibility. This indemnity will expire
three years from the closing of the Steuart terminals acquisition and will be
secured by a cash escrow fund.

Aboveground Storage Tank Acts

A number of the states in which the Partnership operates have passed
statutes regulating aboveground tanks containing liquid substances. Generally,
these statutes require that such tanks include secondary containment systems or
that the operators take certain alternative precautions to ensure that no
contamination results from any leaks in the tanks. Although there is not
currently a federal statute regulating these aboveground tanks, there is a
possibility that such a law will be passed within the next couple of years.
The Partnership is in substantial compliance with all aboveground storage tank
laws in the states with such laws. Although no assurance can be given, the
Partnership believes that the future implementation of aboveground storage tank
laws by either additional states or by the federal government will not have a
material adverse effect on the Partnership's financial condition or results of
operations.

Air Emissions

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

Amendments to the Federal Clean Air Act enacted in late 1990 will
require most industrial operations in the United States to incur future capital
expenditures in order to meet the air emission control standards that are to be
developed and implemented by the EPA and state environmental agencies during
the next decade. Pursuant to these Clean Air Act Amendments, those Partnership
facilities that emit volatile organic compounds ("VOC") or nitrogen oxides and
are located in non-attainment areas will be subject to increasingly stringent
regulations, including requirements that certain sources install reasonably
available control technology. The EPA is also required to promulgate new
regulations governing the emissions of hazardous air pollutants. Some of the
Partnership's facilities are included within the categories of hazardous air
pollutant sources that will be affected by these regulations. Additionally,
new dockside loading facilities owned or operated by the Partnership will be
subject to the New Source Performance Standards that were proposed in May 1994.
These regulations will control VOC emissions from the loading and unloading of
tank vessels.

Although the Partnership is in substantial compliance with applicable
air pollution laws, in anticipation of the passage of stricter air control
regulations, the Partnership is taking actions to substantially reduce its air
emissions. The Partnership plans to install bottom loading and vapor

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recovery equipment on the loading racks at almost all of the terminal sites
that do not already have such emissions control equipment. These modifications
are expected to reduce substantially the total air emissions from each of these
facilities. Having begun in 1993, this project is being phased in over a
period of years at an approximate cost of $5.0 million. Another project that
is underway is the installation of marine vapor collection equipment and a
large flare at the Texas City terminal site. This Texas City project is
estimated to cost approximately $2.0 million and to be completed by the end of
1995.

Solid Waste

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

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

Superfund

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

ST has been named a potentially responsible party for a site located
at Elkton, Maryland, operated by Spectron, Inc. until August 1988. This site
is presently under the oversight of the EPA and is listed as a federal
"Superfund" site. A small amount of material handled by Spectron was
attributed to ST. The Partnership believes that ST will be able to settle its
potential obligation in connection with this matter for an aggregate cost of
approximately $10,000. However, until a final settlement agreement is signed
with the EPA, there is a possibility that the EPA could bring additional claims
against ST.

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Environmental Impact Statement

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

Indemnification

Kaneb has agreed to indemnify the Partnership against liabilities for
damage to the environment resulting from operations of the East Pipeline prior
to October 3, 1989. Such indemnification does not extend to any liabilities
that arise after such date to the extent such liabilities result from changes
in environmental laws or regulations. Nevertheless, the Partnership will
remain liable for the remediation of groundwater contamination resulting from
three spills and the possible groundwater contamination at a pumping and
storage site referred to under "--Water" to the standards that are in effect at
the time such remediation operations are concluded. In addition, ST's former
owner has agreed to indemnify the Partnership against liabilities for damages
to the environment from operations conducted by such former owner prior to
March 2, 1993. The indemnity, which expires March 1, 1998, is limited in
amount to 60% of any claim exceeding $100,000 until an aggregate amount of $10
million has been paid by ST's former owner. In addition, with respect to
unknown environmental expenses from operations conducted by Wyco Pipe Line
Company prior to the closing of the Partnership's acquisition of the West
Pipeline, KPOP has agreed to pay the first $150,000 of such expenses, KPOP and
Wyco Pipe Line Company will share, on an equal basis, the next $900,000 of such
expenses and Wyco Pipe Line Company will indemnify KPOP for up to $2,950,000 of
such expenses thereafter. The indemnity expires in August 1999. To the extent
environmental liabilities exceed the amount of such indemnity, KPOP has
affirmatively assumed the excess environmental liabilities.

The Steuart terminals Asset Purchase Agreements provide, with respect
to unknown environmental damages that are discovered after the closing of the
Steuart terminals acquisition and that were caused by operations conducted by
Steuart prior to the closing, that the Partnership and Steuart will share
expenses associated with such environmental damages at a ratio of 20% for the
Partnership and 80% for Steuart until a total of $2.5 million has been
expended. Thereafter, such expenses will be the Partnership's responsibility.
This indemnity will expire three years from the closing of the Steuart
terminals acquisition and will be secured by a cash escrow fund.

SAFETY REGULATION

The Pipelines are subject to regulation by the Department of
Transportation under the Hazardous Liquid Pipeline Safety Act of 1979 ("HLPSA")
relating to the design, installation, testing, construction, operation,
replacement and management of their pipeline facilities. The HLPSA covers
petroleum and petroleum products and requires any entity that owns or operates
pipeline facilities to comply with such plan, to permit access to and copying
of records and to make certain reports and provide information as required by
the Secretary of Transportation.

The Federal Pipeline Safety Act of 1992 amended the HLPSA to include
requirements for the future use of internal inspection devices. The
Partnership does not believe that it will be required to make any substantial
capital expenditures to comply with the requirements of HLPSA as so amended.

The Partnership is subject to the requirements of the Federal
Occupational Safety and Health Act ("OSHA") and comparable state statutes. The
Partnership believes that it is in general compliance

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with OSHA requirements, including general industry standards, record keeping
requirements and monitoring of occupational exposure to benzene.

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

EMPLOYEES

The Partnership has no employees. The pipeline business of the
Partnership is conducted by the General Partner, KPL, which at June 30, 1995,
employed 163 persons, approximately 56 of whom were salaried and, approximately
107 of whom were hourly rate employees. Approximately 107 persons employed by
KPL were subject to representation by unions for collective bargaining
purposes; however, the last collective bargaining contract expired in 1967 and
the employees have not operated under a contract since that date.

The Partnership's liquids terminaling business is conducted through
subsidiaries of ST which at June 30, 1995, employed 175 persons, approximately
105 of whom were salaried and approximately 70 of whom were hourly rate
employees. Approximately 34 persons employed by ST were subject to
representation by the Oil, Chemical and Atomic Workers International Union
AFL-CIO ("OCAW"). ST has an agreement with OCAW regarding conditions of
employment for the above persons, which is in effect through June 28, 1996.
This agreement is subject to automatic renewal for successive one- year periods
unless ST or OCAW serves written notice to terminate or modify such agreement
in a timely manner.

CASH DISTRIBUTIONS

GENERAL

Because the Partnership holds all of its assets and conducts all of
its operations through the Operating Partnerships and STI, all Cash from
Operations will be generated by such subsidiaries, and the distribution of such
cash from such subsidiaries to the Partnership is expected to be the principal
source of Available Cash (see "Glossary") from which to make distributions.
The Operating Partnerships are required under their partnership agreements to
distribute 100% of their available cash. Available cash is defined in the
partnership agreements of the Operating Partnerships in substantially the same
manner as is Available Cash of the Partnership; and the board of directors of
STI has adopted a dividend policy under which all available cash (defined in
substantially the same manner as is Available Cash of the Partnership) is to be
distributed to KPOP as a dividend. Since KPL will have a 1% general partner's
interest in all distributions of KPOP and a 1/99th general partner's interest
in all distributions of the Partnership, the holders of LP Units will have a
98% interest in Partnership distributions on a combined basis (subject to
incentive distributions to the General Partner as described below).
Accordingly, the following paragraphs describing distributions to Unitholders
and the General Partner, and the percentage interests in distributions by the
Partnership, are stated on the basis of cash available for distribution by the
Partnership, KPOP and KPOP's subsidiaries on a combined basis.

The Partnership will make distributions to Unitholders and the General
Partner with respect to each calendar quarter in an amount equal to 100% of its
Available Cash for such quarter, except in

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connection with the dissolution and liquidation of the Partnership.
Distributions by the Partnership of its Available Cash will be made 98% to
Unitholders and 2% to the General Partner, subject to the payment of incentive
distributions to the General Partner if certain target levels of cash
distributions to the Unitholders are achieved. The distribution to Unitholders
of Available Cash that constitutes Cash from Operations with respect to each
quarter within the Preference Period is subject to the preferential rights of
the holders of the Senior Preference Units to receive for such quarter $0.55
per Senior Preference Unit (the "Minimum Quarterly Distribution"), plus any
arrearages in the payment of the Minimum Quarterly Distribution for prior
quarters, prior to any distribution of Available Cash that constitutes Cash
from Operations to holders of Preference Units, Preference B Units or Common
Units with respect to such quarter. In addition, for each quarter through the
quarter ending September 30, 1997, the distribution of Available Cash that
constitutes Cash from Operations to holders of Preference B Units is subject to
the preferential rights of the holders of the Preference Units to receive the
Minimum Quarterly Distribution for such quarter, plus any arrearages in the
payment of the Minimum Quarterly Distribution for prior quarters. After such
time, the Preference B Units will be deemed to be Preference Units for purposes
of determining the priority and amount of distributions of Available Cash on
the Preference Units and Preference B Units. During the Preference Period the
distribution of Available Cash that constitutes Cash from Operations to holders
of Common Units is subject to the preferential rights of the holders of the
Senior Preference Units, the Preference Units and the Preference B Units to
receive the Minimum Quarterly Distribution for such quarter, plus any
arrearages in the payment of the Minimum Quarterly Distribution for prior
quarters. The Common Units are not entitled to arrearages in the payment of
the Minimum Quarterly Distribution.

The Partnership has paid the Minimum Quarterly Distribution on
outstanding Senior Preference Units for each quarter since the Partnership's
inception. The Partnership has also paid the Minimum Quarterly Distribution on
Preference Units with respect to all quarters since inception of the
Partnership, except for deficiencies in the payment of distributions with
respect to the second, third and fourth quarters of 1991 totalling $9,323,000.
All such arrearages were satisfied in 1992 and 1993. Had the operations of the
West Pipeline, ST and the other terminals acquired by the Partnership since its
inception been included in the Partnership's operations from such date, the
General Partner believes that such arrearages would not have been incurred. No
Preference B Units will have been issued prior to the closing of the offering
made by this Prospectus.

The Partnership believes that it will be able to make distributions of
Available Cash on the Preference Units of not less than the Minimum Quarterly
Distribution for each quarter during at least the next two years, although no
assurance can be given with respect to such distributions. Distributions
totalling $2,686,000 and $1,896,000 were paid on the Common Units with respect
to the final three calendar quarters of 1994 and the first two quarters of
1995, respectively. The Partnership believes that had the acquisition of the
West Pipeline been completed as of the beginning of 1994, the Partnership could
have distributed approximately $5.3 million to the holders of Common Units with
respect to such year. See "Distributions".

The priorities of distributions of Available Cash are set forth below
under the captions "--Quarterly Distributions of Available Cash--Distributions
of Cash from Operations During Preference Period" and "--Distributions of Cash
from Operations After Preference Period" and "--Distributions of

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<PAGE> 64
Cash from Interim Capital Transactions". Distributions of Available Cash are
characterized as either distributions of Cash from Operations or Cash from
Interim Capital Transactions. Cash from Operations generally refers to all
cash generated by the Partnership's operations after deducting related expenses
and new reserves. Cash from Interim Capital Transactions will generally be
generated by (i) borrowings and sales of debt securities by the Partnership
(other than for working capital purposes), (ii) sales of equity interests in
the Partnership and (iii) sales or other dispositions of assets of the
Partnership. All Available Cash distributed by the Partnership on any date
from any source will be treated as if it were a distribution of Cash from
Operations until the sum of all Available Cash distributed as Cash from
Operations to the Unitholders and to the General Partner (including any
incentive distributions) equals the aggregate amount of all Cash from
Operations generated by the Partnership since the Partnership commenced
operations through the end of the prior calendar quarter; any remaining
Available Cash distributed on such date will be treated as if it were a
distribution of Cash from Interim Capital Transactions, except as otherwise set
forth below under the caption "--Distributions of Cash from Interim Capital
Transactions".

The Partnership expects to make distributions of all Available Cash
within 45 days after the end of each calendar quarter to holders of record on
the applicable record date. The first distribution on the Preference Units to
which Unitholders acquiring Preference Units pursuant to this offering will be
entitled will be with respect to the quarter ending December 31, 1995. Such
distribution is expected to be made on or before February 14, 1996 to holders
of record of such LP Units as of January 31, 1996. All record holders of
Preference Units on such record date would be entitled to a full distribution.

A more complete description of the manner in which distributions of
cash will be made prior to commencement of the dissolution and liquidation of
the Partnership is set forth below under "--Quarterly Distributions of
Available Cash". Distributions of cash in connection with the dissolution and
liquidation of the Partnership will be made as described below under
"--Distributions of Cash Upon Liquidation".

QUARTERLY DISTRIBUTIONS OF AVAILABLE CASH

Distributions of Cash from Operations During Preference Period

Distributions by the Partnership of Available Cash that constitute
Cash from Operations in respect of any calendar quarter during the Preference
Period will be made in the following priorities:

first, 98% of such Available Cash to Unitholders holding
Senior Preference Units pro rata and 2% thereof to the General Partner
until there has been distributed in respect of each Senior Preference
Unit an amount equal to the sum of the Minimum Quarterly Distribution
for such quarter plus an amount equal to any cumulative arrearages in
the Minimum Quarterly Distribution on each Senior Preference Unit with
respect to any prior quarter;

second, 98% of any such Available Cash then remaining to
Unitholders holding Preference Units pro rata and 2% thereof to the
General Partner until there has been distributed in respect of each
Preference Unit an amount equal to the sum of the Minimum Quarterly
Distribution for such quarter plus an amount equal to any cumulative
arrearages in the Minimum Quarterly Distribution on each Preference
Unit with respect to any prior quarter;

third, 98% of any such Available Cash then remaining to
Unitholders holding Preference B Units pro rata and 2% thereof to the
General Partner until there has been distributed in respect of each
Preference B Unit an amount equal to the sum of the Minimum

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<PAGE> 65
Quarterly Distribution for such quarter plus an amount equal to any
cumulative arrearages in the Minimum Quarterly Distribution on each
Preference B Unit with respect to any prior quarter;

fourth, 98% of any such Available Cash then remaining to
Unitholders holding Common Units pro rata and 2% thereof to the
General Partner until there has been distributed in respect of each
Common Unit an amount equal to the Minimum Quarterly Distribution for
such quarter; and

thereafter, in the manner specified under "--Distributions of
Cash from Operations After Preference Period" below, commencing with
paragraph second

; provided, however, that after the record date for distributions with respect
to the quarter ending September 30, 1997, no distribution will be made pursuant
to paragraph third above and the Preference B Units shall be deemed to be
Preference Units for purposes of determining the priority and amount of
distributions of Available Cash that constitutes Cash from Operations.

Any holder of Preference B Units may, at its option exercisable from
time to time after the record date for distributions with respect to the
quarter ending September 30, 1997, exchange Preference B Units for an equal
number of Preference Units. See "--Exchange of Preference Units and Preference
B Units".

Distributions of Cash from Operations After Preference Period

Distributions by the Partnership of Available Cash that constitute
Cash from Operations in respect of any calendar quarter after the Preference
Period will be made in the following priorities:

first, 98% of such Available Cash to all Unitholders pro rata
and 2% thereof to the General Partner until there has been distributed
in respect of each LP Unit an amount equal to the Minimum Quarterly
Distribution;

second, 98% of any such Available Cash then remaining to all
Unitholders pro rata and 2% thereof to the General Partner until there
has been distributed in respect of each LP Unit an amount equal to the
excess of (i) $0.60 per LP Unit (the "First Target Distribution") over
(ii) the Minimum Quarterly Distribution;

third, 90% of any such Available Cash then remaining to all
Unitholders pro rata and 10% (8% incentive distribution plus 2% normal
distribution) thereof to the General Partner until there has been
distributed in respect of each LP Unit an amount equal to the excess
of (i) $0.65 per LP Unit (the "Second Target Distribution") over (ii)
the First Target Distribution;

fourth, 80% of any such Available Cash then remaining to all
Unitholders pro rata and 20% (18% incentive distribution plus 2%
normal distribution) thereof to the General Partner until there has
been distributed in respect of each LP Unit an amount equal to the
excess of (i) $0.70 per LP Unit (the "Third Target Distribution") over
(ii) the Second Target Distribution; and

thereafter, 70% of any such Available Cash then remaining to
all Unitholders pro rata and 30% (28% incentive distribution plus 2%
normal distribution) thereof to the General Partner.

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<PAGE> 66
The Minimum Quarterly Distribution, First Target Distribution, Second
Target Distribution and Third Target Distribution are each subject to
adjustment as described below under "--Adjustment of Minimum Quarterly
Distribution and Target Distribution Levels".

DISTRIBUTIONS OF CASH FROM INTERIM CAPITAL TRANSACTIONS

Distributions on any date by the Partnership of Available Cash that
constitute Cash from Interim Capital Transactions will be distributed 98% to
all Unitholders pro rata and 2% to the General Partner until the Partnership
shall have made distributions of Available Cash constituting Cash from Interim
Capital Transactions in respect of each Senior Preference Unit, Preference Unit
and Preference B Unit in an aggregate amount equal to $22 per unit.
Thereafter, all distributions of Available Cash that constitute Cash from
Interim Capital Transactions will be distributed as if they were Cash from
Operations.

DISTRIBUTION RESTRICTION ON PREFERENCE UNITS, PREFERENCE B UNITS AND COMMON
UNITS

The Partnership Agreement prohibits the Partnership from distributing
Available Cash on the Preference Units, Preference B Units or Common Units or
acquiring Preference Units, Preference B Units or Common Units with Available
Cash in respect of any calendar quarter if (i) the Preference Period continues
in effect during the quarter in respect of which the distribution or
acquisition would be made and (ii) after giving effect to such distribution or
acquisition, the sum of (A) plus (B) would exceed an amount equal to $45
million plus 80% of the aggregate expansive capital expenditures since the
inception of the Partnership greater than $45 million, where (A) is equal to
the outstanding principal balance as of the proposed distribution or
acquisition date, as the case may be, of the Partnership's consolidated
indebtedness (excluding borrowings for working capital purposes) and (B) is
equal to the amount of revenues collected by the Partnership that (x) are then
subject to possible refund under a pending rate case and (y) are not maintained
by the Partnership in a separate reserve fund. At June 30, 1995, the
Partnership's consolidated indebtedness was $71.1 million, and its aggregate
Expansive Capital Expenditures since October 3, 1989 was approximately $116.8
million. Therefore, at June 30, 1995, the Partnership could have borrowed an
additional $156.9 million (approximately) for Expansive Capital Expenditures
without being restricted in the payment of distributions to the holders of
Preference Units. The General Partner does not currently anticipate that this
restriction will prevent the distribution of the Minimum Quarterly Distribution
to the holders of Preference Units.

EXCHANGE OF PREFERENCE UNITS AND PREFERENCE B UNITS

KPL has agreed to exchange, upon consummation of the offering made by
this Prospectus, an aggregate of 1,000,000 Preference Units for an equal number
of Preference B Units. The purpose of such exchange is to cause 1,000,000 of
the Preference Units currently owned by KPL to be subordinate through the
quarter ending September 30, 1997, for purposes of determining the priority and
amount of distributions of Available Cash, to the rights of the holders of
Preference Units. After the Record Date for distributions of Available Cash to
the holders of Preference Units with respect to the quarter ending September
30, 1997, the Preference B Units shall be deemed to be Preference Units for
purposes of determining the priority and amount of distributions of Available
Cash on the Preference Units and the Preference B Units. Thereafter, the
holders of Preference B Units will not have a right to receive distributions of
Available Cash that is senior in priority to the rights of the holders of
Preference Units. In addition, any holder of Preference B Units may, at its
option exercisable from time to time after the record date for distributions
with respect to the quarter ending September 30, 1997, exchange Preference B
Units for an equal number of Preference Units. Each such exchange shall be
conditioned upon receipt by the Partnership of an Opinion of Counsel that the
intrinsic economic and federal income tax characteristics of the Preference
Units issuable upon such exchange are identical to the intrinsic economic and
federal income tax characteristics of the Preference Units outstanding

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<PAGE> 67
immediately prior to such exchange. The effect of any such exchange will be to
increase the number of Preference Units issued and outstanding.

EXCHANGE OF PREFERENCE UNITS AND PREFERENCE B UNITS FOR SENIOR PREFERENCE UNITS

Of the Preference Units and Preference B Units held by KPL after the
offering made by this Prospectus, after the record date for distributions to
the holders of Senior Preference Units with respect to the quarter ending
September 30, 1997, up to 2,650,000 may be exchanged for an equal number of
Senior Preference Units upon the distribution by the Partnership of Available
Cash that constitutes Cash from Operations to all Unitholders in respect of
each of the four full consecutive preceding calendar quarters (including the
calendar quarter with respect to which such distribution is being made) in an
amount at least equal to $.70 per LP Unit. The Partnership has not had, and
does not anticipate that it will have in the foreseeable future, sufficient
Available Cash to permit distributions at such level for four full consecutive
calendar quarters.

In addition, such exchange is permitted only if, as of such date, the
sum of (A) plus (B) is less than an amount equal to $45 million, plus 80% of
the aggregate Expansive Capital Expenditures since October 3, 1989, greater
than $45 million, where (A) is equal to the outstanding principal balance as of
such date of the Partnership's consolidated indebtedness (excluding borrowings
for working capital purposes) and (B) is equal to the amount of revenues
collected by the Partnership that (x) are then subject to possible refund under
a pending rate case and (y) are not maintained by the Partnership in a separate
reserve fund. The following table illustrates the application of such formula
as of June 30, 1995 (in millions):

<TABLE>
<CAPTION>
HISTORICAL PRO FORMA(1)
------------------------ -----------------------
<S> <C> <C> <C> <C>
Aggregate Expansive Capital Expenditures since
October 3, 1989 in excess of $45 million . . . . . . $ 71.8 $ -- $ 228.7 $ --
---------- ----------
Times 80% . . . . . . . . . . . . . . . . . . . . . . 57.4 183.0
Plus $45 Million . . . . . . . . . . . . . . . . . . . 45.0 45.0
----------- ----------
"Indebtedness Limitation" . . . . . . . . . . . . . . . $ 102.4 $ 228.0
=========== ==========

Principal Balance of Partnership's
Consolidated Indebtedness . . . . . . . . . . . . . . $ 71.1 $ -- $ 228.0 $ --
Less Borrowings for Working Capital Purposes . . . . -- 71.1 -- 228.0
---------- ----------
Revenues collected that were subject to refund . . . . -- --
----------- ----------
"Net Indebtedness" . . . . . . . . . . . . . . . . . . $ 71.1 $ 228.0
=========== ==========

"Indebtedness Limitation" less
"Net Indebtedness" . . . . . . . . . . . . . . . . . $ 31.3 $ 0.0
=========== ==========
</TABLE>
_________
(1) Pro forma amounts assume that the Partnership borrowed an additional
$156.9 million at June 30, 1995 for
Expansive Capital Expenditures.

At June 30, 1995, the Partnership could have incurred additional consolidated
indebtedness for Expansive Capital Expenditures in the amount of $156.9 million
at such date without impairing its ability to meet such test. Such test does
not limit borrowings for working capital purposes.

Each such exchange shall be conditioned upon receipt by the
Partnership of an Opinion of Counsel that the intrinsic economic and federal
income tax characteristics of the Senior Preference Units issuable upon such
exchange are identical to the intrinsic economic and federal income tax
characteristics of the Senior Preference Units outstanding immediately prior to
such exchange. Any Preference Units or Preference B Units so exchanged will
have the right to receive distributions of

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<PAGE> 68
Available Cash (including any distributions upon liquidation) prior to the
distribution of Available Cash on the Preference Units and Preference B Units.

STATUS OF LP UNITS AT END OF PREFERENCE PERIOD

At such time as the Preference Period has ended, all differences and
distinctions between Senior Preference Units, Preference Units, Preference B
Units and Common Units for the purpose of distributions shall automatically
cease. The Senior Preference Units, Preference Units, Preference B Units and
Common Units shall remain separately identified until such time as the
Partnership has received an opinion of counsel that the intrinsic economic and
federal income tax characteristics of the Senior Preference Units are identical
to the intrinsic economic and federal income tax characteristics of the other
LP Units. Upon receipt of such an opinion of counsel, the Senior Preference
Units, Preference Units, Preference B Units and Common Units shall thereafter
be designated "Units".

ADJUSTMENT OF MINIMUM QUARTERLY DISTRIBUTION AND TARGET DISTRIBUTION LEVELS

The Minimum Quarterly Distribution, First Target Distribution, Second
Target Distribution and Third Target Distribution will be proportionately
adjusted in the event of any combination or subdivision (whether effected by a
distribution payable in LP Units or otherwise) of LP Units. In addition, if a
distribution is made of Available Cash constituting Cash from Interim Capital
Transactions, the Minimum Quarterly Distribution, First Target Distribution,
Second Target Distribution and Third Target Distribution will also be adjusted
proportionately downward to equal the product resulting from multiplying each
of the Minimum Quarterly Distribution, First Target Distribution, Second Target
Distribution and Third Target Distribution by a fraction, of which the
numerator shall be the Unrecovered Capital (as defined below) immediately after
giving effect to such distribution and of which the denominator shall be the
Unrecovered Capital immediately prior to such distribution. For such purposes,
"Unrecovered Capital" means, at any time, an amount equal to the excess of (i)
$22 over (ii) the sum of all distributions theretofore made in respect of a
hypothetical Senior Preference Unit offered in the initial public offering of
the Partnership (expressed on a per Senior Preference Unit basis) out of
Available Cash constituting Cash from Interim Capital Transactions.

The Minimum Quarterly Distribution, First Target Distribution, Second
Target Distribution and Third Target Distribution also may be adjusted if
legislation is enacted that causes the Partnership to be taxable as a
corporation or to be treated as an association taxable as a corporation for
federal income tax purposes. In such event, the Minimum Quarterly
Distribution, First Target Distribution, Second Target Distribution and Third
Target Distribution for each quarter thereafter would be reduced to an amount
equal to the product of (i) each of the Minimum Quarterly Distribution, First
Target Distribution, Second Target Distribution and Third Target Distribution
multiplied by (ii) 1 minus the sum of (x) the maximum marginal federal
corporate income tax rate (expressed as a fraction) plus (y) the effective
overall state and local income tax rate (expressed as a fraction) applicable to
the Partnership for the taxable year in which such quarter occurs (after taking
into account the benefit of any deduction allowable for federal income tax
purposes with respect to the payment of state and local income taxes).

DISTRIBUTIONS OF CASH UPON LIQUIDATION

The Partnership and the Operating Partnerships will dissolve on
December 31, 2039, unless sooner dissolved pursuant to the terms of the
Partnership Agreement. In connection with the dissolution and liquidation of
the Partnership, the proceeds of such liquidation shall be applied, first, in
accordance with the provisions of the Partnership Agreement and applicable law
to the payment of creditors of the Partnership in the order of priority
provided by law and, thereafter, any remaining

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<PAGE> 69
proceeds (or assets in kind) will be distributed to Unitholders and the General
Partner as set forth below.

Generally, the holders of Senior Preference Units, Preference Units
and Preference B Units will have no preference with respect to liquidation
proceeds available for distribution to Unitholders. In such event, the holders
of Senior Preference Units, Preference Units and Preference B Units would be
entitled to share with the holders of Common Units and the General Partner in
the remainder of the Partnership's assets in proportion to their capital
account balances in the Partnership, after giving effect to the following
allocations of any gain or loss realized from sales or other dispositions of
assets following commencement of the dissolution and liquidation of the
Partnership ("Terminating Capital Transactions"), including any unrealized gain
or loss attributable to assets distributed in kind. During the Preference
Period, any such gain will be allocated as follows:

first, to each partner having a deficit balance in such
partner's capital account to the extent of and in proportion to such
deficit balance;

second, any then remaining gain would be allocated 98% to the
holders of Senior Preference Units pro rata and 2% to the General
Partner, until the capital account of each Senior Preference Unit
equals the sum of the Remaining Capital (as defined below) in respect
of such Senior Preference Unit plus any cumulative arrearages then
existing in the payment of the Minimum Quarterly Distribution on such
Senior Preference Unit with respect to any quarter within the
Preference Period;

third, any then remaining gain would be allocated 98% to the
holders of Preference Units pro rata and 2% to the General Partner,
until the capital account of each Preference Unit equals the sum of
the Remaining Capital in respect of such Preference Unit plus any
cumulative arrearages then existing in the payment of the Minimum
Quarterly Distribution on such Preference Unit with respect to any
quarter within the Preference Period;

fourth, any then remaining gain would be allocated 98% to the
holders of Preference B Units pro rata and 2% to the General Partner,
until the capital account of each Preference B Unit equals the sum of
the Remaining Capital in respect of such Preference B Unit plus any
cumulative arrearages then existing in the payment of the Minimum
Quarterly Distribution on such Preference B Unit with respect to any
quarter within the Preference Period;

fifth, any then remaining gain would be allocated 98% to the
holders of Common Units pro rata and 2% to the General Partner, until
the capital account of each Common Unit equals the Remaining Capital
in respect of such Common Unit;

sixth, any then remaining gain would be allocated 98% to all
Unitholders pro rata and 2% to the General Partner until the capital
account of each outstanding LP Unit is equal to the sum of (a) the
Remaining Capital with respect to such LP Unit plus (b) any cumulative
arrearages then existing in the payment of the Minimum Quarterly
Distribution with respect to such LP Unit (in the case of a Senior
Preference Unit, a Preference Unit or a Preference B Unit) plus (c)
the excess of the First Target Distribution over the Minimum Quarterly
Distribution of each quarter of the Partnership's existence less (d)
the amount of any distributions of Cash from Operations in excess of
the Minimum Quarterly Distribution which were distributed 98% to the
Unitholders pro rata and 2% to the General Partner for each quarter of
the Partnership's existence ((b), if applicable, plus (c) less (d)
being the "Target Amount");

seventh, any then remaining gain would be allocated 90% to all
Unitholders pro rata and 10% (8% incentive allocation plus 2% normal
allocation) to the General Partner, until the

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capital account of each outstanding LP Unit is equal to the sum of (a)
the Remaining Capital with respect to such LP Unit plus (b) the Target
Amount plus (c) the excess of the Second Target Distribution over the
First Target Distribution for each quarter of the Partnership's
existence less (d) the amount of any distributions of Cash from
Operations in excess of the First Target Distribution which were
distributed 90% to the Unitholders pro rata and 10% to the General
Partner for each quarter of the Partnership's existence (the
respective Target Amount plus (c) less (d) being referred to as the
"Second Target Amount");

eighth, any then remaining gain would be allocated 80% to all
Unitholders pro rata and 20% (18% incentive allocation plus 2% normal
allocation) to the General Partner, until the capital account of each
outstanding LP Unit is equal to the sum of (a) the Remaining Capital
with respect to such LP Unit plus (b) the Second Target Amount plus
(c) the excess of the Third Target Distribution over the Second Target
Distribution for each quarter of the Partnership's existence less (d)
the amount of any distributions of Cash from Operations in excess of
the Second Target Distribution which were distributed 80% to the
Unitholders pro rata and 20% to the General Partner for each quarter
of the Partnership's existence; and

thereafter, any then remaining gain would be allocated 70% to
all Unitholders pro rata and 30% (28% incentive allocation plus 2%
normal allocation) to the General Partner.

For such purposes, "Remaining Capital" means, at any time with respect to any
class or series of LP Units, the price per LP Unit at which such class or
series of LP Units was initially sold by the Partnership, as determined by the
General Partner, less the sum of any distributions of Available Cash
constituting Cash from Interim Capital Transactions and any distributions of
cash (or the fair value of any assets distributed in kind) in connection with
the dissolution and liquidation of the Partnership theretofore made in respect
of an LP Unit of such class or series that was sold in the initial offering of
such LP Units.

After September 30, 1997, no allocations will be made under paragraph
fourth above and the Preference B Units shall be deemed to be Preference Units
for purposes of the allocations described above. In addition, after the
Preference Period, any such gain will be allocated as above described; provided
that no allocations will be made under paragraphs second, third and fourth and
that the references to "Common Units" after the Preference Period shall refer
to "Units".

Holders of Senior Preference Units, Preference Units or Preference B
Units will have no preferential right in respect of any excess of the
cumulative arrearages in the Minimum Quarterly Distribution on such Senior
Preference Units, Preference Units or Preference B Units, as the case may be,
with respect to any quarter ending during the Preference Period over the amount
of such gain available for allocation to the holders of Senior Preference
Units, Preference Units or Preference B Units.

Any loss or unrealized loss will be allocated to the General Partner
and the Unitholders: first, in proportion to the positive balances in such
partners' capital accounts until all such balances are reduced to zero; and
second, to the General Partner.

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<PAGE> 71
CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES

GENERAL

The General Partner will make all decisions relating to the management
of the Partnership. In some cases the officers of KPL who make such decisions
also may be officers of Kaneb. In addition, Kaneb owns all the capital stock
of KPL and owns, either directly or through a subsidiary, all of the
outstanding Common Units. Certain conflicts of interest could arise as a
result of the relationships among the General Partner, Kaneb and the
Partnership. The directors and officers of Kaneb have fiduciary duties to
manage Kaneb, including its investments in its subsidiaries and affiliates, in
a manner beneficial to the stockholders of Kaneb. The General Partner has a
fiduciary duty to manage the Partnership in a manner beneficial to the
Unitholders. The duty of the directors of Kaneb to the stockholders of Kaneb
may, therefore, conflict with the duties of the General Partner to the
Unitholders. The Audit Committee of the Board of Directors of the General
Partner will review conflicts of interest that may arise between Kaneb or its
subsidiaries, on the one hand, and the Partnership or any partner thereof, on
the other hand. In resolving any conflict of interest that may arise, the
Audit Committee may consider (i) the relative interests of any party to such
conflict and the benefits and burdens relating to such interest, (ii) any
customary or accepted industry practices, (iii) any applicable generally
accepted accounting or engineering practices or principles and (iv) such
additional factors as the Audit Committee determines in its sole discretion to
be relevant, reasonable and appropriate under the circumstances. The Audit
Committee will have access to the management of KPL, and independent advisers
as appropriate, and will attempt to resolve any such conflict of interest
consistent with provisions of the Partnership Agreement and the General
Partner's fiduciary duties under Delaware law. While final authority with
respect to all decisions of the General Partner, including those involving
conflicts of interest, is vested in the General Partner's board of directors,
it is anticipated that the board would give considerable weight to the
recommendations of the Audit Committee as to matters involving conflicts of
interest.

Potential conflicts of interest could arise in the situations
described below, among others:

(a) Under the definitions of Available Cash and Cash from
Operations set forth elsewhere herein, the amount of cash
expenditures, borrowings and reserves in any quarter may affect the
extent to which there is sufficient Available Cash constituting Cash
from Operations to meet the Minimum Quarterly Distribution on all
Senior Preference Units and Preference Units without subordination of
distributions on the Preference B Units and the Common Units. In
addition, the General Partner's determination whether to make, or
which portion of an expenditure constitutes, an Expansive Capital
Expenditure may have the same effect. Borrowings and issuances of
additional LP Units also increase the amount of Available Cash and, in
the case of working capital borrowings, the amount of Cash from
Operations. By purchasing a Preference Unit, a Unitholder agrees that
borrowings by the Partnership or the approval thereof by the General
Partner shall not constitute a breach of any duty of the General
Partner to the Partnership or the Unitholders whether or not the
purpose or effect thereof is to avoid subordination of Preference
Units, Preference B Units or Common Units. Further, such purchaser
agrees that any actions taken by the General Partner consistent with
the standards of reasonable discretion set forth in the definitions of
Available Cash and Cash from Operations will be deemed not to breach
any duty of the General Partner to the Partnership or the Unitholders.
See "Cash Distributions". Such provisions purport to limit the
liability of the General Partner to the Partnership and the
Unitholders, are not supported by an opinion of counsel as to their
enforceability and may not be enforceable under Delaware law.

(b) Under the terms of the Amended and Restated Agreement of
Limited Partnership of the Partnership (the "Partnership Agreement"),
the Amended and Restated Agreement of

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Limited Partnership of KPOP and the Agreement of Limited Partnership
of STOP (the "Operating Partnership Agreements"; collectively with the
Partnership Agreement, the "Partnership Agreements"), the General
Partner will exercise its discretion in managing the business of the
Partnership and, as a result, the General Partner is not restricted
from paying Kaneb and its subsidiaries and affiliates for any services
rendered on terms fair and reasonable to the Partnership. In this
connection, the General Partner will determine which of its direct or
indirect costs (including costs allocated to the General Partner by
its affiliates) are reimbursable by the Partnership.

(c) The General Partner or any of its affiliates may lend to
the Partnership or its operating subsidiaries funds needed by such
entities for such periods of time as the General Partner may
determine; provided, however, that the General Partner or such
affiliate may not charge the Partnership or its operating subsidiaries
interest at a rate greater than the lesser of (i) the actual interest
cost (including points or other financing charges or fees) that the
General Partner or such affiliate is required to pay on funds borrowed
by it from commercial banks and (ii) the rate (including points or
other financing charges or fees) that would be charged the borrowing
entity (without reference to the General Partner's financial abilities
or guaranties) by unrelated lenders on comparable loans. The
borrowing entity will reimburse the General Partner or such affiliate,
as the case may be, for any costs incurred by it in connection with
the borrowing of funds obtained by the General Partner or such
affiliate and loaned to the borrowing entity. The Partnership may
lend or contribute to its operating subsidiaries and such operating
subsidiaries may borrow funds from the Partnership, on terms and
conditions established at the sole discretion of the General Partner.

(d) KPL (through its ownership of the Preference Units,
Preference B Units, Common Units and the general partner interest in
the Partnership and KPOP) has certain varying percentage interests and
priorities with respect to Available Cash and net proceeds of capital
transactions. See "Cash Distributions". The timing and amount of
cash receipts and proceeds of capital transactions received by or
allocated to KPL may be affected by various determinations made by KPL
as the general partner under the Partnership Agreements (including,
for example, those relating to the decision to liquidate the
Partnership, the timing of any capital transaction, the establishment
and maintenance of reserves, the timing of expenditures, the
incurrence of debt and other matters).

(e) Upon the request of the General Partner or any affiliate
thereof holding LP Units or other securities of the Partnership, the
Partnership shall be required to register the offer and sale of such
number of such securities (aggregating at least $2.0 million in value)
specified by the General Partner or such affiliate under the
Securities Act and the securities laws of any states reasonably
requested by the General Partner or such affiliate. All costs and
expenses of such registration will be paid by the General Partner or
such affiliate and none of such costs will be allocated to the
Partnership. Under certain circumstances, the General Partner or such
affiliate also will have the right to include such securities in a
registration statement under the Securities Act proposed by the
Partnership for an offering of securities of the Partnership for cash.

(f) Neither the Partnership Agreements nor any of the other
agreements, contracts and arrangements between the Partnership, on the
one hand, and the General Partner, Kaneb and its affiliates, on the
other hand, were or will be the result of arm's length negotiations.

(g) As is customary in many types of public securities
offerings, the Preference Unitholders have not been represented by
separate counsel in connection with the preparation of the Partnership
Agreements or the other agreements referred to herein or in
establishing the

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terms of the offering made by this Prospectus. The attorneys,
accountants and others who have performed services for the Partnership
in connection with the offering have been employed by the General
Partner, Kaneb and their affiliates and may continue to represent the
General Partner, Kaneb and their affiliates. Attorneys, accountants
and others who will perform services for the Partnership in the future
will be selected by the General Partner and also may perform services
for the General Partner, Kaneb and their affiliates. The General
Partner may retain separate counsel for the Partnership or the
Unitholders after the sale of the Preference Units offered by this
Prospectus, depending on the nature of any conflict that might arise
in the future, but does not intend to do so in most cases.

(h) The decision whether to purchase outstanding LP Units at
any time may involve the General Partner or Kaneb in a conflict of
interest. See "Description of the Partnership Agreements--Limited
Call Right".

(i) Subject to their fiduciary duties to the Partnership and
the limited partners of the Partnership, KPL and its affiliates are
permitted to engage in activities in competition with the Partnership
and the Operating Partnerships.

FIDUCIARY RESPONSIBILITY OF THE GENERAL PARTNER

The General Partner will be accountable to the Partnership as a
fiduciary. Consequently, the General Partner must exercise good faith and
integrity in handling the assets and affairs of the Partnership in addition to
such other obligations as the General Partner may assume under the Partnership
Agreement. The Partnership Agreement provides that whenever a conflict of
interest arises between the General Partner or its affiliates, on the one hand,
and the Partnership or any limited partner, on the other hand, the General
Partner will, in resolving such conflict or determining such action, consider
the relative interests of the parties involved in such conflict or affected by
such action, any customary or accepted industry practices and, if applicable,
generally accepted accounting practices or principles. The same considerations
shall apply whenever the Partnership Agreement provides that the General
Partner shall act in a manner that is fair and reasonable to the Partnership or
the limited partners. Thus, unlike the strict duty of a fiduciary who must act
solely in the best interests of his beneficiary, the Partnership Agreement
permits the General Partner to consider the interests of all parties to a
conflict of interest, including the interests of the General Partner, although
it is not clear under Delaware law that such provisions would be enforceable
because of a lack of judicial authority directly on point. Without modifying
the strict fiduciary standard that might otherwise apply, the Partnership's
ability to engage in transactions with the General Partner or its affiliates or
involving conflicts of interest, even if beneficial to the Partnership, would
be impaired. The Partnership Agreement also provides that in certain
circumstances the General Partner shall act in its sole discretion, in good
faith or pursuant to other appropriate standards.

The Delaware Revised Uniform Limited Partnership Act (the "Delaware
Act") provides that a limited partner may institute legal action on behalf of
the partnership (a partnership derivative action) to recover damages from a
third party where the general partner has failed to institute the action or
where an effort to cause the general partner to do so is not likely to succeed.
In addition, cases have been decided under the common law of partnerships in
Delaware and the common or statutory law of other jurisdictions to the effect
that a limited partner may institute legal action on behalf of himself or all
other similarly situated limited partners (a class action) to recover damages
from a general partner for violations of its fiduciary duties to the limited
partners. In addition, counsel has advised the General Partner that on the
basis of federal statutes and rules and decisions by federal courts, it appears
that limited partners have the right, subject to the provisions of the Federal
Rules of Civil Procedure, to bring partnership derivative actions or actions
against a general partner in the federal courts to enforce

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federal rights of the limited partners, including, in each case, rights under
certain Securities and Exchange Commission rules.

The Partnership Agreement also provides that any standard of care and
duty imposed thereby or under the Delaware Act or any applicable law, rule or
regulation will be modified, waived or limited as required to permit the
General Partner to act under the Partnership Agreement or any other agreement
contemplated therein and to make any decision pursuant to the authority
prescribed in the Partnership Agreement so long as such action is not
inconsistent with the overall purposes of the Partnership. Further, the
Partnership Agreement provides that the General Partner will not be liable for
monetary damages to the Partnership, the Unitholders or assignees for any acts
or omissions if the General Partner acted in good faith. The extent to which
these provisions would be enforceable under Delaware law is not clear, however.
In addition, the Partnership is required, under the terms of the Partnership
Agreements, to indemnify the General Partner and its directors, officers,
employees and agents against liabilities, costs and expenses incurred by the
General Partner or other such persons, if the General Partner or such persons
acted in good faith and in a manner they reasonably believed to be in, or not
opposed to, the best interests of the Partnership and such action did not
constitute gross negligence or willful misconduct on the part of the General
Partner or other such persons and, with respect to any criminal proceeding, had
no reasonable cause to believe that their conduct was unlawful. See
"Description of the Partnership Agreements--Indemnification".

The fiduciary obligations of general partners is a rapidly developing
and changing area of the law, and Unitholders should consult their own legal
counsel concerning the fiduciary responsibilities of the General Partner and
the remedies available to Unitholders.

DESCRIPTION OF THE PREFERENCE UNITS

GENERAL

The Preference Units have been registered under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and
regulations promulgated thereunder, and the Partnership is subject to the
reporting and proxy solicitation requirements of the Exchange Act. The
Partnership is required to file periodic reports containing financial and other
information with the Securities and Exchange Commission.

Upon the closing of the offering made by this Prospectus, the
Underwriters will offer the Preference Units directly to the public.
Purchasers of Preference Units in this offering and subsequent transferees of
Preference Units (or their brokers, agents or nominees on their behalf) will be
required to execute a transfer application.

Preference Units may be held in "street name" or by any other nominee
holder. As among the Partnership, the beneficial owner and the nominee holder,
the Partnership will be entitled to treat the nominee holder of a Preference
Unit as the absolute owner thereof.

The Preference Units have been approved for listing on the New York
Stock Exchange subject to official notice of issuance.

TRANSFER OF PREFERENCE UNITS

Until a Preference Unit has been transferred on the books of the
Partnership, the Partnership, notwithstanding any notice to the contrary or any
notation or other writing on the certificate representing such Preference Unit,
may treat the record holder thereof as the absolute owner for all purposes. A
transfer of a Preference Unit (including a transfer from the Underwriters as a
part of the

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offering made by this Prospectus) will not be recorded or recognized by the
Partnership unless the transferee or his nominee holder executes and delivers
the transfer application. By executing and delivering the transfer
application, the transferee of Preference Units automatically requests
admission as a substituted limited partner in the Partnership, agrees to be
bound by the terms and conditions of, and executes, the Partnership Agreement,
represents that such transferee has capacity and authority to enter into the
Partnership Agreement, grants powers of attorney to the General Partner and any
liquidator of the Partnership and makes the consents and waivers contained in
the Partnership Agreement. An assignee will become a limited partner of the
Partnership in respect of the transferred Preference Units upon the consent of
the General Partner and the recordation of the name of the assignee on the
books and records of the Partnership. Such consent may be withheld in the sole
discretion of the General Partner. Preference Units are securities and are
transferable according to the laws governing transfers of securities. In
addition to other rights acquired upon transfer, the transferor gives the
transferee who executes and delivers a transfer application the right to
request admission as a substituted limited partner in the Partnership in
respect of the transferred Preference Units. A purchaser or transferee of
Preference Units who does not execute and deliver a transfer application
obtains only (i) the right to assign the Preference Units to a purchaser or
other transferee and (ii) the right to transfer the right to seek admission as
a substituted limited partner in the Partnership with respect to the
transferred Preference Units. Thus, a purchaser or transferee of Preference
Units who does not execute and deliver a transfer application will not receive
cash distributions unless the Preference Units are held in a nominee or street
name account and the nominee or broker has executed and delivered a transfer
application with respect to such Preference Units and may not receive certain
federal income tax information or reports furnished to record holders of
Preference Units. The transferor of Preference Units will have a duty to
provide such transferee with all information that may be necessary to obtain
registration of the transfer of the Preference Units, but a transferee agrees,
by acceptance of the certificate representing such Preference Unit, that the
transferor will not have a duty to see to the execution of the transfer
application by the transferee and will have no liability or responsibility if
such transferee neglects or chooses not to execute and forward the transfer
application. See "Description of the Partnership Agreements--Status as Limited
Partner or Assignee".

In the event the Partnership is or becomes subject to federal, state
or local laws or regulations that create a substantial risk of cancellation or
forfeiture of any property in which the Partnership has an interest because of
the nationality, citizenship or other related status of any Preference
Unitholder or assignee, the General Partner may redeem the Preference Units
held by such Preference Unitholder or assignee. To avoid any such cancellation
or forfeiture, the General Partner may request a record holder of a Preference
Unit to furnish to the General Partner certain information about his
nationality, citizenship or other related status. If the record holder fails
to furnish such information or if the General Partner determines, on the basis
of the information furnished by such holder in response to the request, that
the cancellation or forfeiture of any property in which the Partnership has an
interest may occur, the General Partner may be substituted as the Preference
Unitholder for such record holder, who will then be treated as a non-citizen
assignee, and the General Partner will have the right to redeem the Preference
Units held by such record holder. See "Description of the Partnership
Agreements--Non-citizen Assignees; Redemption".

DESCRIPTION OF THE PARTNERSHIP AGREEMENTS

The following paragraphs are a summary of the material provisions of
the Partnership Agreements. A copy of the Partnership Agreements is available
on request (see "Incorporation of Certain Documents"). The following
discussion is qualified in its entirety by reference to the Partnership
Agreements.

Certain provisions of the Partnership Agreements are summarized
elsewhere in this Prospectus under various headings. With regard to various
transactions and relationships of the Partnership with

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KPL and its affiliates, see "Conflicts of Interest and Fiduciary
Responsibilities"; with regard to the transfer of Preference Units, see
"Description of the Preference Units"; with regard to distributions of
Available Cash, see "Cash Distributions"; and with regard to allocations of
taxable income and taxable loss, see "Federal Income Tax Considerations".
Prospective investors are urged to review these sections of this Prospectus
carefully.

ORGANIZATION AND DURATION

The Partnership and KPOP were organized in 1989 as Delaware limited
partnerships. STOP was organized in 1993 as a Delaware limited partnership.
KPL is the general partner of both the Partnership and KPOP. A wholly owned
corporate subsidiary of KPOP is the sole general partner of STOP. KPL holds a
2% interest as general partner in the Partnership and KPOP on a combined basis.
The Unitholders (including Kaneb through its subsidiaries) hold a 98% interest
as limited partners in the Partnership and KPOP on a combined basis. The
Partnership and the Operating Partnerships will dissolve on December 31, 2039,
unless sooner dissolved pursuant to the terms of the Partnership Agreements.

PURPOSE

The purpose of the Partnership under the Partnership Agreement is
limited to serving as the limited partner of KPOP and any other business
permitted under the Delaware Act. The Operating Partnership Agreements provide
that the Operating Partnerships may engage in the transportation of refined
petroleum products through the Pipelines, the specialty liquids storage
business and any other business permitted under the Delaware Act.

The General Partner is authorized in general to perform all acts
deemed necessary to carry out such purposes and to conduct the business of the
Partnership.

POWER OF ATTORNEY

Each limited partner of the Partnership, and each person who acquires
an LP Unit from a prior holder and executes and delivers a transfer application
with respect thereto, grants to the General Partner and, if a liquidating
trustee has been appointed, the liquidating trustee a power of attorney to,
among other things, execute and file certain documents required in connection
with the qualification, continuance or dissolution of the Partnership or the
amendment of the Partnership Agreement and to make the consents and waivers
contained in the Partnership Agreement.

RESTRICTIONS ON AUTHORITY OF THE GENERAL PARTNER

The authority of the General Partner is limited in certain respects
under the Partnership Agreement. The General Partner is prohibited, without
the prior approval of holders of record of a majority of the LP Units and,
during the Preference Period, the approval of the holders of a majority of the
Senior Preference Units (excluding for purposes of such determination Senior
Preference Units held by KPL and its affiliates), from, among other things,
selling or exchanging all or substantially all of the Partnership's assets in a
single transaction or a series of related transactions or approving on behalf
of the Partnership the sale, exchange or other disposition of all or
substantially all of the assets of the Partnership, provided that the
Partnership may mortgage, pledge, hypothecate or grant a security interest in
all or substantially all of its assets and may sell all or substantially all of
its assets pursuant to a foreclosure or other realization upon the foregoing
encumbrances without such approval. Except as provided in the Partnership
Agreement and generally described below under "--Amendment of Partnership
Agreements", any amendment to a provision of the Partnership Agreement
generally will require the approval of the holders of a majority of the LP
Units, and any amendment which would

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materially and adversely affect any class of LP Units will require the approval
of the holders of a majority of such class of affected LP Units (excluding for
purposes of such determination LP Units held by KPL and its affiliates unless
KPL and its affiliates own all of the LP Units of such class). A merger or
consolidation of the Partnership requires the approval of the General Partner
and the holders of a majority of each class of LP Units, voting as separate
classes (with the holders of Preference Units and Preference B Units voting
together as a single class); provided that the Senior Preference Units held by
the General Partner or its affiliates will be excluded from such vote.

In general, the General Partner may not take any action, or refuse to
take any reasonable action, without the consent of the holders of a majority of
each class of LP Units, and, during the Preference Period, the vote of a
majority of Senior Preference Units other than Senior Preference Units owned by
KPL and its affiliates, the effect of which would be to cause the Partnership
or either of the Operating Partnerships to be taxable as corporation or to be
treated as an association taxable as a corporation for federal income tax
purposes.

WITHDRAWAL OR REMOVAL OF THE GENERAL PARTNER

The General Partner has agreed not to voluntarily withdraw as general
partner of the Partnership and KPOP prior to January 1, 2000 (with limited
exceptions described below) without the approval of a majority of the LP Units
and the approval of the holders of a majority of the Senior Preference Units
(excluding for purposes of such determination Senior Preference Units held by
KPL and its affiliates), after which time KPL may withdraw as such general
partner by giving 90 days' written notice. A majority of the holders of the LP
Units may elect a successor General Partner, subject to the receipt by the
Partnership of an opinion of counsel that the selection of a successor may be
taken without the approval of all of the limited partners of the Partnership,
such action would not result in the loss of limited liability of the
Unitholders of any class or the limited liability of the Partnership as the
limited partner of the Operating Partnerships or cause the Partnership to be
taxable as a corporation or to be treated as an association taxable as a
corporation for federal income tax purposes and that any required consents by
any regulatory authorities have been obtained. If such an opinion of counsel
cannot be obtained, the Partnership will be dissolved after such withdrawal.
Notwithstanding the foregoing, prior to January 1, 2000, KPL may withdraw
without such Unitholder approval upon 90 days' notice to the limited partners
of the Partnership if more than 50% of the LP Units are held or controlled by
one person and its affiliates other than the withdrawing General Partner and
its affiliates.

KPL may not be removed as general partner of the Partnership unless
such removal is approved by the affirmative vote of the holders of not less
than 85% of the LP Units and any other limited partner interests, voting as a
single class, and approved by the affirmative vote of holders of not less than
85% of each class of LP Units and any other limited partner interests
outstanding, voting as separate classes (with the holders of Preference Units
and Preference B Units voting together as a single class), in each case
including for purposes of such determination LP Units and any other limited
partner interests owned by KPL and its affiliates, provided that certain other
conditions are satisfied. Any such removal is subject to the approval of the
successor general partner by a majority of the LP Units then outstanding
(including LP Units held by the removed general partner and its affiliates) and
receipt of an opinion of counsel that such removal and the approval of a
successor may be effected without the approval of all Partners and that such
actions will not result in the loss of the limited liability of any limited
partner of the Partnership or of the limited partner of the Operating
Partnerships or cause the Partnership to be taxable as a corporation or to be
treated as an association taxable as a corporation for federal income tax
purposes and that any required consents by any regulatory authorities have been
obtained.

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Removal or withdrawal of the General Partner of the Partnership also
constitutes removal or withdrawal, as the case may be, of KPL as the general
partner of KPOP.

In the event of withdrawal of KPL or removal of KPL by the limited
partners of the Partnership or by the limited partner of KPOP, a successor
general partner will have the option to acquire the general partner interests
of the departing general partner (the "Departing Partner") for a cash payment
equal to the fair market value of such interests. Such market value will be
determined by agreement between the Departing Partner and a successor general
partner, or if no agreement is reached, by an independent investment banking
firm or other independent expert selected by the Departing Partner and a
successor general partner (or if no expert can be agreed upon, by the expert
chosen by agreement of the expert selected by each of them). In addition, the
Partnership also would be required to reimburse the Departing Partner for all
employee-related liabilities, including severance liabilities, incurred in
connection with the termination of the employees employed by the Departing
Partner for the benefit of the Partnership.

If the above-described option is not exercised by the successor
general partner, the Departing Partner's general partner interest in the
Partnership will be converted into Common Units equal to the fair market value
of such interests.

KPL may transfer its general partner interests in the Partnership
without the approval of the limited partners of the Partnership (i) to an
affiliate of KPL or (ii) upon its merger or consolidation into another entity
or the transfer of all or substantially all of its assets to another entity
provided in either case that such entity assumes the rights and duties of the
General Partner and agrees to be bound by the provisions of the Partnership
Agreements. In addition KPL may (i) transfer part of its interest in items of
Partnership income, gain, losses, deductions, credits, distributions or
surplus, (ii) transfer all of its interest in items of Partnership income,
gain, losses, deductions, credits, distributions or surplus if KPL agrees to
continue as general partner, (iii) mortgage, pledge, hypothecate or grant a
security interest in its partnership interest or (iv) transfer its partnership
interest pursuant to a forced sale upon the foreclosure of any encumbrance
created pursuant to clause (iii) above. In each case described above in this
paragraph the transfer, merger, assumption or sale is subject to the
requirement that the transferee furnish to the Partnership an opinion of
counsel that such transfer, merger, assumption or sale (i) may be taken without
the approval of all limited partners of the Partnership to such specific act,
(ii) would not cause the loss of limited liability of the limited partners of
the Partnership under the Partnership Agreements and (iii) would not cause the
Partnership to be taxable as a corporation or treated as an association taxable
as a corporation for federal income tax purposes. In the case of any other
transfer, in addition to the foregoing requirements, the vote of the holders of
a majority of the LP Units, including during the Preference Period the approval
of the holders of a majority of the Senior Preference Units (excluding for
purposes of such determination Senior Preference Units held by KPL and its
affiliates), is required.

STATUS AS LIMITED PARTNER OR ASSIGNEE

Except as described under "--Limited Liability", LP Units are fully
paid and Unitholders will not be required to make additional contributions to
the Partnership.

Each purchaser of Preference Units offered by this Prospectus must
execute a transfer application requesting admission as, and agreeing to become,
a substituted limited partner in the Partnership. If such action is not taken,
a purchaser will not be registered as a record holder of Preference Units on
the books of the transfer agent or issued a Preference Unit. Purchasers may
hold Preference Units in nominee accounts. See "Description of the Preference
Units-- Transfer of Preference Units" for a more complete description of the
requirements for the transfer of Preference Units.

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An assignee, pending its admission as a substituted limited partner in
the Partnership, is entitled to an interest in the Partnership equivalent to
that of a limited partner with respect to the right to share in allocations and
distributions from the Partnership, including liquidating distributions. The
General Partner will vote, and exercise other powers attributable to Preference
Units owned by an assignee who has not become a substituted limited partner, at
the written direction of such assignee. See "--Meetings; Voting" below.
Transferees who do not execute and deliver a transfer application will be
treated neither as assignees nor as record holders of Preference Units, and
will not receive cash distributions, federal income tax allocations or reports
furnished to record holders of Preference Units. The only right such
transferees will have is the right to negotiate such Preference Units to a
purchaser or other transferee and the right to transfer the right to request
admission as a limited partner of the Partnership in respect of the transferred
Preference Units to a purchaser or other transferee who executes a transfer
application in respect of the Preference Units. A nominee or broker who has
executed a transfer application with respect to Preference Units held in street
name or nominee accounts will receive such distributions and reports pertaining
to such Preference Units.

NON-CITIZEN ASSIGNEES; REDEMPTION

If the Partnership is or becomes subject to federal, state or local
laws or regulations that create a substantial risk of cancellation or
forfeiture of any property in which the Partnership has an interest because of
the nationality, citizenship or other related status of any limited partner of
the Partnership or assignee, the Partnership may redeem the LP Units held by
such limited partner or assignee. To avoid any such cancellation or
forfeiture, the General Partner may require each limited partner of the
Partnership or assignee to furnish information about his nationality,
citizenship, residency or related status. If a limited partner of the
Partnership or assignee fails to furnish information about his nationality,
citizenship, residency or related status within 30 days after a request for
such information, such limited partner or assignee may be treated as a
non-citizen assignee ("non-citizen assignee"). The Partnership Agreement sets
forth the rights of such a limited partner or assignee upon redemption.
Pending such redemption or in lieu thereof, the General Partner may change the
status of any such limited partner or assignee to that of a non-citizen
assignee. In addition to other limitations on the rights of an assignee who is
not a substituted limited partner, a non-citizen assignee does not have the
right to direct the voting of his LP Units and may not receive distributions in
kind upon liquidation of the Partnership. See "--Status as limited partner or
Assignee".

ISSUANCE OF ADDITIONAL LP UNITS AND SECURITIES

The Partnership Agreement authorizes the General Partner to cause the
Partnership to issue Additional LP Units (additional limited partner interests
and other equity securities of the Partnership) for such consideration and on
such terms and conditions as shall be established by the General Partner
including, without limitation, Preference Units in addition to the Preference
Units offered by this Prospectus and Additional LP Units with rights to
distributions or in liquidation ranking prior or senior to or on a parity with
Preference Units. During the Preference Period, however, the Partnership may
not issue (i) more than 7,750,000 additional Senior Preference Units (other
than any Senior Preference Units issuable upon exchange of Preference Units if
certain conditions are met), (ii) any other class of partnership interest of
the Partnership on a parity with, convertible into or exchangeable for Senior
Preference Units or (iii) any other classes of partnership interests of the
Partnership ranking prior to or on a parity with the Senior Preference Units,
without the approval of the holders of a majority of the outstanding Senior
Preference Units (excluding for purposes of such determination Senior
Preference Units held by the General Partner and its affiliates). After the
Preference Period, there is no restriction on the ability of the Partnership to
issue Additional LP Units, including, without limitation, Additional LP Units
with rights to distributions or in liquidation ranking prior or senior to any
of the outstanding LP Units. The General Partner will take into account the
interests of the holders of each class of the LP Units in determining whether
to cause the Partnership to issue Additional LP Units.

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LIMITED CALL RIGHT

If at any time after the Preference Period less than 750,000 of the LP
Units are held by persons other than the General Partner and its affiliates,
the General Partner will have the right, which it may assign and transfer to
any of its affiliates or to the Partnership, on a date to be selected by the
General Partner on at least 10 but not more than 60 days' notice, to purchase
all, but not less than all, of the LP Units held by such nonaffiliated persons.
In the event of any such purchase, the price payable for any LP Units of a
particular class shall be the greater of (i) the Current Market Price (as
defined below) as of the date the General Partner mails written notice of its
election to purchase LP Units or (ii) the highest cash price paid by the
General Partner or any of its affiliates for any LP Unit of such class
purchased within the 90 days preceding the date the General Partner mails
notice of its election to purchase such LP Units.

As used herein, (i) "Current Market Price" of an LP Unit as of any
date means the average of the daily Closing Prices (as hereinafter defined) per
LP Unit for the twenty consecutive Trading Days (as hereinafter defined)
immediately prior to such date; (ii) "Closing Price" for any day means the last
sale price on such day, regular way, or, in case no such sale takes place on
such day, the average of the closing bid and asked prices on such day, regular
way, in either case as reported in the principal consolidated transaction
reporting system with respect to securities listed or admitted to trading on
the NYSE or, if the LP Units are not listed or admitted to trading on the NYSE,
as reported in the principal consolidated transaction reporting system with
respect to securities listed on the principal National Securities Exchange on
which the LP Units are listed or admitted to trading or, if the LP Units are
not listed or admitted to trading on any National Securities Exchange, the last
quoted price on such day or, if not so quoted, the average of the high bid and
low asked prices on such day in the over-the-counter market, as reported by
NASDAQ or such other system then in use, or, if on any such day the LP Units
are not quoted by any such organization, the average of the closing bid and
asked prices on such day as furnished by a professional market maker making a
market in the LP Units selected by the independent committee of the board of
directors of the Partnership, or, if on any such day no market maker is making
a market in the LP Units, the fair value of such LP Units on such day as
determined reasonably and in good faith by the independent committee of the
board of directors of the Partnership, and (iii) "Trading Day" means a day on
which the principal National Securities Exchange on which the LP Units are
listed or admitted to trading is open for the transaction of business or, if
the LP Units are not listed or admitted to trading on any National Securities
Exchange, a day on which banking institutions in New York City generally are
open.

AMENDMENT OF PARTNERSHIP AGREEMENTS

Amendments to the Partnership Agreement may be proposed only by the
General Partner. If an amendment is proposed, the General Partner is required
to seek written approval of the holders of the number of LP Units required to
approve such amendment or call a meeting of the limited partners of the
Partnership to consider and vote upon the proposed amendment. Proposed
amendments (other than those described below) must be approved by holders of a
majority of the LP Units, except that any amendment which materially and
adversely affects a class of LP Units in relation to any other class of LP
Units or the general partner interest in the Partnership will require the
approval of at least a majority in interest of the LP Units of the class so
affected (excluding for purposes of such determination, LP Units of such class
owned by KPL and its affiliates, unless KPL and its affiliates own all of the
LP Units of such class).

Amendments to the Operating Partnership Agreements may be proposed
either by the general partner or by the limited partner of the respective
Operating Partnerships. Proposed amendments to the Operating Partnership
Agreement of KPOP (other than those described below) require the approval of
the Partnership, as the limited partner of KPOP, and the General Partner.

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The General Partner may make amendments to the Partnership Agreements
without the approval of any limited partner of the Partnership or assignee of
the Partnership to reflect (i) a change in the name of the Partnership or the
location of the principal place of business of the Partnership, (ii) admission,
substitution, withdrawal or removal of Partners in accordance with the
Partnership Agreement, (iii) a change that, in the opinion of the General
Partner, is necessary or advisable to qualify or continue the qualification of
the Partnership as a partnership in which the limited partners have limited
liability under the laws of any state or to ensure that the Partnership will
not be taxable as a corporation or be treated as an association taxable as a
corporation for federal income tax purposes, (iv) a change that in the sole
discretion of the General Partner does not adversely affect the limited
partners of the Partnership in any material respect, (v) a change that is
necessary or desirable to satisfy any requirements, conditions or guidelines
contained in any opinion, directive, order, ruling or regulation of any federal
or state agency or contained in any federal or state statute, (vi) a change
that is necessary or desirable to facilitate the trading of the LP Units or
comply with any rule, regulation, guideline or requirement of any National
Securities Exchange on which the LP Units are or will be listed for trading,
compliance with any of which the General Partner deems to be in the best
interests of the Partnership and the limited partners of the Partnership, (vii)
a change that is required or contemplated by the Partnership Agreement or the
Registration Statement of which this Prospectus is a part, (viii) an amendment
that is necessary, as reflected in an opinion of counsel to the Partnership, to
prevent the Partnership or the General Partner or its respective directors or
officers from in any manner being subjected to the provisions of the Investment
Company Act of 1940, as amended, the Investment Advisors Act of 1940, as
amended, the Public Utility Holding Company Act of 1935, as amended, or "plan
asset" regulations adopted under the Employee Retirement Income Security Act of
1974, as amended, whether or not substantially similar to plan asset
regulations currently applied or proposed by the United States Department of
Labor, (ix) a change in a provision of the Partnership Agreement which requires
any action to be taken by or on behalf of the General Partner or the
Partnership pursuant to the requirements of the Delaware Act if the provisions
of the Delaware Act are amended, modified or revoked so that the taking of such
action is no longer required, provided that such changes are not materially
adverse to the limited partners of the Partnership, (x) an amendment that in
the sole discretion of the General Partner is necessary or desirable in
connection with the authorization of additional LP Units, (xi) an amendment
insofar as is necessary to maintain or establish the uniformity of intrinsic
tax characteristics as to all LP Units or the uniformity of capital accounts
underlying all LP Units and to make subsequent adjustments to distributions in
a manner which, in the reasonable judgment of the General Partner, will make as
little alteration in the priority and amount of distributions otherwise
applicable under the Partnership Agreement, and will not otherwise alter the
distributions to which Partners and assignees are entitled under the
Partnership Agreement and (xii) any other amendments similar to the foregoing.

Except for amendments described in the preceding paragraph, no
amendment will become effective without the approval of the holders of 90% of
the LP Units unless the Partnership obtains an opinion of counsel to the effect
that such amendment will not cause the Partnership or KPOP to be taxable as a
corporation or to be treated as an association taxable as a corporation for
federal income tax purposes and will not affect the limited liability of any LP
Unitholder or the limited partner of KPOP.

MEETINGS; VOTING

Unitholders or assignees who are record holders of LP Units on the
record date set pursuant to the Partnership Agreement will be entitled to
notice of, and to vote at, meetings of limited partners of the Partnership and
to act with respect to matters as to which approvals may be solicited. With
respect to voting rights attributable to LP Units that are owned by assignees
who have not yet been admitted as limited partners of the Partnership, the
General Partner shall be deemed to be the limited partner with respect thereto
and shall, in exercising the voting rights in respect of such LP Units on

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any matter, vote such LP Units at the written direction of such record holder.
Absent such direction, the General Partner may exercise the voting rights with
respect to such LP Units.

The General Partner does not anticipate that any meeting of limited
partners of the Partnership will be called in the foreseeable future. Any
action that is required or permitted to be taken by the limited partners of the
Partnership may be taken either at a meeting of the limited partners of the
Partnership or without a meeting if consents in writing setting forth the
action so taken are signed by holders of such number of LP Units as would be
necessary to authorize or take such action at a meeting of the limited partners
of the Partnership and consented to by the General Partner. Limited partners
of the Partnership may vote either in person or by proxy at meetings. A
majority of the LP Units of the class for which a meeting is to be held
represented in person or by proxy will constitute a quorum at a meeting of
limited partners of the Partnership of the Partnership.

Each record holder of an LP Unit has a vote according to his
Percentage Interest in the Partnership, although Additional LP Units having
special voting rights could, under certain circumstances, be issued by the
General Partner. The Partnership Agreement provides that LP Units held in
nominee or street name accounts will be voted by the broker (or other nominee)
pursuant to the instruction of the beneficial owner unless the arrangement
between the beneficial owner and his nominee provides otherwise.

Any notice, demand, request, report or proxy materials required or
permitted to be given or made to record holders of LP Units (whether or not
such record holder has been admitted as a limited partner of the Partnership)
under the terms of the Partnership Agreement will be delivered to the record
holder by the Partnership or by the transfer agent at the request of the
Partnership.

INDEMNIFICATION

The Partnership Agreements provide that the Partnership will, to the
fullest extent permitted by law, indemnify and advance expenses to the General
Partner, any Departing Partner, any person who is or was an affiliate of the
General Partner or any Departing Partner, any person who is or was an officer,
director, employee, partner, agent or trustee of the General Partner or any
Departing Partner or any affiliate of the General Partner or any Departing
Partner, or any person who is or was serving at the request of the General
Partner or any affiliate of the General Partner or any Departing Partner or any
affiliate of any Departing Partner as an officer, director, employee, partner,
agent or trustee of another person ("Indemnitees") from and against any and all
losses, claims, damages, liabilities (joint or several), expenses (including
legal fees and expenses), judgments, fines, settlements and other amounts
arising from any and all claims, demands, actions, suits or proceedings, civil,
criminal, administrative or investigative, in which any Indemnitee may be
involved, or is threatened to be involved, as a party or otherwise, by reason
of its status as the General Partner, Departing Partner or an affiliate of
either, an officer, director, employee, partner, agent or trustee of the
General Partner, any Departing Partner or affiliate of either or a person
serving at the request of the Partnership in another entity in a similar
capacity, provided that in each case the Indemnitee acted in good faith and in
a manner which such Indemnitee reasonably believed to be in or not opposed to
the best interests of the Partnership and such action did not constitute gross
negligence or willful misconduct on the part of the Indemnitee, and, with
respect to any criminal proceeding, the Indemnitee had no reasonable cause to
believe its conduct was unlawful. This indemnification would under certain
circumstances include indemnification for liabilities under the Securities Act.
In addition, each Indemnitee would automatically be entitled to the advancement
of expenses in connection with the foregoing indemnification. Any
indemnification under these provisions will be only out of the assets of the
Partnership. The Partnership is authorized to purchase insurance against
liabilities asserted against and expenses incurred by such persons in
connection with the Partnership's activities, whether or not the

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Partnership would have the power to indemnify such person against such
liabilities under the provisions described above.

LIMITED LIABILITY

Assuming that a limited partner of the Partnership does not take part
in the control of the business of the Partnership, within the meaning of the
Delaware Act, and that he otherwise acts in conformity with the provisions of
the Partnership Agreement, his liability under the Delaware Act will be
limited, subject to certain possible exceptions, generally to the amount of
capital he is obligated to contribute to the Partnership in respect of his LP
Units plus his share of any undistributed profits and assets of the
Partnership. Under the Delaware Act, a limited partnership may not make a
distribution to a partner to the extent that at the time of the distribution,
after giving effect to the distribution, all liabilities of the partnership,
other than liabilities to partners on account of their partnership interest and
nonrecourse liabilities, exceed the fair value of the assets of the limited
partnership. For the purpose of determining the fair value of the assets of a
limited partnership, the Delaware Act provides that the fair value of property
subject to nonrecourse liability shall be included in the assets of the limited
partnership only to the extent that the fair value of that property exceeds
that nonrecourse liability. The Delaware Act provides that a limited partner
who receives such a distribution and knew at the time of the distribution that
the distribution was in violation of the Delaware Act shall be liable to the
limited partnership for the amount of the distribution for three years from the
date of the distribution. Under the Delaware Act, an assignee who becomes a
substituted limited partner of a limited partnership is liable for the
obligations of his assignor to make contributions to the partnership, except
that the assignee is not obligated for liabilities unknown to him at the time
he became a limited partner and which liabilities could not be ascertained from
the Partnership Agreement.

KPOP conducts business in Kansas, Nebraska, Iowa, Oregon, South
Dakota, North Dakota, Colorado, Washington and Wyoming and may, in the future,
conduct business in other states. STOP conducts business in 16 states.
Maintenance of limited liability will require compliance with legal
requirements in such jurisdictions in which the Operating Partnerships conduct
business. Limitations on the liability of limited partners for the obligations
of a limited partnership have not been clearly established in many
jurisdictions. If it were determined that the Partnership, by virtue of a
limited partner interest in the Operating Partnerships or otherwise, was
conducting business in any state without compliance with the applicable limited
partnership statute, or that the right or exercise of the right by the limited
partners of the Partnership as a group to remove or replace the General
Partner, to make certain amendments to the Partnership Agreement, or to take
other action pursuant to the Partnership Agreement constituted "control" of the
Partnership's business for the purposes of the statutes of any relevant
jurisdiction, then a limited partner of the Partnership could be held
personally liable for the Partnership's obligations under the law of such
jurisdiction to the same extent as the General Partner. The Partnership will
operate in such manner as the General Partner deems reasonable and necessary or
appropriate to preserve the limited liability of Unitholders.

BOOKS AND REPORTS

The General Partner is required to keep appropriate books of the
business at the principal offices of the Partnership. The books will be
maintained for both tax and financial reporting purposes on an accrual basis.
The fiscal year of the Partnership is the calendar year.

As soon as practicable, but in no event later than 120 days after the
close of each calendar year, the General Partner is required to furnish each
record holder of an LP Unit (as of a record date selected by the General
Partner) with an annual report containing audited financial statements of the
Partnership for the past fiscal year, prepared on the accrual basis in
accordance with generally accepted accounting principles, and an opinion
thereon expressed by independent public accountants.

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As soon as practicable, but in no event later than 60 days after the close of
each calendar quarter (except the fourth quarter), the General Partner is
required to furnish each record holder of an LP Unit (as of a record date
selected by the General Partner) with unaudited financial statements prepared
in the same manner.

The General Partner is required to use all reasonable efforts to
furnish each record holder of an LP Unit information required for tax reporting
purposes within 75 days after the close of each taxable year. Such information
is furnished in a summary form so that certain complex calculations normally
required of partners can be avoided. The General Partner's ability to furnish
such summary information to Unitholders is dependent on the cooperation of such
Unitholders in supplying certain information to the General Partner. Every
Unitholder (without regard to whether he supplies such information to the
General Partner) will receive information to assist him in determining his
federal and state tax liability and filing his federal and state income tax
returns.

RIGHT TO INSPECT PARTNERSHIP BOOKS AND RECORDS

The Partnership Agreement provides that a limited partner of the
Partnership can for a purpose reasonably related to such limited partner's
interest as a limited partner, upon reasonable demand and at his own expense,
have furnished to him (i) a current list of the name and last known address of
each Partner, (ii) a copy of the Partnership's tax returns, (iii) information
as to the amount of cash, and a description and statement of the Net Agreed
Value (as defined in the Partnership Agreement) of any other property or
services, contributed or to be contributed by each Partner and the date on
which each became a Partner, (iv) copies of the Partnership Agreement, the
Certificate of Limited Partnership of the Partnership, amendments thereto and
powers of attorney pursuant to which the same have been executed, (v)
information regarding the status of the Partnership's business and financial
condition, and (vi) such other information regarding the affairs of the
Partnership as is just and reasonable. The General Partner may, and intends
to, keep confidential from the limited partners of the Partnership trade
secrets or other information the disclosure of which the General Partner
believes in good faith is not in the best interests of the Partnership or which
the Partnership is required by law or by agreements with third parties to keep
confidential.

TERMINATION, DISSOLUTION AND LIQUIDATION

The Partnership will continue until December 31, 2039, unless sooner
terminated pursuant to the Partnership Agreement. The Partnership will be
dissolved upon (i) the election by the General Partner to dissolve the
Partnership, if approved by the holders of a majority of the LP Units,
including the approval of the holders of a majority of the Senior Preference
Units (excluding Senior Preference Units held by the General Partner and its
affiliates), (ii) the sale of all or substantially all of the assets and
properties of the Partnership or KPOP, (iii) the bankruptcy or dissolution of
the General Partner, (iv) withdrawal or removal of the General Partner or any
other event that results in its ceasing to be the General Partner (other than
by reason of a transfer in accordance with the Partnership Agreement or
withdrawal or removal following approval of a successor), provided that the
Partnership shall not be dissolved upon an event described in clause (iv) if
upon such removal or within 90 days after such event of withdrawal the holders
of a majority of the LP Units agree in writing to the appointment, effective as
of the date of such event, of a successor General Partner, (v) a written
determination by the General Partner that projected future revenues of the
Partnership will be insufficient to enable payment of projected Partnership
costs and expenses or, if sufficient, will be such that continued operation of
the Partnership is not in the best interest of the Partners or (vi) any other
event that would cause the dissolution of the Partnership under the Delaware
Act. Upon a dissolution pursuant to clause (iii) or clause (iv) and a failure
to elect a successor General Partner, the holders of a majority of the LP Units
may elect, within 180 days after such event, to reconstitute the Partnership
and continue its business on the same terms and conditions set forth in the
Partnership Agreement by forming a new

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limited partnership on terms identical to those set forth in the Partnership
Agreement and having as a general partner an entity approved by the holders of
a majority of the LP Units, subject to receipt by the Partnership of an opinion
of counsel that such approval may be made without the approval of all Partners
and that such reconstitution and continuation will not result in the loss of
the limited liability of Unitholders or cause KPOP or the reconstituted limited
partnership to be taxable as a corporation or to be treated as an association
taxable as a corporation for federal income tax purposes and that any required
consents of any regulatory authorities have been obtained.

Upon dissolution of the Partnership, unless the Partnership is
reconstituted and continued as a new limited partnership, the liquidating
trustee will liquidate the Partnership's assets and apply the proceeds of the
liquidation in the order of priority set forth in the Partnership Agreements.
The liquidating trustee may defer liquidation or distribution of the
Partnership's assets and/or distribute assets to Partners in kind if it
determines that an immediate sale would be unsuitable.

FEDERAL INCOME TAX CONSIDERATIONS

This section was prepared by Fulbright & Jaworski L.L.P., counsel to
the Partnership ("Counsel") and addresses all material income tax consequences
to individuals who are citizens or residents of the United States. Unless
otherwise noted, this section reflects Counsel's opinion with respect to the
matters set forth except for statements of fact and the representations and
estimates of the results of future operations of the General Partner included
in such discussion as to which no opinion is expressed. Counsel bases its
opinions on its interpretation of the Internal Revenue Code of 1986, as amended
(the "Code") and Treasury Regulations issued thereunder, judicial decisions,
the facts set forth in this Prospectus and certain factual representations made
by the General Partner. Counsel's opinions are subject to both the accuracy of
such facts and the continued applicability of such legislative, administrative
and judicial authorities, all of which authorities are subject to changes and
interpretations that may or may not be retroactively applied.

No ruling has been requested from the IRS with respect to the
classification of the Partnership as a partnership for federal income tax
purposes or any other matter affecting the Partnership. Accordingly, the IRS
may adopt positions that differ from Counsel's conclusions expressed herein.
It may be necessary to resort to administrative or court proceedings in an
effort to sustain some or all of Counsel's conclusions, and some or all of
these conclusions ultimately may not be sustained. The costs of any contest
with the IRS will be borne directly or indirectly by some or all of the
Unitholders and the General Partner. Furthermore, no assurance can be given
that the tax consequences of investing in the Partnership will not be
significantly modified by future legislation or administrative changes or court
decisions. Any such modifications may or may not be retroactively applied.

It is impractical to comment on all aspects of federal, state, local
and foreign laws that may affect the tax consequences of the transactions
contemplated by the sale of Preference Units made by this Prospectus and of an
investment in such Preference Units. Moreover, certain types of taxpayers such
as tax-exempt entities, regulated investment companies and insurance companies
may be subject to rules and regulations unique to their status or form of
organization in addition to those rules and regulations described herein. Each
prospective Preference Unitholder should consult his own tax advisor in
deciding to acquire Preference Units.

PARTNERSHIP STATUS

A partnership is not a taxable entity and incurs no federal income tax
liability. Each partner is required to take into account in computing his
federal income tax liability his allocable share of income, gains, losses,
deductions and credits of the Partnership, regardless of whether cash

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distributions are made. Distributions by a partnership to a partner are
generally not taxable unless the distribution is in excess of the partner's
adjusted basis in his partnership interest.

Counsel is of the opinion that under present law, and subject to the
conditions and qualifications set forth below, for federal income tax purposes
each of the Partnership and the Operating Partnerships will be treated as a
partnership. Counsel's opinion as to the partnership status of the Partnership
and the Operating Partnerships is based principally upon its interpretation of
the factors set forth in Treasury Regulations under Section 7701 of the Code,
its interpretation of Section 7704 of the Code, and upon certain
representations made by the General Partner.

The Treasury Regulations under Section 7701 of the Code provide that,
for classification purposes, a corporation has six major characteristics: (i)
associates, (ii) an objective to carry on a business and divide the gains
therefrom, (iii) continuity of life, (iv) free transferability of interests,
(v) centralization of management and (vi) limited liability. Since the first
two characteristics, associates and an objective to carry on a business and
divide the gains therefrom, can be common to both partnerships and
corporations, the determination of whether a limited partnership will be
classified as a partnership or as an association taxable as a corporation for
federal income tax purposes depends upon the extent to which the partnership
has the corporate characteristics of continuity of life, free transferability
of interests, centralization of management and limited liability. A limited
partnership having no more than two of these four characteristics will
ordinarily be classified as a partnership for federal income tax purposes. In
Counsel's opinion, neither the Partnership, KPOP nor STOP have the corporate
characteristics of continuity of life or limited liability, the Partnership
does not have the corporate characteristic of centralization of management and
the Operating Partnerships do not have the corporate characteristic of free
transferability of interests. Based on this analysis, Counsel has concluded
that neither the Partnership, KPOP nor STOP will be classified as an
association taxable as a corporation under Section 7701 of the Code.

Section 7704 of the Code provides that publicly traded partnerships
shall, as a general rule, be taxed as corporations despite the fact that they
are not classified as associations taxable as corporations under Section 7701.
Section 7704 of the Code provides an exception to this general rule (the
"Natural Resource Exception") for a publicly traded partnership if 90% or more
of its gross income for every taxable year consists of "qualifying income".
"Qualifying income" includes income and gains derived from the exploration,
development, mining or production, processing, refining, transportation
(including pipelines transporting gas, oil or products thereof) or marketing of
any mineral or natural resource. Other types of "qualifying income" include
dividends, gains from the sale of real property (including real property held
by one considered to be a "dealer" in such property) and gains from the sale or
other disposition of capital assets held for the production of income that
otherwise constitutes "qualifying income".

The Pipelines, like other pipeline systems transporting petroleum
products, includes certain ancillary storage facilities which are an integral
component of the system and are necessary for efficient and competitive
operation. The General Partner has advised Counsel that the Partnership
provides storage of petroleum products prior to transportation through the
Pipelines or subsequent to transportation through the Pipelines while awaiting
delivery to the Partnership's customers. Based on these facts and statements
made by Congressman Rostenkowski and Senator Bentsen on the floors of the House
of Representatives and Senate, respectively, indicating that storage fees can
be "qualifying income" for purposes of qualifying for the Natural Resource
Exception, Counsel is of the opinion that any fees charged for such storage
facilities are "qualifying income".

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the Code. Such fees, which consist primarily of revenues from the Westwego and
Baltimore terminals, were less than 7% of Partnership revenues in 1994, and the
Partnership believes that such fees will be less than 7% of Partnership
revenues in 1995. STOP received a ruling from the IRS in 1993 to the effect
that fees earned from its terminaling operations for petroleum or other
qualifying products will be qualifying income for purposes of Section 7704(d)
of the Code. Although that ruling was based on the facts as they existed in
1993, the Partnership believes that current operations continue to be in
conformity with the facts disclosed and representations made in STOP's request
for the ruling. For this purpose, the Steuart liquids terminaling operations
are not materially different form the Partnership's current terminaling
operations. The Partnership does not intend to request a similar ruling from
the IRS if such business is acquired.

If the Partnership fails to meet the Natural Resource Exception to the
general rule of Section 7704 of the Code (other than a failure determined by
the IRS to be inadvertent which is cured within a reasonable time after
discovery), the Partnership will be treated as if it had transferred all of its
assets (subject to liabilities) to a newly-formed corporation (on the first day
of the year in which it fails to meet the Natural Resource Exception) in return
for stock in such corporation, and then distributed such stock to the Partners
in liquidation of their interest in the Partnership.

In rendering its opinion that the Partnership and the Operating
Partnerships will each be treated as a partnership for federal income tax
purposes, Counsel has relied on the following factual representations by the
General Partner as to the Partnership and the Operating Partnerships:

1. As to each of the Partnership and KPOP, the General
Partner at all times while acting as general partner will have a net
worth of at least $5.0 million computed by excluding any net worth
attributable to its interest in, and accounts and notes receivable
from, or payable to, the Partnership, KPOP, or any other limited
partnership in which it is a general partner. As to STOP, STS at all
times while acting as general partner will have a net worth of at
least $5.0 million computed by excluding any net worth attributable to
its interest in and the accounts and notes receivable from, or payable
to STOP or any other limited partnership in which it is a general
partner.

2. Each such partnership will be operated in accordance
with applicable state partnership statutes, the Partnership Agreements
and the statements and representations made in this Prospectus.

3. Except as otherwise required by Section 704(c) of the
Code, the general partner of each partnership will have at least a 1%
interest in each material item of income, gain, loss, deduction and
credit of its respective partnership.

4. For each taxable year, less than 10% of the
partnerships' aggregate gross income will be derived from sources
other than (i) the exploration, development, production, processing,
refining, transportation or marketing of oil, gas or products thereof
or (ii) other items of "qualifying income" within the meaning of
Section 7704(d) of the Code.

5. The General Partner of the Partnership and the
general partners of each of the Operating Partnerships will act
independently of the limited partners of such partnerships.

Counsel's opinion as to the classification of the Partnership and the
Operating Partnerships is based on the assumption that if the General Partner
or STS cease to be a general partner, any successor general partner will make
and satisfy such representations. In this regard, if the General Partner or
STS were to withdraw as a general partner at a time when there is no successor
general partner, or if the successor general partner could not satisfy the
above representations, then the IRS

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might attempt to treat the Partnership or an Operating Partnership as an
association taxable as a corporation.

If the Partnership or an Operating Partnership were taxable as a
corporation or treated as an association taxable as a corporation in any
taxable year, its income, gains, losses, deductions and credits would be
reflected only on its tax return rather than being passed through to its
partners and its net income would be taxed at corporate rates. Losses realized
by the Partnership would not flow through to the Unitholders. In addition, any
distribution made to a Unitholder would be treated as either dividend income
(to the extent of the Partnership's, KPOP's or STOP's current or accumulated
earnings and profits), in the absence of earnings and profits as a nontaxable
return of capital (to the extent of the Unitholder's basis in his LP Units) or
taxable capital gain (after the Unitholder's basis in the LP Units is reduced
to zero). Accordingly, treatment of either the Partnership or an Operating
Partnership as a corporation would probably result in a material reduction in a
Unitholder's cash flow and after-tax return.

If legislation is enacted which causes the Partnership to become
taxable as a corporation or to be treated as an association taxable as a
corporation for federal income tax purposes, the Minimum Quarterly Distribution
and the Target Distributions (see "Glossary") for each quarter thereafter would
be reduced to an amount equal to the product of (i) the otherwise applicable
Minimum Quarterly Distribution and Target Distributions, multiplied by (ii) 1
minus the sum of (x) the maximum marginal federal income tax rate (expressed as
a fraction) and (y) the effective overall state and local income tax rate
(expressed as a fraction) applicable to the Partnership for the taxable year in
which such quarter occurs.

The discussion below is based on the assumption that the Partnership
and the Operating Partnerships each will be classified as a partnership for
federal income tax purposes. If that assumption proves to be erroneous, most,
if not all, of the tax consequences described below would not be applicable to
Unitholders.

PARTNER STATUS

Unitholders who have become limited partners of the Partnership
pursuant to the provisions of the Partnership Agreement will be treated as
partners of the Partnership for federal income tax purposes.

The IRS has ruled that assignees of partnership interests who have not
been admitted to a partnership as partners, but who have the capacity to
exercise substantial dominion and control over the assigned partnership
interests, will be treated as partners for federal income tax purposes. On the
basis of such ruling, except as otherwise described herein, (i) assignees who
have executed and delivered transfer applications, and are awaiting admission
as limited partners of the Partnership, and (ii) Preference Unitholders whose
Preference Units are held in street name or by another nominee will be treated
as partners for federal income tax purposes. As such ruling does not extend,
on its facts, to assignees of Preference Units who are entitled to execute and
deliver transfer applications and thereby become entitled to direct the
exercise of attendant rights, but who fail to execute and deliver transfer
applications, the tax status of such Preference Unitholders is unclear and
Counsel expresses no opinion with respect to the status of such assignees.
Such Preference Unitholders should consult their own tax advisors with respect
to their status as partners in the Partnership for federal income tax purposes.
A purchaser or other transferee of Preference Units who does not execute and
deliver a transfer application may not receive certain federal income tax
information or reports furnished to record holders of Preference Units unless
the Preference Units are held in a nominee or street name account and the
nominee or broker has executed and delivered a transfer application with
respect to such Preference Units.

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A beneficial owner of Preference Units whose Preference Units have
been transferred to a short seller to complete a short sale would appear to
lose his status as a partner with respect to such Preference Units for federal
income tax purposes. See "--Tax Treatment of Operations--Treatment of Short
Sales".

TAX CONSEQUENCES OF PREFERENCE UNIT OWNERSHIP

Flow-through of Taxable Income

The Partnership's income, gains, losses, deductions and credits will
consist of its allocable share of the income, gains, losses, deductions and
credits of the Operating Partnerships and dividends from its corporate
subsidiaries. Since the Partnership is not a taxable entity and incurs no
federal income tax liability, each Unitholder will be required to take into
account his allocable share of income, gain, loss and deductions of the
Operating Partnerships (through the Partnership) without regard to whether
corresponding cash distributions are received by Unitholders. Consequently, a
Preference Unitholder may be allocated income from the Partnership although he
has not received a cash distribution in respect of such income.

Treatment of Partnership Distributions

Under Section 731 of the Code, distributions by the Partnership to a
Preference Unitholder generally will not be taxable to such Preference
Unitholder for federal income tax purposes to the extent of his basis in his
Preference Units immediately before the distribution. Cash distributions in
excess of such basis generally will be considered to be gain from the sale or
exchange of the Preference Units, taxable in accordance with the rules
described under "--Disposition of Preference Units". Any reduction in a
Preference Unitholder's share of the Partnership's liabilities included in his
basis in his Preference Units will be treated as a distribution of cash to such
Unitholder. See "--Basis of Preference Units". A decrease in a Preference
Unitholder's percentage interest in the Partnership because of a Partnership
offering of additional LP Units will decrease such Preference Unitholder's
share of nonrecourse liabilities, and thus will result in a corresponding
deemed distribution of cash.

A non-pro rata distribution of money or property may result in
ordinary income to a Preference Unitholder, regardless of his basis in his
Preference Units, if such distribution reduces the Unitholder's share of the
Partnership's "unrealized receivables" (including depreciation recapture)
and/or substantially appreciated "inventory items" (both as defined in Section
751 of the Code) (collectively, "Section 751 Assets"). To that extent, the
Preference Unitholder will be treated as having received his proportionate
share of the Section 751 Assets and having exchanged such assets with the
Partnership in return for the non-pro rata portion of the actual distribution
made to him. This latter deemed exchange will generally result in the
Preference Unitholder's realization of ordinary income under Section 751(b) of
the Code. Such income will equal the excess of (i) the non-pro rata portion of
such distribution over (ii) the Preference Unitholder's basis for the share of
such Section 751 Assets deemed relinquished in the exchange.

Basis of Preference Units

In general, a Preference Unitholder's tax basis for his Preference
Units initially will be equal to the price of such Preference Units to him. A
Preference Unitholder's tax basis will generally be increased by (i) his share
of Partnership taxable income and (ii) his share of Partnership liabilities
that are without recourse to any Partner ("nonrecourse liabilities"), if any.
Generally, a Preference Unitholder's basis in his interest will be decreased
(but not below zero) by (i) his share of Partnership distributions, (ii) his
share of decreases in nonrecourse liabilities of the Partnership, (iii) his
share of losses of the Partnership and (iv) his share of nondeductible
expenditures of the Partnership that are

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not chargeable to capital. A Preference Unitholder's share of nonrecourse
liabilities will generally be based on his share of the Partnership's profits.
See "--Disposition of Preference Units--Aggregate Tax Basis for Preference
Units".

Limitations on Deductibility of Losses

The passive loss limitations contained in Section 469 of the Code
generally provide that individuals, estates, trusts and certain closely held
corporations and personal service corporations can only deduct losses from
passive activities (generally, activities in which the taxpayer does not
materially participate) that are not in excess of the taxpayer's income from
such passive activities or investments. The passive loss limitations are to be
applied separately with respect to publicly traded partnerships. Consequently,
losses generated by the Partnership, if any, will only be available to offset
future income generated by the Partnership and will not be available to offset
income from other passive activities or investments (including other publicly
traded partnerships) or salary or active business income. Passive losses that
are not deductible because they exceed the Preference Unitholder's income
generated by the Partnership may be deducted in full when the Preference
Unitholder disposes of his entire investment in the Partnership to an unrelated
party in a fully taxable transaction.

A Preference Unitholder's share of net income from the Partnership may
be offset by any suspended passive losses from the Partnership, but may not be
offset by any other current or carryover losses from other passive activities,
including those attributable to other publicly traded partnerships. According
to an IRS announcement, Treasury regulations will be issued which characterize
net passive income from a publicly traded partnership as investment income for
purposes of deducting investment interest.

In addition to the foregoing limitations, a Preference Unitholder may
not deduct from taxable income his share of Partnership losses, if any, to the
extent that such losses exceed the lesser of (i) the adjusted tax basis of his
Preference Units at the end of the Partnership's taxable year in which the loss
occurs and (ii) the amount for which the Preference Unitholder is considered
"at risk" under Section 465 of the Code at the end of that year. In general, a
Preference Unitholder will initially be "at risk" to the extent of the purchase
price of his Preference Units. A Preference Unitholder's "at risk" amount
increases or decreases as his adjusted basis in his Preference Units increases
or decreases, except that nonrecourse liabilities (or increases or decreases in
such liabilities) of the Partnership generally do not affect his "at risk"
amount. Losses disallowed to a Preference Unitholder as a result of these
rules can be carried forward and will be allowable to the Preference Unitholder
to the extent that his adjusted basis or "at risk" amount (whichever was the
limiting factor) is increased in a subsequent year. The "at risk" rules apply
to an individual Unitholder, a shareholder of a corporate Unitholder that is an
S corporation and a corporate Unitholder if 50% or more of the value of such
stock is owned directly or indirectly by five or fewer individuals.

ALLOCATION OF PARTNERSHIP INCOME, GAIN, LOSS AND DEDUCTION

The Partnership Agreement requires that a capital account be
maintained for each partner, that the capital accounts generally be maintained
in accordance with the tax accounting principles set forth in applicable
Treasury Regulations under Section 704 of the Code and that all allocations to
a partner be reflected by appropriate increases or decreases in his capital
account. Distributions upon liquidation of the Partnership generally are to be
made in accordance with positive capital account balances.

In general, if the Partnership has a net profit, items of income,
gain, loss and deduction will be allocated among the General Partner and the
Unitholders in accordance with their respective interests in the Partnership.
A class of Unitholders (such as Preference Unitholders) that receives more cash

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than another class, on a per LP Unit basis, with respect to a year will be
allocated additional income equal to that excess. If the Partnership has a net
loss, items of income, gain, loss and deduction will generally be allocated (1)
first, to the General Partner and the Unitholders in accordance with their
respective interests in the Partnership to the extent of their positive capital
accounts; and (2) second, to the General Partner.

Notwithstanding the above, as required by Section 704(c) of the Code,
certain items of Partnership income, gain, loss and deduction will be allocated
to account for the difference between the tax basis and fair market value of
certain property held by the Partnership ("Contributed Property"). In
addition, certain items of recapture income will be allocated to the extent
possible to the partner allocated the deduction giving rise to the treatment of
such gain as recapture income in order to minimize the recognition of ordinary
income by some Unitholders, but these allocations may not be respected. If
these allocations of recapture income are not respected, the amount of the
income or gain allocated to a Unitholder will not change, but a change in the
character of the income allocated to a Unitholder would result. Finally,
although the Partnership does not expect that its operations will result in the
creation of negative capital accounts, if negative capital accounts
nevertheless result, items of Partnership income and gain will be allocated in
an amount and manner sufficient to eliminate the negative balances as quickly
as possible.

Under Section 704(c) of the Code, the partners in a partnership cannot
be allocated more depreciation, gain or loss than the total amount of any such
item recognized by that partnership in a particular taxable period (the
"ceiling limitation"). To the extent the ceiling limitation is or becomes
applicable, the Partnership Agreement will require that certain items of income
and deduction be allocated in a way designed to effectively "cure" this problem
and eliminate the impact of the ceiling limitation. Such allocations will not
have substantial economic effect because they will not be reflected in the
capital accounts of the Unitholders. Recently released Temporary Regulations
under Section 704(c) of the Code permit a partnership to make reasonable
curative allocations to reduce or eliminate disparities between the tax basis
and value attributable to Contributed Properties.

Counsel is of the opinion that, with the exception of the allocation
of recapture income discussed above, allocations under the Partnership
Agreement will be given effect for federal income tax purposes in determining a
partner's distributive share of an item of income, gain, loss or deduction.
There are, however, uncertainties in the Treasury Regulations relating to
allocations of partnership income, and investors should be aware that the
allocations of recapture income in the Partnership Agreement may be
successfully challenged by the IRS.

TAX TREATMENT OF OPERATIONS

Income and Deductions in General

No federal income tax will be paid by the Partnership. Instead, each
Preference Unitholder will be required to report on his income tax return his
allocable share of income, gains, losses and deductions of the Partnership.
Such items must be included on the Preference Unitholder's federal income tax
return without regard to whether the Partnership makes a distribution of cash
to the Preference Unitholder. A Preference Unitholder is generally entitled to
offset his allocable share of the Partnership's passive income with his
allocable share of losses generated by the Partnership, if any. See "--Tax
Consequences of Preference Unit Ownership--Limitations on Deductibility of
Losses".

A Preference Unitholder who owns Preference Units as of the first day
of each month during a quarter and who disposes of such Preference Units prior
to the record date for a distribution with respect to such quarter will be
allocated items of Partnership income and gain attributable to the

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months in such quarter during which such Preference Units were owned but will
not be entitled to receive such cash distribution.

Accounting Method and Taxable Year

The Partnership utilizes the calendar year as its taxable year and
adopted the accrual method of accounting for federal income tax purposes.

Depreciation Method

The Partnership elected to use depreciation methods that resulted in
the largest depreciation deductions in the early years of the Partnership.
Property subsequently acquired or constructed by the Partnership may be
depreciated using accelerated depreciation methods permitted by Section 168 of
the Code.

Section 754 Election

The Partnership and the Operating Partnerships have each make the
election permitted by Section 754 of the Code. Such election will generally
permit a purchaser of Preference Units to adjust his share of the basis in the
Partnership's properties pursuant to Section 743(b) of the Code. Such
elections are irrevocable without the consent of the IRS. The Section 743(b)
adjustment is attributed solely to a purchaser of LP Units and is not added to
the basis of the Partnership's assets associated with all of the Unitholders
described above under the heading "--Initial Tax Basis of Partnership Assets"
(the "Common Bases"). The amount of the adjustment under Section 743(b) is the
difference between the Preference Unitholder's adjusted federal income tax
basis in his Preference Units and the Unitholder's proportionate share of the
Common Bases attributable to the Preference Units pursuant to Section 743. The
aggregate amount of the adjustment computed under Section 743(b) is then
allocated among the various assets of the Partnership pursuant to the rules of
Section 755. The Section 743(b) adjustment acts in concert with the Section
704(c) allocations (including the curative allocations, if respected) in
providing the purchaser of Preference Units with the equivalent of an adjusted
tax basis in his share of the Partnership's properties equal to the fair market
value of such share. See "--Allocation of Partnership Income, Gain, Loss and
Deduction--The Partnership Agreement" and "--Uniformity of Preference Units".

Proposed Treasury Regulation Section 1.168-2(n) generally requires the
Section 743(b) adjustment attributable to recovery property to be depreciated
as if the total amount of such adjustment were attributable to newly-acquired
recovery property placed in service when the transfer occurs. The legislative
history of Section 197 of the Code indicates that the Section 743(b) adjustment
attributable to an amortizable Section 197 intangible should be similarly
treated. Under Treasury Regulation Section 1.167(c)-1(a)(6), a Section 743(b)
adjustment attributable to property subject to depreciation under Section 167
of the Code rather than cost recovery deductions under Section 168 is generally
required to be depreciated using either the straight-line method or the 150
percent declining balance method. The Partnership utilizes the 150 percent
declining method on such property. The depreciation and amortization methods
and useful lives associated with the Section 743(b) adjustment, therefore, may
differ from the methods and useful lives generally used to depreciate the
Common Bases in such properties. The General Partner is authorized to adopt a
convention to preserve the uniformity of LP Units despite its inconsistency
with Proposed Treasury Regulation Section 1.168-2(n) and Treasury Regulation
Section 1.167(c)-1(a)(6). See "Uniformity of Preference Units".

Although Counsel is unable to opine as to the validity of such an
approach, the Partnership intends to depreciate the portion of a Section 743(b)
adjustment attributable to unrealized appreciation

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in the value of Contributed Property (to the extent of any unamortized
disparity between the tax basis and value attributable to Contributed Property)
using a rate of depreciation or amortization derived from the depreciation or
amortization method and useful life applied to the Common Bases of such
property, despite its inconsistency with Proposed Treasury Regulation Section
1.168-2(n), Treasury Regulation Section 1.167(c)-1(a)(6) or the legislative
history of Section 197 of the Code. If the Partnership determines that such
position cannot reasonably be taken, the Partnership may adopt a depreciation
or amortization convention under which all purchasers acquiring LP Units in the
same month would receive depreciation or amortization, whether attributable to
Common Bases or Section 743(b) basis, based upon the same applicable rate as if
they had purchased a direct interest in the Partnership's property. Such an
aggregate approach may result in lower annual depreciation or amortization
deductions than would otherwise be allowable to certain Unitholders. See "--
Uniformity of Preference Units".

The allocation of the Section 743(b) adjustment must be made in
accordance with the principles of Section 1060 of the Code. Based on these
principles, the IRS may seek to reallocate some or all of any Section 743(b)
adjustment not so allocated by the Partnership to goodwill which, as an
intangible asset, would be amortizable over a longer period of time than the
Partnership's tangible assets. Alternatively, it is possible that the IRS
might seek to treat the portion of such Section 743(b) adjustment attributable
to the underwriters' discount as if it were allocable to a non-deductible
syndication cost.

A Section 754 election is advantageous when the transferee's basis in
such Preference Units is higher than such Preference Units' share of the
aggregate basis in the Partnership's assets immediately prior to the transfer.
In such case, pursuant to the election, the transferee will take a new and
higher basis in his share of the Partnership's assets for purposes of
calculating, among other items, his depreciation deductions and his share of
any gain or loss on a sale of the Partnership's assets. Conversely, a Section
754 election would be disadvantageous if the transferee's basis in such
Preference Units is lower than such Preference Units' share of the aggregate
basis in the Partnership's assets immediately prior to the transfer. Thus, the
amounts that a Unitholder would be able to obtain on a sale or other
disposition of his Preference Units may be affected favorably or adversely by
the elections under Section 754.

The calculations and adjustments in connection with the Section 754
election depend, among other things, on the date on which a transfer occurs and
the price at which the transfer occurs. To help reduce the complexity of those
calculations and the resulting administrative cost to the Partnership, the
General Partner will apply the following method in making the necessary
adjustments pursuant to the Section 754 election on transfers subsequent to the
transfers pursuant to this offering: the price paid by a transferee for his
Preference Units will be deemed to be the lowest quoted trading price for the
Preference Units during the calendar month in which the transfer was deemed to
occur, without regard to the actual price paid. The application of such
convention yields a less favorable tax result, as compared to adjustments based
on actual price, to a transferee who paid more than the "convention price" for
his Preference Units. The calculations under Section 754 elections are highly
complex, and there is little legal authority concerning the mechanics of the
calculations, particularly in the context of publicly traded partnerships. It
is possible that the IRS will successfully assert that the adjustments made by
the General Partner do not meet the requirements of the Code or the applicable
regulations and require a different basis adjustment to be made.

Should the IRS require a different basis adjustment to be made, and
should, in the General Partner's opinion, the expense of compliance exceed the
benefit of the elections, the General Partner may seek permission from the IRS
to revoke the Section 754 election previously made for the Partnership. Such a
revocation may increase the ratio of a Preference Unitholder's distributive
share

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of taxable income to cash distributions and adversely affect the amount that a
Preference Unitholder will receive from the sale of his Preference Units.

Safe Harbor Leases

Certain of the assets previously acquired by the Partnership were
originally acquired by the General Partner in 1981 and 1982 pursuant to
transactions that were treated as leases for federal income tax purposes under
Section 168(f)(8) of the Code as it existed in those years ("safe harbor
leases") even though the transactions were not treated as leases for financial
reporting and certain other purposes. Each such transaction included a
provision that will allow the General Partner to acquire complete ownership of
the assets at the end of the term of the safe harbor lease at a price
significantly less than the anticipated value of such assets. The Partnership
acquired these purchase options from the General Partner and will exercise such
options on the first available date. No depreciation or cost recovery
deductions may be claimed by the Partnership (or any Preference Unitholders as
a result of a Section 743(b) adjustment) with respect to such assets until they
are acquired pursuant to the applicable purchase option. Rental deductions are
claimed by the Partnership with respect to such assets to the extent rent is
paid or deemed to be paid pursuant to applicable Treasury Regulations. A
significant portion of any Section 743(b) adjustment attributable to the assets
subject to safe harbor leases must be allocated (based on relative fair market
values) between (i) the excess of the value of the Partnership's right to use
such property during the remaining terms of the safe harbor leases over the
amount paid (or deemed paid) for such use (the "leasehold value") and (ii) the
excess of the value of the option to purchase such assets over the price to be
paid to exercise the option (the "bargain purchase value"). The portion of any
Section 743(b) adjustment attributable to the leasehold value may be amortized
over the remaining term of each lease. The portion attributable to the bargain
purchase value may not be amortized or depreciated; however, such amount will
be added to the option price to determine the depreciable basis attributable to
such asset when the purchase option is exercised. Section 743(b) adjustments
attributable to the assets subject to the safe harbor leases resulting upon a
subsequent sale of Preference Units by a Unitholder will be based on the
relative values of the leasehold and bargain purchase interests at the time of
the adjustment. The inability to claim current deductions with respect to that
portion of the Section 743(b) adjustment attributable to the bargain purchase
value may adversely influence the market value of Preference Units at some time
in the future.

Estimates of Relative Fair Market Values and Basis of Properties

The consequences of the acquisition, ownership and disposition of
Preference Units will depend in part on estimates by the General Partner of the
relative fair market values and determinations of the initial tax basis of the
assets of the Partnership. The federal income tax consequences of such
estimates and determinations of basis may be subject to challenge and will not
be binding on the IRS or the courts. If the estimates of fair market value or
determinations of basis were found to be incorrect, the character and amount of
items of income, gain, loss, deduction or credit previously reported by
Preference Unitholders might change, and Preference Unitholders might be
required to amend their previously filed tax returns or to file claims for
refund. See "--Administrative Matters--Valuation Overstatements".

Treatment of Short Sales

It would appear that a Preference Unitholder whose Preference Units
are loaned to a "short seller" to cover a short sale of Preference Units would
be considered as having transferred beneficial ownership of such Preference
Units and would, thus, no longer be a partner with respect to such Preference
Units during the period of such loan. As a result, during such period any
Partnership income, gains, deductions, losses or credits with respect to such
Preference Units would appear not

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to be reportable by such Preference Unitholder, any cash distributions received
by the Preference Unitholder with respect to such Preference Units would be
fully taxable and all of such distributions would appear to be treated as
ordinary income. The IRS also may contend that a loan of Preference Units to a
"short seller" constitutes a taxable exchange. If such a contention were
successfully made, the lending Preference Unitholder may be required to
recognize gain or loss. Preference Unitholders desiring to assure their status
as partners should modify their brokerage account agreements, if any, to
prohibit their brokers from borrowing their Preference Units. The IRS has
announced that it is actively studying issues relating to the tax treatment of
short sales of partnership interests.

Alternative Minimum Tax

Each Preference Unitholder will be required to take into account his
share of any items of Partnership income, gain or loss for purposes of the
alternative minimum tax. A portion of the Partnership's depreciation
deductions may be treated as an item of tax preference for this purpose. A
Preference Unitholder's alternative minimum taxable income derived from the
Partnership may be higher than his share of Partnership net income because the
Partnership may use more accelerated methods of depreciation for purposes of
computing federal taxable income or loss. Prospective Preference Unitholders
should consult with their tax advisors as to the impact of an investment in
Preference Units on their liability for the alternative minimum tax.

The Partnership's assets will include all of the capital stock of two
corporations, STI and STS. As corporations, they will be subject to
entity-level taxation for federal and state income tax purposes. The
Partnership, as their stockholder, will include in its income any amounts
distributed to it by such corporations to the extent of such corporations'
current and accumulated earnings and profits. The General Partner estimates
that a significant portion of the cash distributions to the Partnership by such
corporations will be treated as taxable dividends.

Tax-Exempt Entities, Regulated Investment Companies and Foreign
Investors

Employee benefit plans and most other organizations exempt from
federal income tax (including individual retirement accounts ("IRAs") and other
retirement plans) are subject to federal income tax on unrelated business
taxable income. Under Section 512 of the Code, virtually all of the taxable
income derived by such an organization from the ownership of a Preference Unit
will be unrelated business taxable income and thus will be taxable to such a
Unitholder.

Regulated investment companies are required to derive 90% or more of
their gross income from interest, dividends, gains from the sale of stocks or
securities or foreign currency or certain related sources. It is not
anticipated that any significant amount of the Partnership's gross income will
be qualifying income.

Nonresident aliens and foreign corporations, trusts or estates that
acquire Preference Units will be considered to be engaged in business in the
United States on account of ownership of such Units and as a consequence will
be required to file federal tax returns in respect of their distributive shares
of Partnership income, gain, loss, deduction or credit and pay federal income
tax at regular rates (net of credits, including withholding) on such income.
Generally, a partnership is required by Section 1446 of the Code to pay a
withholding tax on the portion of the partnership's income that is effectively
connected with the conduct of a United States trade or business and that is
allocable to the foreign partners, regardless of whether any actual
distributions have been made to such partners. However, under rules applicable
to publicly-traded partnerships, the Partnership will withhold (currently at
the rate of 39.6%) on actual cash distributions made quarterly to foreign
Preference Unitholders. Each foreign Preference Unitholder must obtain a
taxpayer identification number from the IRS and submit that number to the
transfer agent of the Partnership on a Form W-8 in order to obtain credit for
the taxes

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withheld. Subsequent adoption of the Treasury Regulations or the issuance of
other administrative pronouncements may require the Partnership to change these
procedures.

Because a foreign corporation that owns Preference Units will be
treated as engaged in a United States trade or business, such a Preference
Unitholder will be subject to United States branch profits tax at a rate of
30%, in addition to regular federal income tax, on its allocable share of the
Partnership's earnings and profits (as adjusted for changes in the foreign
corporation's "U.S. net equity") that are effectively connected with the
conduct of a United States trade or business. Such a tax may be reduced or
eliminated by an income tax treaty between the United States and the country
with respect to which the foreign corporate Preference Unitholder is a
"qualified resident". In addition, such a Preference Unitholder is subject to
special information reporting requirements under Section 6038C of the Code.

A foreign Preference Unitholder who sells or otherwise disposes of a
Preference Unit will be subject to federal income tax on gain realized on the
disposition of such Preference Unit to the extent that such gain is effectively
connected with a United States trade or business of the foreign Preference
Unitholder. The IRS has issued a ruling under which all or a portion of any
gain that is recognized on a sale of a Preference Unit by a foreign Preference
Unitholder will be subject to tax under the rule of the preceding sentence.
The Partnership does not expect that any material portion of any such gain will
avoid United States taxation. If less than all of any such gain is so taxable,
then Section 897 of the Code may increase the portion of any gain that is
recognized by a foreign Preference Unitholder that is subject to United States
income tax and withholding of 10% of the amount realized on the disposition of
a Preference Unit may apply if that foreign Unitholder has held more than 5% in
value of the LP Units during the five-year period ending on the date of the
disposition or if the LP Units are not regularly traded on an established
securities market at the time of the disposition.

UNIFORMITY OF PREFERENCE UNITS

There can arise a lack of uniformity in the intrinsic tax
characteristics of Preference Units sold pursuant to this offering and LP Units
subsequently converted to Senior Preference Units or Senior Preference Units
issued by the Partnership prior or subsequent to this offering. Without such
uniformity, compliance with several federal income tax requirements, both
statutory and regulatory, could be substantially diminished. In addition, such
non-uniformity could have a negative impact on the ability of a Preference
Unitholder to dispose of his interest in the Partnership. Such lack of
uniformity can result from the application of Proposed Treasury Regulation
Section 1.168-2(n) and Treasury Regulation Section 1.167(c)-1(a)(6) or the
application of certain "ceiling" limitations on the Partnership's ability to
make allocations to eliminate disparities between the tax basis and value
attributable to Contributed Properties.

Depreciation conventions may be adopted or items of income and
deduction may be specially allocated in a manner that is intended to preserve
the uniformity of intrinsic tax characteristics among all Preference Units,
despite the application of either Proposed Treasury Regulation Section
1.168-2(n) and Treasury Regulation Section 1.167(c)-1(a)(6) or the "ceiling"
limitations to Contributed Properties. Any such special allocation will be
made solely for federal income tax purposes. In the event the IRS disallows
the use of such conventions, some or all of the adverse consequences described
in the preceding paragraph could result. See "--Allocation of Partnership
Income, Gain, Loss and Deduction" and "--Tax Treatment of Operations--Section
754 Election".

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DISPOSITION OF PREFERENCE UNITS

Gain or Loss in General

If a Preference Unit is sold or otherwise disposed of, the
determination of gain or loss from the sale or other disposition will be based
on the difference between the amount realized and the tax basis for such
Preference Unit. See "--Tax Consequences of Preference Unit Ownership--Basis
of Preference Units". Upon the sale of his Preference Units, a Preference
Unitholder's "amount realized" will be measured by the sum of the cash or other
property received plus the portion of the Partnership's nonrecourse liabilities
allocated to the Preference Units sold. Similarly, upon a gift of his
Preference Units, a Preference Unitholder will be deemed to have realized gain
with respect to the portion of the Partnership's nonrecourse liabilities
allocable to such Preference Units. To the extent that the amount of cash or
property received plus the allocable share of the Partnership's nonrecourse
liabilities exceeds the Preference Unitholder's basis for the Preference Units
disposed of (in the case of a charitable gift, only a portion of such basis may
be offset against the nonrecourse debt), the Preference Unitholder will
recognize gain. The tax liability resulting from such gain could exceed the
amount of cash received upon the disposition of such Preference Units.

The IRS has ruled that a partner must maintain an aggregate adjusted
tax basis for his interests in a single partnership (consisting of all
interests acquired in separate transactions). On a sale of a portion of such
aggregate interest, such partner would be required to allocate his aggregate
tax basis between the interest sold and the interest retained by some equitable
apportionment method. If applicable, the aggregation of tax basis of a
Preference Unitholder effectively prohibits a Unitholder from choosing among
Preference Units with varying amounts of inherent gain or loss to control the
timing of the recognition of such inherent gain or loss as would be possible in
a stock transaction. Thus, the IRS ruling may result in an acceleration of
gain or deferral of loss on a sale of a portion of a Preference Unitholder's
Preference Units. It is not clear whether such ruling applies to publicly
traded partnerships, such as the Partnership, the interests in which are
evidenced by separate registered certificates, providing a verifiable means of
identifying each separate interest and tracing the purchase price of such
interest. A Preference Unitholder considering the purchase of additional
Preference Units or a sale of Preference Units purchased at differing prices
should consult his tax advisor as to the possible consequences of that IRS
ruling.

To the extent that a portion of the gain upon the sale of a Preference
Unit is attributable to a Preference Unitholder's share of "substantially
appreciated inventory items" and "unrealized receivables" of the Partnership,
as those terms are defined in Section 751 of the Code, such portion will be
treated as ordinary income. Unrealized receivables include (i) to the extent
not previously includable in Partnership income, any rights to pay for services
rendered or to be rendered and (ii) amounts that would be subject to recapture
as ordinary income if the Partnership had sold its assets at their fair market
value at the time of the transfer of a Preference Unit.

Gain from the sale or other disposition of a Preference Unit may
constitute investment income under Section 163(d) of the Code. A Preference
Unitholder must report to the transfer agent of the Partnership (on behalf of
the Partnership) any transfer of Preference Units. See "--Information Return
Filing Requirements".

The treatment of distributions received after a Preference Unitholder
has disposed of his Preference Units is unclear. Such a distribution may be
fully taxable as ordinary income or may reduce a Preference Unitholder's basis
for the Preference Units disposed of, resulting in a larger gain or smaller
loss from such disposition.

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Transferor/Transferee Allocations

In general, the Partnership's taxable income and losses are determined
annually and are prorated on a monthly basis and subsequently apportioned among
the Unitholders in proportion to the number of LP Units owned by them as of the
opening of the NYSE on the first business day of the month. However, gain or
loss realized on a sale or other disposition of Partnership assets other than
in the ordinary course of business is allocated among the Unitholders of record
as of the opening of the NYSE on the first business day of the month in which
such gain or loss is recognized. As a result of this monthly allocation, a
Preference Unitholder transferring Preference Units in the open market may be
allocated income, gain, loss, deduction and credit accrued after the transfer.

The use of the monthly conventions discussed above may not be
permitted by existing Treasury Regulations and, accordingly, Counsel is unable
to opine on the validity of the method of allocating income and deductions
between the transferors and transferees of Preference Units. If the IRS treats
transfers of Preference Units as occurring throughout each month and a monthly
convention is not allowed by the regulations (or only applies to transfers of
less than all of a partner's interest), the IRS may contend that taxable income
or losses of the Partnership must be reallocated among the Partners. If any
such contention were sustained, certain Preference Unitholders' respective tax
liabilities would be adjusted to the possible detriment of other Preference
Unitholders. The General Partner is authorized to revise the Partnership's
method of allocation between transferors and transferees (as well as among
Partners whose interests otherwise vary during a taxable period) to comply with
any future regulations.

Constructive Termination or Dissolution of Partnership

Under Section 708(b)(1)(B) of the Code, a partnership will be
considered to have been terminated if within a twelve-month period there is a
sale or exchange of 50% or more of the interests in partnership capital and
profits. A termination results in a closing of the partnership's taxable year
for all partners, and the partnership's assets are treated as having been
distributed to the partners and reconveyed to the partnership, which is then
treated as a new partnership. A constructive termination of the Partnership
will cause a termination of the Operating Partnerships. In the case of a
Preference Unitholder reporting on a fiscal year other than a calendar year,
the closing of a tax year of the Partnership may result in more than twelve
months' taxable income or loss of the Partnership being includable in his
taxable income for the year of termination. In addition, each Preference
Unitholder will realize taxable gain to the extent that any money distributed
or deemed distributed to him (including any net reduction in his share of the
Partnership's nonrecourse liabilities) exceeds the adjusted basis of his
Preference Units.

A termination of the Partnership under Section 708(b)(1)(B) could
result in adverse tax consequences to Unitholders since it could result in a
change in the tax basis for the Partnership's properties and would require that
new tax elections be made by the reconstituted partnerships. In addition, such
a termination could result in a deferral of Partnership depreciation
deductions. Further, such a termination may either accelerate the application
of (or subject the reconstituted partnerships to the application of) any change
in law effective as of a date after the termination.

The Partnership may not have the ability to determine when a
constructive termination occurs as a result of transfers of LP Units because
the LP Units will be freely transferable under "street name" ownership. Thus,
the Partnership may be subject to penalty for failure to file a tax return and
may fail to make certain Partnership elections in a timely manner, including
the Section 754 elections.

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ADMINISTRATIVE MATTERS

Entity-Level Collections

If the Partnership is required under applicable law or elects to pay
any federal, state or local income tax on behalf of any Unitholder or the
General Partner or any former Unitholder, the General Partner is authorized to
pay such taxes from Partnership funds. Such payments, if made, will be treated
as current distributions to the Unitholders for tax purposes, including the
calculation of capital accounts. However, such payments, if made on behalf of
all Unitholders, will not be treated as current distributions of Available Cash
for purposes of determining whether (i) distributed cash constitutes Cash from
Operations or Cash from Interim Capital Transactions or (ii) the Minimum
Quarterly Distribution, First Target Distribution, Second Target Distribution
or Third Target Distribution has been paid. If such payments are made on
behalf of some but not all Unitholders, the payments will be treated as
distributions of Available Cash for all purposes including the determination of
whether (i) distributed cash constitutes Cash from Operations or Cash from
Interim Capital Transactions and (ii) the Minimum Quarterly Distribution, First
Target Distribution, Second Target Distribution or Third Target Distribution
has been distributed on LP Units held by Unitholders on whose behalf such
payments are made. The General Partner is authorized (but not required) to
amend the Partnership Agreement in the manner necessary to maintain uniformity
of intrinsic tax characteristics of LP Units and to adjust subsequent
distributions so that, after giving effect to such deemed distributions, the
priority and characterization of distributions otherwise applicable under the
Partnership Agreement are maintained as nearly as practicable. If the
Partnership is permitted (but not required) under applicable law to pay any
such taxes, the General Partner is authorized (but not required) to pay such
taxes from the Partnership funds and to amend the Partnership Agreement and
adjust subsequent distributions as described above. The Partnership Agreement
further provides that the General Partner is authorized (but not required) to
attempt to collect tax deficiencies from persons who were Unitholders at the
time such deficiencies arose and any amounts so collected will become
Partnership assets.

The amounts payable by the Partnership would be calculated based upon
the maximum rate of tax for individuals or corporations, whichever is higher.
Thus, such a payment by the Partnership could give rise to an overpayment of
tax on behalf of an individual Partner. In such event, the individual Partner
could file a claim for credit or refund with respect to the overpayment.

Partnership Income Tax Information Returns and Partnership Audit
Procedures

The Partnership will use all reasonable efforts to furnish Unitholders
with tax information within 75 days after the close of each Partnership taxable
year. Specifically, the Partnership intends to furnish to each Unitholder a
Schedule K-1 which sets forth his allocable share of the Partnership's income,
gains, losses, deductions and credits, if any. In preparing such information,
the General Partner will necessarily use various accounting and reporting
conventions to determine each Unitholder's allocable share of income, gains,
losses, deductions and credits. There is no assurance that any such
conventions will yield a result that conforms to the requirements of the Code,
regulations thereunder or administrative pronouncements of the IRS. The
General Partner cannot assure prospective Preference Unitholders that the IRS
will not contend that such accounting and reporting conventions are
impermissible. Contesting any such allegations could result in substantial
expense to the Partnership. In addition, if the IRS were to prevail,
Preference Unitholders may incur substantial liabilities for taxes and
interest.

The federal income tax information returns filed by the Partnership
may be audited by the IRS. The Code contains partnership audit procedures that
significantly simplify the manner in which IRS audit adjustments of partnership
items are resolved. Adjustments (if any) resulting from such an audit may
require each Preference Unitholder to file an amended tax return, and possibly
may result in an

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audit of the Preference Unitholder's return. Any audit of a Preference
Unitholder's return could result in adjustments of non-Partnership as well as
Partnership items.

Under Sections 6221 through 6233 of the Code, partnerships generally
are treated as separate entities for purposes of federal tax audits, judicial
review of administrative adjustments by the IRS and tax settlement proceedings.
The tax treatment of partnership items of income, gain, loss, deduction and
credit is determined at the partnership level in a unified partnership
proceeding rather than in separate proceedings with the partners. The Code
provides for one partner to be designated as the "Tax Matters Partner" for
these purposes. The Partnership Agreement appoints the General Partner as the
Tax Matters Partner for the Partnership.

The Tax Matters Partner is entitled to make certain elections on
behalf of the Partnership and Unitholders and can extend the statute of
limitations for assessment of tax deficiencies against Unitholders with respect
to Partnership items. In connection with adjustments to Partnership tax
returns proposed by the IRS, the Tax Matters Partner may bind any Unitholder
with less than a 1% profits interest in the Partnership to a settlement with
the IRS unless the Unitholder elects, by filing a statement with the IRS, not
to give such authority to the Tax Matters Partner. The Tax Matters Partner may
seek judicial review (to which all the Unitholders are bound) of a final
Partnership administrative adjustment and, if the Tax Matters Partner fails to
seek judicial review, such review may be sought by any Unitholder having at
least a 1% profit interest in the Partnership and by Unitholders having, in the
aggregate, at least a 5% profits interest. Only one judicial proceeding will
go forward, however, and each Unitholder with an interest in the outcome may
participate.

The Unitholders will generally be required to treat Partnership items
on their federal income tax returns in a manner consistent with the treatment
of the items on the Partnership information return. In general, that
consistency requirement is waived if the Unitholder files a statement with the
IRS identifying the inconsistency. Failure to satisfy the consistency
requirement, if not waived, will result in an adjustment to conform the
treatment of the item by the Unitholder to the treatment on the Partnership
return. Even if the consistency requirement is waived, adjustments to the
Unitholder's tax liability with respect to Partnership items may result from an
audit of the Partnership's or the Unitholder's tax return. Intentional or
negligent disregard of the consistency requirement may subject a Unitholder to
substantial penalties.

Information Return Filing Requirements

A Preference Unitholder who sells or exchanges Preference Units is
required by Section 6050K of the Code to notify the Partnership in writing of
such sale or exchange, and the Partnership is required to notify the IRS of
such transaction and to furnish certain information to the transferor and
transferee. However, these reporting requirements do not apply with respect to
a sale by an individual who is a citizen of the United States and who effects
such sale through a broker. In addition, a transferor and a transferee of a
Preference Unit will be required to furnish to the IRS the amount of the
consideration received for such Preference Unit that is allocated to goodwill
or going concern value of the Partnership. Failure to satisfy such reporting
obligations may lead to the imposition of substantial penalties.

Nominee Reporting

Under Section 6031(c) of the Code, persons who hold an interest in the
Partnership as a nominee for another person must report certain information to
the Partnership. Temporary Treasury Regulations provide that such information
should include (i) the name, address and taxpayer identification number of the
beneficial owners and the nominee; (ii) whether the beneficial owner is (a) a
person that is not a United States person, (b) a foreign government, an
international organization

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or any wholly owned agency or instrumentality of either of the foregoing, or
(c) a tax-exempt entity; (iii) the amount and description of Preference Units
held, acquired or transferred for the beneficial owners; and (iv) certain
information including the dates of acquisitions and transfers, means of
acquisitions and transfers, and acquisition cost for purchases, as well as the
amount of net proceeds from sales. Brokers and financial institutions are
required to furnish additional information, including whether they are a United
States person and certain information on Preference Units they acquire, hold or
transfer for their own account. A penalty of $50 per failure (up to a maximum
of $100,000 per calendar year) is imposed for failure to report such
information to the Partnership. The nominee is required to supply the
beneficial owner of the Preference Units with the information furnished to the
Partnership.

Registration as a Tax Shelter

Section 6111 of the Code requires that "tax shelters" be registered
with the Secretary of the Treasury. The temporary Treasury Regulations
interpreting the tax shelter registration provisions of the Code are extremely
broad. Although it is arguable that the Partnership will not be subject to the
registration requirement, the General Partner, as principal organizer of the
Partnership, has registered the Partnership as a tax shelter with the IRS in
the absence of assurance that the Partnership will not be subject to tax
shelter registration and in light of the substantial penalties which might be
imposed if registration is required and not undertaken. The Partnership has
received a tax shelter registration number from the IRS. ISSUANCE OF THE
REGISTRATION NUMBER DOES NOT INDICATE THAT AN INVESTMENT IN THE PARTNERSHIP OR
THE CLAIMED TAX BENEFITS HAVE BEEN REVIEWED, EXAMINED OR APPROVED BY THE IRS.
The Partnership must furnish the registration number to the Unitholders, and a
Unitholder who sells or otherwise transfers a Preference Unit in a subsequent
transaction must furnish the registration number to the transferee. The
penalty for failure of the transferor of a Preference Unit to furnish such
registration number to the transferee is $100 for each such failure. The
Unitholder must disclose the tax shelter registration number of the Partnership
on Form 8271 to be attached to the tax return on which any deduction, loss,
credit or other benefit generated by the Partnership is claimed or income of
the Partnership is included. A Unitholder who fails to disclose the tax
shelter registration number on his return, without reasonable cause for such
failure, will be subject to a $250 penalty for each such failure. Any
penalties discussed herein are not deductible for federal income tax purposes.

STATE AND OTHER TAXES

In addition to federal income taxes, Unitholders may be subject to
other taxes, such as state and local income taxes, unincorporated business
taxes, and estate, inheritance or intangible taxes that may be imposed by the
various jurisdictions in which the Partners reside or in which the Partnership
or the Operating Partnerships do business or own property. Although an
analysis of those various taxes cannot be presented here, each prospective
Preference Unitholder should consider the potential impact of such taxes on his
investment in the Partnership. The Operating Partnerships own property and do
business in Alabama, Arizona, California, Colorado, Florida, Georgia, Indiana,
Illinois, Iowa, Kansas, Louisiana, Maryland, Minnesota, Nebraska, New Mexico,
North Dakota, Oklahoma, Oregon, South Dakota, Texas, Washington, Wisconsin,
Wyoming and Virginia. A Preference Unitholder will likely be required to file
state income tax returns in such states (other than Florida, South Dakota,
Texas and Wyoming) and may be subject to penalties for failure to comply with
such requirements. In addition, an obligation to file tax returns or to pay
taxes may arise in other states. Moreover, in certain states, tax losses may
not produce a tax benefit in the year incurred (if, for example, the Partner
has no income from sources within that state) and also may not be available to
offset income in subsequent taxable years. The General Partner is authorized
(but not required) to cause the Partnership to pay any state or local income
tax on behalf of all the Partners even though such payment may be greater than
the amount that would have been required to be paid if such payment

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had been made directly by a particular Partner or assignee; provided, however,
that such tax payment shall be in the same amount with respect to each LP Unit
and, in the General Partner's sole discretion, payment of such tax on behalf of
all the Partners or assignees is in the best interests of the Partners or the
assignees as a whole. Any amount so paid on behalf of all Partners or
assignees shall be deducted as a cash operating expenditure of the Partnership
in calculating "Cash from Operations".

It is the responsibility of each prospective Preference Unitholder to
investigate the legal and tax consequences, under the laws of pertinent states
or localities, of his investment in the Partnership. Accordingly, each
prospective Preference Unitholder should consult, and must depend upon, his own
tax counsel or other advisor with regard to those matters. Further, it is the
responsibility of each Preference Unitholder to file all state and local, as
well as federal, tax returns that may be required of such Unitholder.

INVESTMENT IN THE PARTNERSHIP BY EMPLOYEE BENEFIT PLANS

An investment in the Partnership by an employee benefit plan is
subject to certain additional considerations because the investments of such
plans are subject to the fiduciary responsibility and prohibited transaction
provisions of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and restrictions imposed by Section 4975 of the Code. As used
herein, the term "employee benefit plan" includes, but is not limited to,
qualified pension, profit-sharing and stock bonus plans, Keogh plans,
Simplified Employee Pension Plans, and tax deferred annuities or Individual
Retirement Accounts established or maintained by an employer or employee
organization. Among other things, consideration should be given to (a) whether
such investment is prudent under Section 404(a)(1)(B) of ERISA; (b) whether in
making such investment such plan will satisfy the diversification requirement
of Section 404(a)(1)(C) of ERISA; and (c) (i) the fact that such investment
could result in recognition of UBTI by such plan even if there is no net
income, (ii) the effect of an imposition of income taxes on the potential
investment return for an otherwise tax-exempt investor and (iii) whether, as a
result of the investment, the plan will be required to file an exempt
organization business income tax return with the IRS. See "Federal Income Tax
Considerations--Tax Treatment of Operations--Tax-Exempt Entities, Regulated
Investment Companies and Foreign Investors". The person with investment
discretion with respect to the assets of an employee benefit plan (a
"fiduciary") should determine whether an investment in the Partnership is
authorized by the appropriate governing instrument and is a proper investment
for such plan.

In addition, a fiduciary of an employee benefit plan should consider
whether such plan will, by investing in the Partnership, be deemed to own an
undivided interest in the assets of the Partnership, with the result that the
General Partner also would be a fiduciary of such plan and the Partnership
would be subject to the regulatory restrictions of ERISA, including its
prohibited transaction rules, as well as the prohibited transaction rules of
the Code.

Section 406 of ERISA and Section 4975 of the Code (which also applies
to Individual Retirement Accounts which are not considered part of an employee
benefit plan) prohibit an employee benefit plan from engaging in certain
transactions involving "plan assets" with parties that are "parties in
interest" under ERISA or "disqualified persons" under the Code with respect to
the plan. The Department of Labor issued final regulations on November 13,
1986, providing guidance with respect to whether the assets of an entity in
which employee benefit plans acquire equity interests would be deemed "plan
assets" under certain circumstances. Pursuant to these regulations, an
entity's assets would not be considered to be "plan assets" if, among other
things, (i) the equity interests acquired by employee benefit plans are
publicly offered securities, i.e., the equity interests are widely held by 100
or more investors independent of the issuer and each other, freely transferable
and registered pursuant to certain provisions of the federal securities laws,
(ii) the entity is an "operating company", i.e., it is primarily engaged in the
production or sale of a product or service other than the investment

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of capital either directly or through a majority-owned subsidiary or
subsidiaries, or (iii) there is no significant investment by benefit plan
investors, which is defined to mean that less than 25% of the value of each
class of equity interest (disregarding certain interests held by the General
Partner, its affiliates and certain other persons) is held by employee benefit
plans (as defined in Section 3(3) of ERISA), whether or not they are subject to
the provisions of Title I of ERISA, plans described in Section 4975(e)(1) of
the Code, and any entities whose underlying assets include plan assets by
reason of a plan's investments in the entity. The Partnership's assets would
not be considered "plan assets" under these regulations because it is expected
that the investment will satisfy the requirements in (i) above, and also may
satisfy requirements (ii) and (iii) above.

SELLING UNITHOLDER AND LP UNITS ELIGIBLE FOR FUTURE SALE

All of the Preference Units being offered by this Prospectus are being
offered for the account of KPPLP. After the sale of such Preference Units by
KPPLP and the exchange by KPL of 1,000,000 Preference Units for an equal number
of Preference B Units, KPL and its affiliates will hold, directly or
indirectly, 1,150,000 Preference Units (assuming the Underwriters'
over-allotment option is not exercised), 1,000,000 Preference B Units and
3,160,000 Common Units, representing all of the outstanding Preference B Units
and Common Units. Neither KPL nor KPPLP currently holds any Senior Preference
Units.

The Preference Units sold in this offering will generally be freely
transferable without restriction or further registration under the Securities
Act of 1933, as amended (the "Securities Act"), except that any Preference
Units owned by an "affiliate" of the Partnership (as that term is defined in
the rules and regulations under the Securities Act) may not be resold publicly
except in compliance with the registration requirements of the Securities Act
or pursuant to an exemption therefrom under Rule 144 thereunder ("Rule 144") or
otherwise. Rule 144 permits securities acquired by an affiliate of the issuer
in an offering to be sold into the market in an amount that does not exceed,
during any three- month period, the greater of (i) 1% of the total number of
such securities outstanding and (ii) the average weekly trading volume for the
four calendar weeks prior to such sale. Sales under Rule 144 are also subject
to certain manner of sale provisions, notice requirements and the availability
of current public information about the Partnership.

Kaneb and its affiliates have the right to cause the Partnership to
register under the Securities Act any LP Units that it or its affiliates own,
subject to certain limitations. Such right is assignable to purchasers of such
LP Units. Kaneb and any such assignee will pay the cost of any registration
that they request. In addition, Kaneb and its affiliates may sell their LP
Units in private transactions at any time.

The Partnership, the General Partner, KPPLP and Kaneb have agreed
that, for a period of 90 days from the date of this Prospectus (the "Lock-Up
Period"), they will not, without the prior written consent of Smith Barney
Inc., offer, sell, contract to sell or otherwise dispose of any LP Units or any
securities substantially similar to, convertible into or exercisable or
exchangeable for LP Units, or grant options or warrants to purchase any LP
Units or any securities substantially similar to, convertible into or
exercisable or exchangeable for LP Units, other than the Preference Units
offered by this Prospectus. Such agreement does not include any such
securities that may be issued by the Partnership to acquire terminals or
pipelines. See "Underwriting".

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UNDERWRITING

Upon the terms and subject to the conditions stated in the
Underwriting Agreement dated the date hereof, KPPLP has agreed to sell to each
of the Underwriters named below, and each of the Underwriters has severally
agreed to purchase from KPPLP, the number of Preference Units set forth
opposite the name of such Underwriter.

<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
UNDERWRITER PREFERENCE UNITS UNDERWRITER PREFERENCE UNITS
----------- ---------------- ----------- ----------------
<S> <C> <C> <C>
Smith Barney Inc. . . . . . . . . . . . . . 1,025,000 Janney Montgomery Scott Inc. . . . . . . . . . 29,000
PaineWebber Incorporated . . . . . . . . . . 1,025,000 Legg Mason Wood Walker,
Bear, Stearns & Co. Inc. . . . . . . . . . . . 68,000 Incorporated . . . . . . . . . . . . . . . . 47,000
Alex. Brown & Sons Incorporated . . . . . . . . 68,000 McDonald & Company Securities, Inc. . . . . . 47,000
CS First Boston Corporation . . . . . . . . . . 68,000 Merrill Lynch, Pierce, Fenner & Smith
The Chicago Corporation . . . . . . . . . . . . 47,000 Incorporated . . . . . . . . . . . . . . . . 68,000
Cowen & Company . . . . . . . . . . . . . . . . 47,000 Morgan Stanley & Co. Incorporated . . . . . . . 68,000
Dean Witter Reynolds Inc. . . . . . . . . . . 68,000 Petrie Parkman & Co. . . . . . . . . . . . . . 29,000
Dillon, Read & Co. Inc. . . . . . . . . . . . 68,000 Principal Financial Securities, Inc. . . . . . 47,000
Donaldson, Lufkin & Jenrette Prudential Securities Incorporated . . . . . . 68,000
Securities Corporation . . . . . . . . . . . 68,000 Ragen MacKenzie Incorporated . . . . . . . . . 29,000
A. G. Edwards & Sons, Inc. . . . . . . . . . . 68,000 Rauscher Pierce Refsnes, Inc. . . . . . . . . 47,000
Fahnestock & Co. Inc. . . . . . . . . . . . . 29,000 The Robinson-Humphrey Company, Inc. . . . . . 47,000
First of Michigan Corporation . . . . . . . . . 29,000 Southwest Securities, Inc. . . . . . . . . . . 29,000
Furman Selz Incorporated . . . . . . . . . . . 47,000 Stephens Inc. . . . . . . . . . . . . . . . . 29,000
Goldman, Sachs & Co. . . . . . . . . . . . . . 68,000 Tucker Anthony Incorporated . . . . . . . . . . 47,000
Interstate/Johnson Lane Corporation . . . . . . 29,000 Wheat, First Securities, Inc. . . . . . . 47,000
---------
Total . . . . . . . . . . . . . . . . . . . 3,500,000
=========
</TABLE>

The Underwriting Agreement provides that the obligations of the
several Underwriters to pay for and accept delivery of the Preference Units are
subject to approval of certain legal matters by counsel and to certain other
conditions. The Underwriters are obligated to take and pay for all Preference
Units offered by this Prospectus (other than those covered by the
over-allotment option described below) if any such Preference Units are taken.

The Underwriters, for whom Smith Barney Inc. and PaineWebber
Incorporated are acting as representatives, propose to offer part of the
Preference Units directly to the public at the initial public offering price
set forth on the cover page of this Prospectus and part of such Preference
Units to certain dealers at such price less a concession not in excess of $0.68
per Preference Unit. The Underwriters may allow, and such dealers may reallow,
a concession not in excess of $0.10 per Preference Unit to certain other
dealers.

Prior to this offering, there has been no public market for the
Preference Units. The initial public offering price has been negotiated among
KPL, KPPLP and the Underwriters. Among the factors considered in determining
the initial public offering price of the Preference Units, in addition to
prevailing market conditions, were the historical performance of the
Partnership, the market price of the Senior Preference Units, the assets and
liabilities of the Partnership, the General Partner's estimates of the business
potential and earnings prospects of the Partnership, an assessment of the
Partnership's management and the consideration of the above factors in relation
to market valuation of companies and publicly traded limited partnerships in
related businesses.

The Partnership, the General Partner, KPPLP and Kaneb have agreed
that, during the Lock-Up Period, they will not, without the prior written
consent of Smith Barney Inc., offer, sell, contract to sell or otherwise
dispose of any LP Units or any securities substantially similar to, convertible
into or exercisable or exchangeable for LP Units, or grant options or warrants
to purchase any LP Units or any securities substantially similar to,
convertible into or exercisable or exchangeable for LP Units, other

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than the Preference Units offered by this Prospectus. Such agreement does not
include any such securities that may be issued by the Partnership to acquire
terminals or pipelines.

KPPLP has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to 325,000 additional
Preference Units at the price to public set forth on the cover page of this
Prospectus minus the underwriting discounts and commissions. The Underwriters
may exercise such option solely for the purpose of covering over-allotments, if
any, in connection with the offering of the Preference Units offered by this
Prospectus. To the extent such option is exercised, each Underwriter will be
obligated, subject to certain conditions, to purchase approximately the same
percentage of such additional Preference Units as the number of Preference
Units set forth opposite each Underwriter's name in the preceding table bears
to the total number of Preference Units listed in such table.

The Preference Units have been approved for listing on the New York
Stock Exchange subject to official notice of issuance. To meet one of the
requirements for listing the Preference Units on the NYSE, the Underwriters
have undertaken to sell lots of 100 or more Preference Units to a minimum of
2,000 beneficial holders.

As the National Association of Securities Dealers, Inc. ("NASD") views
the Preference Units offered by this Prospectus as interest in a direct
participation program, the offering is being made in compliance with Article
III, Section 34 of the NASD's Rules of Fair Practice. The Underwriters do not
intend to confirm sales to any accounts over which they exercise discretionary
authority without the prior written approval of the transaction by the
customer.

Kaneb, the Partnership, KPPLP and KPL have agreed to indemnify the
several Underwriters against certain civil liabilities, including liabilities
under the Securities Act.

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LEGAL

Certain legal matters in connection with the Preference Units will be
passed upon by Fulbright & Jaworski L.L.P., Houston, Texas, as counsel for
Kaneb. Certain legal matters in connection with the Preference Units will be
passed upon for the Underwriters by Andrews & Kurth L.L.P., Houston, Texas, as
counsel for the Underwriters.

EXPERTS

The financial statements incorporated in this Prospectus by reference
to the Annual Report on Form 10-K for the year ended December 31, 1994 of Kaneb
Pipe Line Partners, L.P. have been so incorporated, and the financial
statements of Kaneb Pipe Line Partners, L.P. as of December 31, 1994 and 1993
and for each of the three years in the period ended December 31, 1994 and the
consolidated balance sheet of Kaneb Pipe Line Company and subsidiaries at
December 31, 1994 included in this Prospectus have been so included, in
reliance on the reports of Price Waterhouse LLP, independent accountants, given
on the authority of said firm as experts in auditing and accounting.

The audited historical financial statements of Wyco Pipe Line Company
which appear in the Form 8-K of Kaneb Pipe Line Partners, L.P. dated March 13,
1995, have been so incorporated in this Prospectus by reference in reliance on
the report of Price Waterhouse LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.

The audited historical statements of net assets to be acquired and the
related statements of revenues and direct operating expenses of SPC/SIC --
Terminal Operations Division, which appear in the Form 8-K of Kaneb Pipe Line
Partners, L.P. dated August 29, 1995, have been so incorporated in this
Prospectus by reference in reliance on the report of Price Waterhouse LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.

GLOSSARY

"Available Cash" means with respect to any calendar quarter, (i) the
sum of (a) all cash receipts of the Partnership during such quarter from all
sources (including distributions of cash received from subsidiaries) and (b)
any reduction in reserves established in prior quarters, less (ii) the sum of
(aa) all cash disbursements of the Partnership during such quarter, including,
without limitation, disbursements for operating expenses, taxes on the
Partnership as an entity or paid by the Partnership on behalf of, or amounts
withheld with respect to, all but not less than all of the Unitholders, if any,
debt service (including the payment of principal, premium and interest),
capital expenditures and contributions, if any, to a subsidiary corporation or
partnership (but excluding cash distributions to Unitholders and to KPL), (bb)
any reserves established in such quarter in such amounts as the General Partner
shall determine to be necessary or appropriate in its reasonable discretion (x)
to provide for the proper conduct of the business of the Partnership (including
reserves for future capital expenditures) or (y) to provide funds for
distributions with respect to any of the next four calendar quarters and (cc)
any other reserves established in such quarter in such amounts as the General
Partner determines in its reasonable discretion to be necessary because the
distribution of such amounts would be prohibited by applicable law or by any
loan agreement, security agreement, mortgage, debt instrument or other
agreement or obligation to which the Partnership is a party or by which it is
bound or its assets are subject. Taxes paid by the Partnership on behalf of,
or amounts withheld with respect to, less than all of the Unitholders shall not
be considered cash disbursements of the Partnership that reduce "Available
Cash". Notwithstanding the foregoing, "Available Cash" shall not include any
cash receipts or reductions in reserves or take into account any disbursements
made or reserves established after commencement of the dissolution and
liquidation of the Partnership.

"Barrel Mile" means the movement of one barrel of refined petroleum
product one mile.

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"Cash from Interim Capital Transactions" means cash receipts of the
Partnership determined by the General Partner to be from Interim Capital
Transactions in accordance with the terms of the Partnership Agreement.

"Cash from Operations" means, at any date but prior to the
commencement of the dissolution and liquidation of the Partnership, on a
cumulative basis, all cash receipts of the Partnership plus $3,526,000
(excluding any cash proceeds from any Interim Capital Transactions (as defined
below) or Terminating Capital Transactions (as defined in "Distributions of
Cash Upon Liquidation")) during the period since the commencement of operations
by the Partnership through such date, less the sum of (a) all cash operating
expenditures of the Partnership during such period including, without
limitation, taxes imposed on the Partnership as an entity or taxes paid by the
Partnership on behalf of, or amounts withheld with respect to, all but not less
than all of the Unitholders, if any, (b) all cash debt service payments of the
Partnership during such period (other than payments or prepayments of principal
and premium required by reason of loan agreements (including covenants and
default provisions therein) or by lenders, in each case in connection with
sales or other dispositions of assets or made in connection with refinancings
or refundings of indebtedness, provided that any payment or prepayment of
principal, whether or not then due, shall be determined at the election and in
the discretion of the General Partner, to be refunded or refinanced by any
indebtedness incurred or to be incurred by the Partnership simultaneously with
or within 180 days prior to or after such payment or prepayment to the extent
of the principal amount of such indebtedness so incurred), (c) all cash capital
expenditures of the Partnership during such period (other than (i) cash capital
expenditures made to increase the throughput or deliverable capacity or
terminaling capacity (assuming normal operating conditions, including down-time
and maintenance) of the assets of the Partnership, taken as a whole, from the
throughput or deliverable capacity or terminaling capacity (assuming normal
operating conditions, including down-time and maintenance) existing immediately
prior to such capital expenditures and (ii) cash expenditures made in payment
of transaction expenses relating to Interim Capital Transactions), (d) an
amount equal to revenues collected pursuant to a rate increase that are subject
to possible refund, (e) any additional reserves outstanding as of such date
which the General Partner determines in its reasonable discretion to be
necessary or appropriate to provide for the future cash payment of items of the
type referred to in (a) through (c) above, and (f) any reserves that the
General Partner determines to be necessary or appropriate in its reasonable
discretion to provide funds for distributions with respect to any one or more
of the next four calendar quarters, all as determined on a consolidated basis
and after elimination of intercompany items and KPL's general partner interest
in KPOP. Where cash capital expenditures are made in part to increase the
throughput or deliverable capacity or terminaling capacity and in part for
other purposes, the General Partner's good faith allocation thereof between the
portion increasing capacity and the portion for other purposes shall be
conclusive. Taxes paid by the Partnership on behalf of, or amounts withheld
with respect to, less than all of the Unitholders shall not be considered cash
operating expenditures of the Partnership that reduce "Cash from Operations".

"Common Unit" means one of that certain class of LP Units with those
special rights and obligations specified in the Partnership Agreement as being
appurtenant to a "Common Unit".

"East Pipeline" means KPOP's 2,075 mile integrated pipeline system and
the 16 associated terminals.

"Expansive Capital Expenditures" means cash capital expenditures made
to increase the throughput or deliverable capacity or terminaling capacity
(assuming normal operating conditions, including down-time and maintenance) of
the assets of the Partnership and its subsidiaries, taken as a whole, from the
throughput or deliverable capacity or terminaling capacity (assuming normal
operating conditions, including down-time and maintenance) existing immediately
prior to such capital expenditures. Where cash capital expenditures are made
in part to increase the throughput or deliverable capacity or terminaling
capacity of the assets of the Partnership, taken as a whole, and in

106
<PAGE> 108
part for other purposes, the General Partner's good faith allocation thereof
between the portion increasing capacity and the portion for other purposes
shall be conclusive.

"First Target Distribution" means $0.60 per LP Unit per calendar
quarter, subject to adjustment as described under "Cash
Distributions--Adjustment of Minimum Quarterly Distribution and Target
Distribution Levels".

"General Partner" means Kaneb Pipe Line Company, a Delaware
corporation.

"Interim Capital Transactions" means (a) borrowings and sales of debt
securities (other than for working capital purposes and other than for items
purchased on open account in the ordinary course of business) by the
Partnership, (b) sales of partnership interests by the Partnership and (c)
sales or other voluntary or involuntary dispositions of any assets of the
Partnership (other than (x) sales or other dispositions of inventory in the
ordinary course of business, (y) sales or other dispositions of other current
assets including receivables and accounts or (z) sales or other dispositions of
assets as a part of normal retirements or replacements), in each case prior to
the commencement of the dissolution and liquidation of the Partnership.

"Kaneb" means Kaneb Services, Inc., a Delaware corporation.

"KPPLP" means KPP, L.P., a Delaware Limited partnership and an
indirect wholly owned subsidiary of KPL.

"KPL" means Kaneb Pipe Line Company, a Delaware corporation.

"KPOP" means Kaneb Pipe Line Operating Partnership, L.P., a Delaware
limited partnership.

"LP Units" means Senior Preference Units, Preference Units, Preference
B Units and Common Units.

"MBbl" means thousand barrels.

"Minimum Quarterly Distribution" means $0.55 per LP Unit per calendar
quarter, subject to adjustment as described under "Cash
Distributions--Adjustment of Minimum Quarterly Distribution and Target
Distribution Levels".

"Note Purchase Agreements" means the agreements among KPOP, the
Partnership, STOP, STI and STS and various insurance companies providing for
the purchase by such insurance companies of $33 million of notes of STI and $27
million of notes of KPOP.

"Operating Partnership Agreements" means the Agreements of Limited
Partnership of the Operating Partnerships.

"Operating Partnerships" means KPOP and STOP.

"Partnership Agreement" means the Amended and Restated Agreement of
Limited Partnership of the Partnership.

"Partnership" means Kaneb Pipe Line Partners, L.P., a Delaware limited
partnership.

"Pipelines" means the East Pipeline and the West Pipeline.

107
<PAGE> 109
"Preference Period" means the period ending effective as of the end of
the calendar quarter as to which each of the following conditions is met: (i)
the Partnership shall have distributed to all Unitholders in respect of such
calendar quarter and each of the 11 full consecutive preceding calendar
quarters Available Cash that constitutes Cash from Operations in an amount at
least equal to the Minimum Quarterly Distribution, and (ii) as of such date,
the sum of (A) plus (B) is less than an amount equal to $45 million, plus 80%
of the aggregate expansive capital expenditures since the inception of the
Partnership greater than $45 million, where (A) is equal to the outstanding
principal balance as of such date of the Partnership's consolidated
indebtedness (excluding borrowings for working capital purposes) and (B) is
equal to the amount of revenues collected by the Partnership that (x) are then
subject to possible refund under a pending rate case and (y) are not maintained
by the Partnership in a separate reserve fund.

"Preference B Unit" means one of that certain class of LP Units with
those special rights and obligations specified in the Partnership Agreement as
being appurtenant to a "Preference B Unit".

"Preference Unit" means one of that certain class of LP Units with
those special rights and obligations specified in the Partnership Agreement as
being appurtenant to a "Preference Unit".

"Second Target Distribution" means $0.65 per LP Unit, subject to
adjustment as described under "Cash Distributions--Adjustment of Minimum
Quarterly Distribution and Target Distribution Levels".

"Senior Preference Unit" means one of that certain class of LP Units
with those special rights and obligations specified in the Partnership
Agreement as being appurtenant to a "Senior Preference Unit".

"Single-use pipelines" means the pipelines located in Umatilla, Oregon
and Rawlins, Wyoming, which supply diesel fuel to Union Pacific Railroad
facilities and were acquired by the Partnership from Calnev Pipe Line Company
in October 1991 and the pipeline located at Pasco, Washington, which supplies
diesel fuel to the Burlington Northern Railroad and which was constructed by
the Partnership in 1993.

"ST" means the terminal business of ST Terminals, Inc. formerly owned
by an affiliate of W.R. Grace, as continued by the Partnership through its
subsidiaries.

"STI" means StanTrans, Inc., a Delaware corporation.

"STOP" means Support Terminals Operating Partnership, L.P., a Delaware
limited partnership.

"STS" means Support Terminal Services, Inc., a Delaware corporation.

"Target Distributions" means the First Target Distribution, the Second
Target Distribution and the Third Target Distribution.

"Third Target Distribution" means $0.70 per LP Unit, subject to
adjustment as described under "Cash Distributions--Adjustment of Minimum
Quarterly Distribution and Target Distribution Levels".

"Unitholder" means a person who holds LP Units.

"West Pipeline" means the pipeline assets formerly owned by Wyco Pipe
Line Company, as continued by the Partnership through its subsidiaries.

108
<PAGE> 110

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
THE PARTNERSHIP

FINANCIAL STATEMENTS:

Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Statements of Income -- Years Ended December 31, 1994,
1993 and 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Balance Sheets -- December 31, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Cash Flows -- Years Ended December 31, 1994,
1993 and 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Partners' Capital -- Years Ended December 31, 1994,
1993 and 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7

INTERIM FINANCIAL STATEMENTS (UNAUDITED):

Consolidated Statements of Income - Three and Six Months Ended
June 30, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-14
Condensed Consolidated Balance Sheets - June 30, 1995 and December 31, 1994 . . . . . . . . . . . . . . . . . . F-15
Condensed Consolidated Statements of Cash Flows - Six Months Ended
June 30, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-16
Notes to Interim Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-17

PRO FORMA FINANCIAL STATEMENTS (UNAUDITED):

Pro Forma Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-18
Pro Forma Consolidated Statements of Income - Six Months Ended June 30, 1995 . . . . . . . . . . . . . . . . . . F-19
Pro Forma Consolidated Statements of Income - Year Ended December 31, 1994 . . . . . . . . . . . . . . . . . . . F-20
Pro Forma Condensed Consolidated Balance Sheet -- June 30, 1995 . . . . . . . . . . . . . . . . . . . . . . . . F-21
Notes to Pro Forma Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-22

KANEB PIPE LINE COMPANY

Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-23
Consolidated Balance Sheet -- December 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-24
Notes to Consolidated Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-25
</TABLE>

F-1
<PAGE> 111
REPORT OF INDEPENDENT ACCOUNTANTS

To the Partners of
Kaneb Pipe Line Partners, L.P.

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of cash flows and of partners' capital
present fairly, in all material respects, the financial position of Kaneb Pipe
Line Partners, L.P. and its subsidiaries at December 31, 1994 and 1993, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1994, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
the Partnership's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of
these statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.

PRICE WATERHOUSE LLP

Dallas, Texas
March 16, 1995

F-2
<PAGE> 112
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS - EXCEPT PER UNIT AMOUNTS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1994 1993 1992
----------------- ----------------- -----------------
<S> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . $ 78,745 $ 69,235 $ 42,179
----------------- ----------------- -----------------

Costs and expenses:
Operating costs . . . . . . . . . . . . 33,586 29,012 14,507
Depreciation and amortization . . . . . 7,257 6,135 4,124
General and administrative . . . . . . . 4,924 4,673 2,752
----------------- ----------------- -----------------
Total costs and expenses . . . . . . . 45,767 39,820 21,383
----------------- ----------------- -----------------

Operating income . . . . . . . . . . . . . 32,978 29,415 20,796

Interest and other income . . . . . . . . . 1,299 1,331 1,721

Interest expense . . . . . . . . . . . . . (3,706) (3,376) (2,338)
----------------- ----------------- -----------------

Income before minority
interest and income taxes . . . . . . . . 30,571 27,370 20,179

Minority interest in net income . . . . . . (295) (266) (200)

Income tax provision . . . . . . . . . . . (818) (450) -
----------------- ----------------- -----------------

Net income . . . . . . . . . . . . . . . . 29,458 26,654 19,979

General partner's interest
in net income . . . . . . . . . . . . . . (295) (266) (200)
----------------- ----------------- -----------------

Limited partners' interest
in net income . . . . . . . . . . . . . . $ 29,163 $ 26,388 $ 19,779
================= ================= =================

Allocation of net income per Senior
Preference Unit . . . . . . . . . . . . . $ 2.20 $ 2.20 $ 2.20
================= ================= =================
</TABLE>

See accompanying notes to consolidated financial statements.

F-3
<PAGE> 113
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1993
(IN THOUSANDS)

<TABLE>
<CAPTION>
1994 1993
----------------- -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . $ 4,145 $ 15,061
Accounts receivable . . . . . . . . . . . . . . . . . . . . 5,605 4,504
Current portion of receivable from general partner . . . . . 2,241 1,954
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . 1,924 1,667
----------------- -----------------

Total current assets . . . . . . . . . . . . . . . . . . . 13,915 23,186
----------------- -----------------

Receivable from general partner, less current portion . . . . . 3,544 5,785
----------------- -----------------

Property and equipment . . . . . . . . . . . . . . . . . . . . 214,556 195,048
Less accumulated depreciation . . . . . . . . . . . . . . . . . 68,910 61,612
----------------- -----------------

Net property and equipment . . . . . . . . . . . . . . . . 145,646 133,436
----------------- -----------------

$ 163,105 $ 162,407
================= =================

LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Current portion of long-term debt . . . . . . . . . . . . . $ 1,548 $ 3,850
Accounts payable . . . . . . . . . . . . . . . . . . . . . . 4,007 3,093
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . 2,052 1,725
Accrued distributions payable . . . . . . . . . . . . . . . 7,240 7,240
Deferred terminaling fees . . . . . . . . . . . . . . . . . 1,641 1,600
Payable to general partner . . . . . . . . . . . . . . . . . 786 493
----------------- -----------------

Total current liabilities . . . . . . . . . . . . . . . . 17,274 18,001
----------------- -----------------

Long-term debt, less current portion . . . . . . . . . . . . . 43,265 41,814
----------------- -----------------

Other liabilities and deferred taxes . . . . . . . . . . . . . 1,820 991
----------------- -----------------

Minority interest . . . . . . . . . . . . . . . . . . . . . . . 992 1,003
----------------- -----------------

Partners' capital:
Senior preference unitholders . . . . . . . . . . . . . . . 47,288 47,288
Preference unitholders . . . . . . . . . . . . . . . . . . . 45,247 45,247
Common unitholders . . . . . . . . . . . . . . . . . . . . . 6,227 7,060
General partner . . . . . . . . . . . . . . . . . . . . . . 992 1,003
----------------- -----------------

Total partners' capital . . . . . . . . . . . . . . . . . 99,754 100,598
----------------- -----------------
$ 163,105 $ 162,407
================= =================
</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE> 114
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1994 1993 1992
------------ ------------- ------------
<S> <C> <C> <C>
Operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . $ 29,458 $ 26,654 $ 19,979
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . 7,257 6,135 4,124
Minority interest in net income . . . . . . . . . . . . 295 266 200
Deferred income taxes . . . . . . . . . . . . . . . . . 626 414 -
Changes in working capital components:
Accounts receivable . . . . . . . . . . . . . . . . . (1,101) 2,873 2,282
Prepaid expenses . . . . . . . . . . . . . . . . . . . (257) (954) (125)
Accounts payable and accrued expenses . . . . . . . . 1,282 1,874 (302)
Payable to general partner . . . . . . . . . . . . . . 293 (78) 430
------------ ------------- ------------

Net cash provided by operating activities . . . . . 37,853 37,184 26,588
------------ ------------- ------------

Investing activities:
Terminal acquisitions . . . . . . . . . . . . . . . . . . (12,320) - -
Capital expenditures . . . . . . . . . . . . . . . . . . . (7,147) (8,132) (3,183)
Acquisition of Support Terminal Services, Inc. . . . . . . - (62,677) (2,500)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 203 242 365
------------ ------------- ------------

Net cash used by investing activities . . . . . . . (19,264) (70,567) (5,318)
------------ ------------- ------------

Financing activities:
Changes in receivable from general partner . . . . . . . . 1,954 1,704 1,486
Proceeds from issuance of partnership units . . . . . . . - 53,159 -
Issuance of long-term debt . . . . . . . . . . . . . . . . 41,350 86,300 5,100
Payments of long-term debt . . . . . . . . . . . . . . . . (42,201) (62,677) (1,027)
Distributions:
Senior preference unitholders . . . . . . . . . . . . . (15,950) (13,475) (11,000)
Preference unitholders . . . . . . . . . . . . . . . . . (12,308) (19,286) (14,978)
Common unitholders . . . . . . . . . . . . . . . . . . . (1,738) - -
General partner and minority interest . . . . . . . . . (612) (669) (530)
------------ ------------- ------------

Net cash provided (used) by financing
activities . . . . . . . . . . . . . . . . . . . . (29,505) 45,056 (20,949)
------------ ------------- ------------

Increase (decrease) in cash . . . . . . . . . . . . . . . . . (10,916) 11,673 321

Cash at beginning of period . . . . . . . . . . . . . . . . . 15,061 3,388 3,067
------------ ------------- ------------

Cash at end of period . . . . . . . . . . . . . . . . . . . . $ 4,145 $ 15,061 $ 3,388
============ ============= ============

Supplemental information - Cash paid for interest . . . . . . $ 3,470 $ 3,375 $ 2,338
============ ============= ============
</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE> 115
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(IN THOUSANDS)

<TABLE>
<CAPTION>
SENIOR
PREFERENCE PREFERENCE COMMON GENERAL
UNITHOLDERS UNITHOLDERS UNITHOLDERS PARTNER TOTAL
----------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Partners' capital of January 1, 1992 . $ 23,934 $ 27,047 $ 10,319 $ 618 $ 61,918

1992 income allocation . . . . . . . . 11,000 14,978 (6,199) 200 19,979

Distributions declared . . . . . . . . (11,000) (14,978) - (262) (26,240)
----------- ---------- ----------- ----------- ----------

Partners' capital at
December 31, 1992 . . . . . . . . . . 23,934 27,047 4,120 556 55,657

1993 income allocation . . . . . . . . 14,342 19,286 (7,240) 266 26,654

Allocation of proceeds from
issuance of partnership units . . . . 23,354 18,200 10,180 524 52,258

Distributions declared . . . . . . . . (14,342) (19,286) - (343) (33,971)
----------- ---------- ----------- ----------- ----------

Partners' capital
at December 31, 1993 . . . . . . . . 47,288 45,247 7,060 1,003 100,598

1994 income allocation . . . . . . . . 15,950 12,308 905 295 29,458

Distributions declared . . . . . . . . (15,950) (12,308) (1,738) (306) (30,302)
----------- ---------- ----------- ----------- ----------

Partners' capital at
December 31, 1994 . . . . . . . . . . $ 47,288 $ 45,247 $ 6,227 $ 992 $ 99,754
=========== ========== =========== =========== ==========

Limited Partnership Units
outstanding at December 31, 1992 . . . 5,000 5,650 3,160 (a) 13,810

Limited Partnership Units
issued in 1993 . . . . . . . . . . . . 2,250 - - - 2,250
----------- ---------- ----------- ----------- ----------

Limited Partnerships Units
outstanding at December 31, 1994
and 1993 . . . . . . . . . . . . . . . 7,250(b) 5,650 3,160 (a) 16,060
=========== ========== =========== ============ ==========
</TABLE>
----------
(a) Kaneb Pipe Line Company owns a 1% interest in Kaneb Pipe Line Partners,
L.P. as general partner.
(b) The partnership agreement allows for an additional issuance of up to 7.8
million Senior Preference Units.

See accompanying notes to consolidated financial statements.

F-6
<PAGE> 116
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. PARTNERSHIP ORGANIZATION

Kaneb Pipe Line Partners, L.P. ("Partnership"), a master limited
partnership, owns and operates a refined petroleum products pipeline business.
The Partnership operates through Kaneb Pipe Line Operating Partnership, L.P.
("KPOP"), a limited partnership in which the Partnership holds a 99% interest
as limited partner. Kaneb Pipe Line Company ("Company"), a wholly-owned
subsidiary of Kaneb Services, Inc. ("Kaneb"), as general partner holds a 1%
general partner interest in both the Partnership and KPOP. The Company's 1%
interest in KPOP is reflected as the minority interest in the financial
statements.

In April 1993, the Partnership completed a public offering of 2.25
million SPUs at $25.25 per unit. The net proceeds from the offering of $52.8
million was allocated among the equity accounts of the unitholders, general
partner and minority interest based on the ownership percentages in the
partnership subsequent to the offering. The Partnership believes that this
allocation approximates the distribution of the net assets upon liquidation,
assuming the Partnership was liquidated at net book value. However, the actual
distribution of the net assets upon liquidation could be significantly
different as a result of the fair market value of the net assets being
substantially different than the net book value of the Partnership's assets in
the accompanying financial statements.

The SPUs represent an approximate 44% ownership interest in the
Partnership. The Company owns an approximate 52% interest as limited partner
in the form of Preference Units and Common Units, and as the general partner
owns a combined 2% interest. An approximate 2% ownership interest in the form
of 60,500 Preference Units and 154,000 Common Units is held by officers of
Kaneb.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

CASH AND CASH EQUIVALENTS

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

PROPERTY AND EQUIPMENT

F-7
<PAGE> 117
of property and equipment is provided on a straight-line basis at rates based
upon expected useful lives of various classes of assets. The rates used for
pipeline and storage facilities of KPOP are the same as those which have been
promulgated by the Federal Energy Regulatory Commission.

REVENUE AND INCOME RECOGNITION

KPOP provides pipeline transportation of refined petroleum products and
liquified petroleum gases. Revenue is recognized upon receipt of the products
into the pipeline system.

ST provides terminaling and other ancillary services. Fees are billed
one month in advance and are reported as deferred income. Revenue is
recognized in the month services are provided.

ENVIRONMENTAL MATTERS

The operations of the Partnership are subject to federal, state and local
laws and regulations relating to protection of the environment. Although the
Partnership believes that its operations are in general compliance with
applicable environmental regulation, 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 the Partnership.
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
the Partnership, could result in substantial costs and liabilities to the
Partnership.

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 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 the Partnership's commitment to a
formal plan of action.

The Company has indemnified the Partnership against liabilities for
damage to the environment resulting from operations of the pipeline prior to
October 3, 1989 (date of formation of the Partnership). The indemnification
does not extend to any liabilities that arise after such date to the extent
that the liabilities result from changes in environmental laws and regulations.
In addition, ST's former owner has agreed to indemnify the Partnership against
liabilities for damages to the environment from operations conducted by
the former owner prior to March 2, 1993. The indemnity, which expires
March 1, 1998, is limited in amount to 60% of any claim exceeding $100,000
until an aggregate amount of $10 million has been paid by ST's former owner.
The Partnership has recorded a reserve for environmental claims in the amount
of $1.0 million at December 31, 1994 in other liabilities on the accompanying
balance sheet.

INCOME TAX CONSIDERATIONS

Income before income tax expense is made up of the following components:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1994 1993 1992
----------------- ----------------- -----------------
<S> <C> <C> <C>
Partnership operations . . . . . . . . . $ 28,237,000 $ 26,088,000 $ 19,979,000

Corporation operations . . . . . . . . . 2,039,000 1,016,000 -
----------------- ----------------- -----------------
$ 30,276,000 $ 27,104,000 $ 19,979,000
================= ================= =================
</TABLE>

The Partnership is not subject to federal and state income taxes.
However, certain operations of ST are conducted through wholly-owned
subsidiaries which are taxable entities. The provision for income taxes for
the periods ended December 31, 1994 and 1993 consists of deferred U.S. federal

F-8
<PAGE> 118
income taxes of $.6 million and $.4 million, respectively, and current federal
income taxes of $.2 million in 1994.

Since the income or loss of the operations which are conducted through
limited partnerships will be included in the tax return of the individual
partners of the Partnership, no provision for income taxes has been recorded in
the accompanying financial statements on these earnings. The tax returns of
the Partnership are subject to examination by federal and state taxing
authorities. If such examination results in adjustments to distributive shares
of taxable income or loss, the tax liability of the partners would be adjusted
accordingly.

The tax attributes of the Partnership's net assets flow directly to
each individual partner. Individual partners will have different investment
bases depending upon the timing and prices of acquisition of partnership units.
Further, each partner's tax accounting, which is partially dependent upon their
individual tax position, may differ from the accounting followed in the
financial statements. Accordingly, there could be significant differences
between each individual partner's tax basis and their proportionate share of
the net assets reported in the financial statements. Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," requires
disclosure by a publicly held partnership of the aggregate difference in the
basis of its net assets for financial and tax reporting purposes. Management
does not believe that, in the Partnership's circumstances, the aggregate
difference would be meaningful information.

ALLOCATION OF NET INCOME AND EARNINGS PER SENIOR PREFERENCE UNIT

Net income is allocated to the limited partnership units in an amount
equal to the cash distributions declared for each reporting period and any
remaining income or loss is allocated to the class of units that did not
receive full distributions. If full distributions are declared to all classes
of units, income will be allocated pro rata based on the aggregate amount of
distributions declared.

Earnings per SPU are calculated by dividing the amount of net income
allocated to the SPUs by the weighted average number of SPUs outstanding.

CASH DISTRIBUTIONS

The Partnership makes quarterly distributions of 100% of its Available
Cash, as defined in the Partnership Agreement, to holders of limited
partnership units ("Unitholders") and the Company. Available Cash consists
generally of all the cash receipts of the Partnership plus the beginning cash
balance less all of its cash disbursements and reserves. The Partnership
expects to make distributions of Available Cash for each quarter of not less
than $.55 per Senior Preference Unit (the "Minimum Quarterly Distribution"), or
$2.20 per Senior Preference Unit on an annualized basis, for the foreseeable
future, although no assurance is given regarding such distributions. The
Partnership expects to make distributions of all Available Cash within 45 days
after the end of each quarter to holders of record on the applicable record
date. A distribution of $2.20 per unit was paid to Senior Preference
Unitholders in 1994, 1993 and 1992. During 1994, 1993 and 1992, the
Partnership paid distributions of $2.20, $3.41 (includes $1.21 of arrearage
payments) and $2.65 (includes $.45 of arrearage payments), respectively, to the
Preference Unitholders. During 1994, the Partnership paid distributions of
$.55 per unit to the Common Unitholders. As of December 31, 1994, no
arrearages existed on any class of partnership interest.

Distributions by the Partnership of its Available Cash are made 99% to
Unitholders and 1% to the Company, subject to the payment of incentive
distributions to the General Partner if certain target levels of cash
distributions to the Unitholders are achieved. The distribution of Available
Cash for each quarter within the Preference Period, as defined, is subject to
the preferential rights of the holders of the Senior Preference Units to
receive the Minimum Quarterly Distribution for such quarter, plus any
arrearages in the payment of the Minimum Quarterly Distribution for prior
quarters, before any

F-9
<PAGE> 119
distribution of Available Cash is made to holders of Preference Units or Common
Units for such quarter. In addition, for each quarter within the Preference
Period, the distribution of any amounts to holders of Common Units is subject
to the preferential rights of the holders of the Preference Units to receive
the Minimum Quarterly Distribution for such quarter, plus any arrearages in the
payment of the Minimum Quarterly Distribution for prior quarters. The Common
Units are not entitled to arrearages in the payment of the Minimum Quarterly
Distribution. In general, the Preference Period will continue indefinitely
until the Minimum Distribution has been paid to the holders of the Senior
Preference Units, the Preference Units and the Common Units for twelve
consecutive quarters. Prior to the end of the Preference Period, 2,650,000 of
the Preference Units shall be converted into Senior Preference Units on a
one-for-one basis if the Third Target Distribution, as defined, is paid to all
Unitholders for four full consecutive quarters. The Third Target distribution
is reached when distributions of Available Cash equals $2.80 per Limited
Partner ("LP") Unit on an annualized basis. After the Preference Period ends
all differences and distinctions between the three classes of units for the
purposes of cash distributions will cease.

3. PROPERTY AND EQUIPMENT

The cost of property and equipment is summarized as follows:

<TABLE>
<CAPTION>
ESTIMATED
USEFUL
LIFE DECEMBER 31, DECEMBER 31,
(YEARS) 1994 1993
---------- ----------------- -----------------
<S> <C> <C> <C>
Land . . . . . . . . . . . . . . . . . . . - $ 4,442,000 $ 3,883,000
Buildings . . . . . . . . . . . . . . . . . 35 3,659,000 3,282,000
Furniture and fixtures . . . . . . . . . . 16 1,493,000 1,382,000
Transportation equipment . . . . . . . . . 6 1,193,000 1,928,000
Machinery and equipment . . . . . . . . . . 20 - 40 21,967,000 20,372,000
Pipeline and terminaling equipment . . . . 20 - 40 156,990,000 140,532,000
Pipeline equipment under
capitalized lease . . . . . . . . . . . . 20 - 40 21,901,000 21,632,000
Construction work-in-progress . . . . . . . - 2,911,000 2,037,000
----------------- -----------------

Total . . . . . . . . . . . . . . . . . . $ 214,556,000 $ 195,048,000
================= =================
</TABLE>

4. LONG-TERM DEBT AND LEASES

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 1993
----------------- -----------------
<S> <C> <C>
Term loan . . . . . . . . . . . . . . . . . $ 33,000,000 $ 32,500,000
Obligation under capital lease . . . . . . 11,813,000 13,164,000
----------------- -----------------

Total long-term debt . . . . . . . . . . 44,813,000 45,664,000
Less current portion . . . . . . . . . . 1,548,000 3,850,000
----------------- -----------------

Long-term debt, less current portion . . $ 43,265,000 $ 41,814,000
================= =================
</TABLE>

In 1994, a wholly-owned subsidiary of the Partnership issued $33
million of first mortgage notes ("Notes") to a group of insurance companies.
The Notes bear interest at the rate of 8.05% per annum and are due on December
22, 2001. In 1994, a wholly-owned subsidiary entered into a Restated Credit
Agreement with a group of banks that provides a $15 million revolving credit
facility through November 30, 1997. The credit facility bears interest at
variable interest rates and has a

F-10
<PAGE> 120
commitment fee of .2% per annum of the unused credit facility. No amounts were
drawn under the credit facility at December 31, 1994. The Notes and credit
facility are secured by a mortgage on substantially all of the pipeline assets
of the Partnership and contain certain financial and operational covenants.

The following is a schedule by years of future minimum lease payments
under capital and operating leases together with the present value of net
minimum lease payments for capital leases as of December 31, 1994:

<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASE (a) LEASES
----------------- -----------------
<S> <C> <C>
1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,080,000 $ 738,000
1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,080,000 589,000
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,080,000 360,000
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,198,000 332,000
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 319,000
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . - 2,171,000
----------------- -----------------

Total minimum lease payments . . . . . . . . . . . . . . . . 16,438,000 $ 4,509,000
=================

Less amount representing interest . . . . . . . . . . . . . . 4,625,000
-----------------

Present value of net minimum lease payments . . . . . . . . . 11,813,000

Less current portion . . . . . . . . . . . . . . . . . . . . 1,548,000
-----------------

Total obligation under capital lease,
less current portion . . . . . . . . . . . . . . . . . . . $ 10,265,000
=================
</TABLE>
----------
(a) The capital lease is secured by certain pipeline equipment and the
Partnership has accrued its option to purchase this equipment for
approximately $4.1 million at the termination of the lease.

Total rent expense under operating leases amounted to $.9 million, $.9
million and $.2 million for the years ended December 31, 1994, 1993 and 1992,
respectively.

KPOP and the Company entered into a payment priority agreement related
to the capital lease obligation for pipeline equipment under which the Company
is primarily liable for rental payments of approximately $2.9 million per year
through April 1997 and KPOP is primarily liable for the remaining rental
payments. KPOP has recorded a receivable of $5.8 million at December 31, 1994
from the Company for the present value of these future lease payments. This
receivable bears interest at an annual rate of 13.8%, which reflects the
imputed interest rate on the capital lease. KPOP recorded interest income of
$.9 million, $1.2 million and $1.4 million from the Company on this receivable
balance for the periods ended December 31, 1994, 1993 and 1992, respectively.
The amount of the capital lease obligation that exceeds the receivable from the
Company ($6.0 million at December 31, 1994) represents the present value of the
lease obligation and purchase option due subsequent to April 1997.

The Partnership believes that the carrying value of the notes
represents their estimated fair value as the notes were issued in December 1994
and that it is not practicable to estimate the fair value of the capital lease
obligation and the associated receivable from the general partner.

F-11
<PAGE> 121
5. RELATED PARTY TRANSACTIONS

The Partnership has no employees and is managed and controlled by the
Company. The Company and Kaneb are entitled to reimbursement of all direct and
indirect costs related to the business activities of the Partnership. These
costs, which totaled $9.0 million, $8.7 million and $7.2 million for the years
ended December 31, 1994, 1993 and 1992, respectively, include compensation and
benefits paid to officers and employees of the Company and Kaneb, insurance
premiums, general and administrative costs, tax information and reporting
costs, legal and audit fees. Included in this amount is $7.0 million, $7.0
million and $6.3 million of compensation and benefits, including pension costs,
paid to officers and employees of the Company for the periods ended December
31, 1994, 1993 and 1992, respectively, which represent the actual amounts paid
by the Company or Kaneb. In addition, the Partnership paid $.2 million during
each of these respective periods for an allocable portion of the Company's
overhead expenses. At December 31, 1994 and 1993, the Partnership owed the
Company $.8 million and $.5 million, respectively, for these expenses which are
due under normal invoice terms.

6. QUARTERLY FINANCIAL DATA (UNAUDITED)

Quarterly operating results for 1994 and 1993 are summarized as
follows:

<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
---------------- --------------- --------------- ----------------
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)

<S> <C> <C> <C> <C>
1994:
Revenues . . . . . . . . . . . . $ 18,434 $ 18,773 $ 20,718 $ 20,820
================ =============== =============== ================

Operating income . . . . . . . . $ 7,218 $ 8,107 $ 9,099 $ 8,554
================ =============== =============== ================

Net income . . . . . . . . . . . $ 6,379 $ 7,289 $ 8,067 $ 7,723
================ =============== =============== ================

Allocation of net income per
Senior Preference Unit . . . . . $ .55 $ .55 $ .55 $ .55
================ =============== =============== ================

1993:
Revenues . . . . . . . . . . . . $ 12,094 $ 18,125 $ 18,515 $ 20,501
================ =============== =============== ================

Operating income . . . . . . . . $ 4,817 $ 7,484 $ 7,438 $ 9,676
================ =============== =============== ================

Net income . . . . . . . . . . . $ 4,021 $ 6,671 $ 6,914 $ 9,048
================ =============== =============== ================

Allocation of net income per
Senior Preference Unit . . . . . $ .55 $ .55 $ .55 $ .55
================ =============== =============== ================
</TABLE>

7. SUBSEQUENT EVENT

Effective February 24, 1995, the Partnership, through KPOP, acquired
the refined petroleum product pipeline assets of Wyco Pipe Line Company (the
"West Pipeline") for $27.1 million. The acquisition was financed by the
issuance of first mortgage notes to three insurance companies which are due
February 24, 2002 and bear interest at the rate of 8.37% per annum. The
acquisition will be accounted for as a purchase and, accordingly, the results
of operations of the West Pipeline will be included in the Partnership's
consolidated statement of income subsequent to the date of acquisition.

The following summarized unaudited pro forma consolidated results of
operations for years ended December 31, 1994 and 1993, assume the acquisition
occurred as of the beginning of the

F-12
<PAGE> 122
period presented. These pro forma results have been prepared for
comparative purposes only and do not purport to be indicative of the results
of operations which might have resulted had the combination been in effect at
the dates indicated, or which may occur in the future.

<TABLE>
<CAPTION>
1994 1993
---------------- ----------------
<S> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 92,439,000 $ 80,831,000
================ ================

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 32,245,000 $ 28,932,000
================ ================

Allocation of net income per Senior Preference Unit . . . . . . . . . . $ 2.20 $ 2.20
================ ================
</TABLE>

F-13
r
<PAGE> 123
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
THREE AND SIX MONTHS ENDED JUNE 30, 1995 AND 1994
(IN THOUSANDS - EXCEPT PER UNIT AMOUNTS)
(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- --------------------------
1995 1994 1995 1994
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . $ 23,342 $ 18,773 $ 43,724 $ 37,207
------------ ----------- ----------- -----------

Costs and expenses:
Operating costs . . . . . . . . . . . . . . . 9,711 7,685 18,269 15,865
Depreciation and amortization . . . . . . . . 2,150 1,775 4,161 3,511
General and administrative . . . . . . . . . 1,384 1,206 2,571 2,506
------------ ----------- ----------- -----------

Total costs and expenses . . . . . . . . . 13,245 10,666 25,001 21,882
------------ ----------- ----------- -----------

Operating income . . . . . . . . . . . . . . . 10,097 8,107 18,723 15,325

Other income, net (principally interest) . . . 216 311 447 656

Interest expense . . . . . . . . . . . . . . . (1,662) (870) (3,037) (1,741)
------------ ----------- ----------- -----------
Income before minority interest
and income tax expense . . . . . . . . . . . . 8,651 7,548 16,133 14,240

Minority interest in net income . . . . . . . . (84) (73) (157) (137)

Income tax expense . . . . . . . . . . . . . . (109) (186) (219) (435)
------------ ----------- ----------- -----------

Net income . . . . . . . . . . . . . . . . . . 8,458 7,289 15,757 13,668

General partner's interest in net income . . . (84) (73) (157) (137)
------------ ----------- ----------- -----------

Limited partners' interest in net income . . . $ 8,374 $ 7,216 $ 15,600 $ 13,531
============ =========== =========== ===========
Allocation of net income per Senior
Preference Unit and Preference Unit . . . . . $ .55 $ .55 $ 1.10 $ 1.10
============ =========== =========== ===========
Weighted average number of units
outstanding:
Senior Preference Units . . . . . . . . . . 7,250 7,250 7,250 7,250
============ =========== =========== ===========
Preference Units . . . . . . . . . . . . . 5,650 5,650 5,650 5,650
============ =========== =========== ===========
</TABLE>

See notes to interim consolidated financial statements.

F-14
<PAGE> 124
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1995 1994
----------------- -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . $ 3,087 $ 4,145
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . 8,181 5,605
Current portion of receivable from general partner . . . . . . 2,398 2,241
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . 2,157 1,924
----------------- -----------------

Total current assets . . . . . . . . . . . . . . . . . . . . 15,823 13,915
----------------- -----------------

Receivable from general partner, less current portion . . . . . . 2,305 3,544
----------------- -----------------

Property and equipment . . . . . . . . . . . . . . . . . . . . . 246,341 214,556
Less accumulated depreciation and amortization . . . . . . . . . 73,035 68,910
----------------- -----------------

Net property and equipment . . . . . . . . . . . . . . . . . 173,306 145,646
----------------- -----------------

$ 191,434 $ 163,105
================= =================

LIABILITIES AND PARTNERS' CAPITAL

Current liabilities:
Current portion of long-term debt . . . . . . . . . . . . . . . $ 1,658 $ 1,548
Accounts payable, accrued expenses and
distributions payable . . . . . . . . . . . . . . . . . . . . 15,761 13,299
Deferred terminaling fees . . . . . . . . . . . . . . . . . . . 1,763 1,641
Payable to general partner . . . . . . . . . . . . . . . . . . 701 786
----------------- -----------------

Total current liabilities . . . . . . . . . . . . . . . . . . 19,883 17,274
----------------- -----------------

Long-term debt, less current portion . . . . . . . . . . . . . . 69,408 43,265
----------------- -----------------

Other liabilities and deferred taxes . . . . . . . . . . . . . . 1,899 1,820
----------------- -----------------

Minority interest . . . . . . . . . . . . . . . . . . . . . . . . 985 992
----------------- -----------------

Partners' capital . . . . . . . . . . . . . . . . . . . . . . . . 99,259 99,754
----------------- -----------------

$ 191,434 $ 163,105
================= =================
</TABLE>

See notes to interim consolidated financial statements.

F-15
<PAGE> 125
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1995 AND 1994
(IN THOUSANDS)
(UNAUDITED)

<TABLE>
<CAPTION>
1995 1994
----------------- -----------------
<S> <C> <C>
Operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15,757 $ 13,668
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . 4,161 3,545
Minority interest in net income . . . . . . . . . . . . . . . 157 137
Deferred income taxes . . . . . . . . . . . . . . . . . . . . 216 430
Changes in working capital components . . . . . . . . . . . . (310) 356
----------------- -----------------

Net cash provided by operating activities . . . . . . . . . . 19,981 18,136
----------------- -----------------

Investing activities:
Acquisition of the West Pipeline . . . . . . . . . . . . . . . (27,100) -
Capital expenditures . . . . . . . . . . . . . . . . . . . . . (4,721) (13,924)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (137) -
----------------- -----------------

Net cash used by investing activities . . . . . . . . . . . . (31,958) (13,924)
----------------- ------------------

Financing activities:
Changes in receivable from general partner . . . . . . . . . . 1,082 944
Issuance of long-term debt . . . . . . . . . . . . . . . . . . 28,500 5,200
Payments of long-term debt . . . . . . . . . . . . . . . . . . (2,247) (5,652)
Distributions to partners . . . . . . . . . . . . . . . . . . . (16,416) (14,354)
----------------- -----------------

Net cash provided (used) by financing activities . . . . . . 10,919 (13,862)
----------------- -----------------

Decrease in cash . . . . . . . . . . . . . . . . . . . . . . . . (1,058) (9,650)
Cash at beginning of period . . . . . . . . . . . . . . . . . . . 4,145 15,061
----------------- -----------------

Cash at end of period . . . . . . . . . . . . . . . . . . . . . . $ 3,087 $ 5,411
================= =================

Supplemental information - cash paid for interest . . . . . . . . $ 2,185 $ 1,741
================= =================
</TABLE>

See notes to interim consolidated financial statements.

F-16
<PAGE> 126
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

1. Significant Accounting Policies

The unaudited financial statements of Kaneb Pipe Line Partners, L.P.
("KPP") for the periods ended June 30, 1995 and 1994 have been prepared in
accordance with generally accepted accounting principles applied on a
consistent basis. Significant accounting policies followed by the Partnership
were disclosed in the notes to the financial statements included in the
Partnership's Annual Report on Form 10-K for the period ended December 31,
1994. In the opinion of the Partnership's management, the accompanying
financial statements contain the adjustments, consisting of normal recurring
accruals, necessary to present fairly the financial position of the Partnership
at June 30, 1995 and the results of its operations and cash flows for the
period ended June 30, 1995 and 1994. Operating results for the six month
period ended June 30, 1995 are not necessarily indicative of the results that
may be expected for the year ended December 31, 1995.

2. Acquisition

Effective February 24, 1995, the Partnership, through KPOP, acquired
the refined petroleum product pipeline assets (the "West Pipeline") of Wyco
Pipe Line Company for $27.1 million. The acquisition was financed by the
issuance of first mortgage notes to three insurance companies which are due
February 24, 2002 and bear interest at the rate of 8.37% per annum. The
acquisition has been accounted for as a purchase and, accordingly, the results
of operations of the West Pipeline are included in the Partnership's
consolidated statement of income subsequent to the date of acquisition.

The following summarized unaudited pro forma consolidated results of
operations for the three and six month periods ended June 30, 1995 and 1994,
assume the acquisition occurred as of the beginning of the periods presented.
These pro forma results have been prepared for comparative purposes only and do
not purport to be indicative of the results of operations which might have
resulted had the combination been in effect at the dates indicated, or which
may occur in the future.

<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- --------------------------
1995 1994 1995 1994
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . $ 23,342 $ 21,950 $ 45,439 $ 43,394
============ =========== =========== ===========

Net Income . . . . . . . . . . . . . . . . . $ 8,458 $ 8,470 $ 15,760 $ 16,059
============ =========== =========== ===========

Allocation of net income per Senior
Preference Unit and Preference Unit . . . . $ .55 $ .55 $ 1.10 $ 1.10
============ =========== =========== ===========
</TABLE>

3. Cash Distributions to Senior Preference Unitholders

The cash distribution of $.55 for the second quarter of 1995 was
declared to holders of record as of July 28, 1995 and was paid on August 14,
1995.

F-17
<PAGE> 127
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES

PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

In February 1995, Kaneb Pipe Line Partners, L.P. (the "Partnership")
acquired, through its operating partnership, the refined petroleum product
pipeline assets (the "West Pipeline") of Wyco Pipe Line Company for $27.1
million. The West Pipeline was owned 60% by a subsidiary of GATX Terminals
Corporation and 40% by a subsidiary of Amoco Pipe Line Company. The
acquisition was financed by the sale of $27 million of first mortgage notes to
three insurance companies. The assets acquired from Wyco Pipe Line Company did
not include certain assets that were leased to Amoco Pipe Line Company, and the
purchase agreement did not provide for either (i) the continuation of an
arrangement with Amoco Pipe Line Company for the monitoring and control of
pipeline flows or (ii) the extension or assumption of certain credit agreements
that Wyco Pipe Line Company had with its shareholders.

On August 27, 1995, the Partnership agreed to purchase the liquids
terminaling assets from Steuart Petroleum Company and certain of its affiliates
(collectively, "Steuart"). The acquisition price of $82 million will be
financed by bank borrowings. The contracts include a provision for an earn-out
payment based upon revenues of one of the terminals exceeding a specified
amount for a seven-year period beginning in 1996. The contracts also include a
provision for the continuation of all terminaling contracts in place at the
time of the acquisition, including those contracts with Steuart. The closing
of the acquisition is conditional upon satisfactory completion of a due
diligence investigation, receipt of all necessary consents and approvals, the
execution of certain throughput agreements and certain other conditions. If
all conditions to the closing are satisfied, it is anticipated that the
Partnership would acquire the liquids terminaling assets from Steuart prior to
October 31, 1995. There can be no assurance that the acquisition will be
consummated or, if consummated, that the terms of the acquisition will not vary
materially from those described herein. The acquisition, if consummated, will
be accounted for using the purchase method of accounting. The total purchase
price will be allocated to the assets and liabilities based on their respective
fair values based on valuations and other studies which are not yet completed.
The allocation of the purchase price presented in the unaudited pro forma
consolidated financial statements is preliminary and subject to adjustment.

The following unaudited pro forma financial statements of the
Partnership have been derived from (i) the historical financial statements of
the Partnership as of June 30, 1995 and for the year ended December 31, 1994
and the six-month period ended June 30, 1995, (ii) the historical financial
statements of Wyco Pipe Line Company for the year ended December 31, 1994 and
the period ended February 24, 1995, and (iii) the statements of revenues and
direct operating expenses for the year ended December 31, 1994 and the
six-month period ended June 30, 1995 and the statements of net assets to be
acquired as of June 30, 1995 of SPC/SIC -- Terminal Operations Division. The
following unaudited pro forma financial statements have been compiled as if the
Partnership acquired the pipeline assets of the West Pipeline and the liquids
terminaling assets of Steuart as of the beginning of the period for income
statement purposes and as of June 30, 1995 for balance sheet purposes. The
unaudited pro forma financial statements should be read in conjunction with the
notes accompanying such unaudited pro forma financial statements and with the
historical financial statements and related notes of the Partnership set forth
elsewhere in this Prospectus, the historical financial statements and related
notes of Wyco Pipe Line Company which are incorporated by reference and the
historical statements of revenues and direct operating expenses and statements
of net assets to be acquired and related notes of SPC/SIC -- Terminal
Operations Division which are incorporated by reference.

The unaudited pro forma financial statements may not be indicative of
the results that would have occurred if the Partnership had acquired the
pipeline assets of the West Pipeline and the liquids terminaling assets of
Steuart on the dates indicated or which will be obtained in the future.

F-18
<PAGE> 128
KANEB PIPE LINE PARTNERS, L.P.
PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
SIX MONTHS ENDED JUNE 30, 1995
(IN THOUSANDS - EXCEPT PER UNIT AMOUNTS)
(UNAUDITED)

<TABLE>
<CAPTION>
PARTNERSHIP STEUART
HISTORICAL WEST HISTORICAL PRO
SIX PIPELINE ACQUISITION SIX FORMA-
MONTHS HISTORICAL AD- PRO MONTHS ACQUISITION WEST
ENDED ENDED FEB- JUSTMENTS- FORMA ENDED AD- PIPELINE
JUNE 30, RUARY 24, WEST WEST JUNE 30, JUSTMENTS- AND
1995 1995 PIPELINE PIPELINE 1995 STEUART STEUART
--------- --------- -------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues . . . . . . . $ 43,724 $ 1,715 $ -- $ 45,439 $ 9,113 $ 1,478 (f) $ 56,030

Costs and expenses:
Operating costs . . . 18,269 1,158 -- 19,427 3,857 (29)(g) 23,255
Depreciation and
amortization . . . 4,161 128 (22)(a) 4,267 2,196 637 (h) 7,100
General and
administrative . . 2,571 283 -- 2,854 800 (454)(i) 3,200
--------- --------- --------- ---------- ---------- --------- ---------
Total costs and
expenses . . . . 25,001 1,569 (22) 26,548 6,853 154 33,555
--------- --------- --------- ---------- ---------- --------- ---------

Operating income . . . 18,723 146 22 18,891 2,260 1,324 22,475

Interest and other
income . . . . . . . 447 17,111 (16,926)(b) 632 -- - 632

Interest expense . . . (3,037) - (350)(c) (3,387) -- (3,075)(j) (6,462)

Minority interest in
net income . . . . . (157) - - (157) -- (6)(k) (163)

Income taxes . . . . . (219) (6,026) 6,026 (e) (219) -- - (219)
--------- --------- --------- ---------- ---------- --------- ---------

Net income . . . . . . $ 15,757 $ 11,231 $ (11,228) $ 15,760 $ 2,260 $ (1,757) 16,263
========= ========= ========= ========== ========== ========= =========

Allocation of net
income per Senior
Preference Unit . . . $ 1.10 $ 1.10 $ 1.10
========= ========== =========

Allocation of net
income per
Preference Unit . . . $ 1.10 $ 1.10 $ 1.10
========= ========== =========
</TABLE>

See notes to unaudited pro forma consolidated financial statements.

F-19
<PAGE> 129
KANEB PIPE LINE PARTNERS, L.P.
PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 1994
(IN THOUSANDS - EXCEPT PER UNIT AMOUNTS)
(UNAUDITED)

<TABLE>
<CAPTION>
PRO
ACQUISITION FORMA-
AD- PRO ACQUISITION WEST
WEST JUSTMENTS- FORMA AD- PIPELINE
PARTNERSHIP PIPELINE WEST WEST STEUART JUSTMENTS- AND
HISTORICAL HISTORICAL PIPELINE PIPELINE HISTORICAL STEUART STEUART
--------- ---------- --------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues . . . . . . . $ 78,745 $ 13,694 $ -- $ 92,439 $ 22,672 $ 2,956 (f) $ 118,067
--------- ---------- --------- ---------- ---------- --------- ---------
Costs and expenses:
Operating costs . . . 33,586 7,135 -- 40,721 9,358 (102)(g) 49,977
Depreciation and
amortization . . . 7,257 1,042 (338)(a) 7,961 4,267 1,398 (h) 13,626
General and
administrative . . 4,924 781 -- 5,705 1,679 (929)(i) 6,455
--------- ---------- --------- ---------- ---------- --------- ---------
Total costs
and expenses . . 45,767 8,958 (338) 54,387 15,304 367 70,058
--------- ---------- --------- ---------- ---------- --------- ---------

Operating income . . . 32,978 4,736 338 38,052 7,368 2,589 48,009

Interest and other
income . . . . . . . 1,299 - -- 1,299 - - 1,299

Interest expense . . . (3,706) - (2,260)(c) (5,966) - (6,150)(j) (12,116)

Minority interest in
net income . . . . . (295) - (27)(d) (322) - (38)(k) (360)

Income taxes . . . . . (818) (1,850) 1,850 (e) (818) - - (818)
--------- ---------- --------- ---------- ---------- --------- ----------

Net income . . . . . . $ 29,458 $ 2,886 $ (99) $ 32,245 $ 7,368 $ (3,599) $ 36,014
========= ========== ========= ========== ========== ========= =========

Allocation of net
income per Senior
Preference Unit . . . $ 2.20 $ 2.20 $ 2.20
========= ========== =========

Allocation of net
income per
Preference Unit . . . $ 2.20 $ 2.20 $ 2.20
========= ========== =========
</TABLE>

See notes to unaudited pro forma consolidated financial statements.

F-20
<PAGE> 130
KANEB PIPE LINE PARTNERS, L.P.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1995
(IN THOUSANDS)
(UNAUDITED)

<TABLE>
<CAPTION>
ACQUISITION
PARTNERSHIP ADJUSTMENTS PRO
HISTORICAL STEUART FORMA
----------- ------------ -----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . $ 3,087 $ - $ 3,087
Accounts receivable . . . . . . . . . . . . . . . . . . . . 8,181 - 8,181
Current portion of receivable from general partner . . . . 2,398 - 2,398
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . 2,157 - 2,157
----------- ------------ -----------
Total current assets . . . . . . . . . . . . . . . . . . 15,823 - 15,823
----------- ------------ -----------

Receivable from general partner . . . . . . . . . . . . . . . 2,305 - 2,305
----------- ------------ -----------

Property and equipment, net . . . . . . . . . . . . . . . . . 173,306 82,850(l) 256,156
----------- ------------ -----------

$ 191,434 $ 82,850 $ 274,284
=========== ============ ===========

LIABILITIES AND PARTNERS' CAPITAL

Current liabilities:
Current portion of long-term debt . . . . . . . . . . . . . $ 1,658 $ - $ 1,658
Accounts payable, accrued expenses and
distributions payable . . . . . . . . . . . . . . . . . . 15,761 200(m) 15,961
Deferred terminaling fees . . . . . . . . . . . . . . . . . 1,763 - 1,763
Payable to general partner . . . . . . . . . . . . . . . . 701 - 701
----------- ------------ -----------
Total current liabilities . . . . . . . . . . . . . . . . 19,883 200 20,083
----------- ------------ -----------

Long-term debt, less current portion . . . . . . . . . . . . 69,408 82,000(n) 151,408
----------- ------------ -----------

Other liabilities . . . . . . . . . . . . . . . . . . . . . . 1,899 650(m) 2,549
----------- ------------ -----------

Minority interest . . . . . . . . . . . . . . . . . . . . . . 985 - 985
----------- ------------ -----------

Partners' capital . . . . . . . . . . . . . . . . . . . . . . 99,259 - 99,259
----------- ------------ -----------

$ 191,434 $ 82,850 $ 274,284
=========== ============ ===========
</TABLE>

See notes to unaudited pro forma consolidated financial statements.

F-21
<PAGE> 131
KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES

NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

WEST PIPELINE

(a) Represents adjustments to the depreciation and amortization of the
acquired assets.

(b) Represents the gain on the sale of the pipeline assets that was
recorded by Wyco Pipe Line Company in February 1995 related to the
sale of the West Pipeline to the Partnership.

(d) Represents the General Partner's 1% general partner interest in Kaneb
Pipe Line Operating Partnership, L.P.

(e) Represents elimination of corporate income taxes as the acquired
operations will be held by the Partnership and will not be subject to
federal and state income taxes.

STEUART

(f) Represents the revenues resulting from a throughput agreement entered
into by Steuart in conjunction with the acquisition. The agreement
provides for a fixed volume of storage over a five-year period.

(g) Represents adjustments to insurance expense to reflect the
Partnership's insurance rates.

(h) Represents adjustments to the depreciation and amortization of the
acquired assets.

(i) Represents adjustments to remove duplicate general and administrative
expenses, primarily related to management and clerical positions.

(j) Represents interest expense on the $82 million of acquisition debt at
an assumed rate of 7.5% per annum.

(k) Represents the General Partner's 1% general partner interest in Kaneb
Pipe Line Operating Partnership, L.P.

(l) Represents the preliminary allocation of the estimated fair value of
the acquired assets as of June 30, 1995 as the Partnership's internal
valuation of the assets is not complete as of the date of this filing.

(m) Represents the assumption of environmental liabilities in connection
with the acquisition of the Steuart assets.

(n) Represents the issuance of $82 million of long-term debt incurred in
connection with the acquisition of the Steuart assets.

F-22
<PAGE> 132
REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholder of
Kaneb Pipe Line Company

In our opinion, the accompanying consolidated balance sheet presents fairly, in
all material respects, the financial position of Kaneb Pipe Line Company and
subsidiaries (the "Company"), a wholly-owned subsidiary of Kaneb Services,
Inc., at December 31, 1994 in conformity with generally accepted accounting
principles. This financial statement is the responsibility of the Company's
management; our responsibility is to express an opinion on this financial
statement based on our audit. We conducted our audit in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for the
opinion expressed above.

PRICE WATERHOUSE LLP

Dallas, Texas
March 22, 1995

F-23
<PAGE> 133
KANEB PIPE LINE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1994
(IN THOUSANDS)

<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,223
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,605
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,924
-----------------

Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,752
-----------------

Receivable from parent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,360
-----------------

Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214,556
Less accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68,910
-----------------

Net property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . 145,646
-----------------
$ 164,758
=================

LIABILITIES AND EQUITY
Current liabilities:
Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . $ 4,608
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,291
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,868
Accrued distributions payable . . . . . . . . . . . . . . . . . . . . . . . . . . 4,021
Deferred terminaling fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,641
-----------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,429

Long-term debt, less current portion . . . . . . . . . . . . . . . . . . . . . . . . 43,265
-----------------

Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 781
-----------------

Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,088
-----------------

Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61,733
-----------------

Stockholder's equity
Common stock, $1 par value, authorized, issued and
outstanding 10,000 shares . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,992
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,460
-----------------

Total stockholder's equity . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,462
-----------------
$ 164,758
=================
</TABLE>

See accompanying notes to consolidated balance sheet.

F-24
<PAGE> 134
KANEB PIPE LINE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEET

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The following significant accounting policies are followed by the
Kaneb Pipe Line Company (the "Company") in the preparation of the consolidated
balance sheet. The Company is a wholly-owned subsidiary of Kaneb Services,
Inc. ("Kaneb").

PRINCIPLES OF CONSOLIDATION

The consolidated balance sheet includes the accounts of the Company
and Kaneb Pipe Line Partners, L.P. ("KPP" or the "Partnership"). The Company
controls the pipeline operations of KPP through its two percent general partner
interest and also owns a 52% majority limited partner interest. All
significant intercompany transactions and balances are eliminated in
consolidation.

The Partnership owns and operates a refined petroleum products
pipeline business. The Partnership operates through Kaneb Pipe Line Operating
Partnership, L.P. ("KPOP"), a limited partnership in which the Partnership
holds a 99% interest as limited partner.

Effective March 1, 1993, the Partnership acquired Support Terminal
Services, Inc. ("ST"), a petroleum products and specialty liquids storage and
terminaling company headquartered in Dallas, Texas, for approximately $65
million. The acquisition was accounted for as a purchase, and, accordingly,
the Company's consolidated statements of income include the results of
operations of ST since March 1, 1993. In connection with the acquisition, KPP
borrowed $65 million from a group of banks. In April 1993 KPP sold 2.25
million Senior Preference Units ("SPU") in a secondary public offering at
$25.25 per unit and used $50.8 million of the proceeds from this offering to
repay a portion of the ST acquisition debt. As a result of KPP issuing
additional units to unrelated parties, the Company's pro rata share of the net
assets of KPP increased by $22.4 million. The Company recognized a gain of
$15.1 million and, consistent with the accounting treatment of the initial SPU
offering in 1989, deferred $7.3 million of the gain. The unamortized portion
of the deferred gains, which totaled $6.8 million at December 31, 1994, is
included as minority interest on the balance sheet and is being amortized using
the straight-line method through 1996.

CASH AND CASH EQUIVALENTS

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

PROPERTY AND EQUIPMENT

Property and equipment are carried at historical cost. Certain leases
have been capitalized and the leased assets have been included in property and
equipment. Additions of new equipment and major renewals and replacements of
existing equipment are capitalized. Repairs and minor replacements that do not
materially increase values or extend useful lives are expensed. Depreciation
of property and equipment is provided on a straight-line basis at rates based
upon expected useful lives of various classes of assets. The rates used for
pipeline and storage facilities of KPOP are the same as those which have been
promulgated by the Federal Energy Regulatory Commission.

REVENUE AND INCOME RECOGNITION

KPOP provides pipeline transportation of refined petroleum products
and liquified petroleum gases. Revenue is recognized upon receipt of the
products into the pipeline system.

F-25
<PAGE> 135
ST provides terminaling and other ancillary services. Fees are billed
one month in advance and are reported as deferred income. Revenue is
recognized in the month services are provided.

ENVIRONMENTAL MATTERS

The operations of the Company are subject to federal, state and local
laws and regulations relating to protection of the environment. Although the
Company believes that its operations are in general compliance with applicable
environmental regulation, 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 the Company.
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
the Company, could result in substantial costs and liabilities to the Company.

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
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 the Company's
commitment to a formal plan of action.

ST's former owner has agreed to indemnify the Company against
liabilities for damages to the environment from operations conducted by
the former owner prior to March 2, 1993. The indemnity, which expires
March 1, 1998, is limited in amount to 60% of any claim exceeding $100,000
until an aggregate amount of $10 million has been paid by ST's former owner.
The Company has recorded a reserve for environmental claims in the amount of
$1.0 million at December 31, 1994 in other liabilities on the accompanying
consolidated balance sheet.

CASH DISTRIBUTIONS

The Partnership makes quarterly distributions of 100% of its Available
Cash (as defined in the Partnership Agreement) to holders of limited
partnership units and the Company. Available Cash consists generally of all
the cash receipts of the Partnership less all of its cash disbursements and
reserves. The Partnership believes it will make distributions of Available
Cash for each quarter of not less than $.55 per Senior Preference Unit
("Minimum Quarterly Distribution"), or $2.20 per Senior Preference Unit on an
annualized basis for the foreseeable future. The Minimum Quarterly
Distribution on the Senior Preference Units is cumulative and preferential to
the partnership units held by the Company. Based on the 1994 results of the
Partnership, approximately 42% of the Partnership's cash provided by operations
was distributed to the Senior Preference Unitholders. The assets, other than
Available Cash, cannot be distributed without a majority vote of the
non-affiliated unitholders.

2. MANAGEMENT PLANS

The Board of Directors, on March 21, 1995, authorized the management
of the Company to pursue the sale of up to 3.5 million of the Preference Units
it holds in the Partnership. Management is in discussions with underwriters
regarding a public offering of these securities.

The Company controls the pipeline and terminaling operations of KPP
through its two percent general partner interest and it currently owns a 52%
limited partner interest. The sale of 3.5 million Preference Units would
reduce the Company's limited partner interest to 31%, but it would not affect
the Company's control of the operations of KPP. The excess of the net proceeds
from the sale of these Preference Units over their nominal book basis of $4.37
per Preference Unit will be recorded as a gain in the Company's 1995 statement
of income. The proceeds from the sale will be used to repay certain debt of
Kaneb.

F-26
<PAGE> 136
3. PROPERTY AND EQUIPMENT

The cost of property and equipment is summarized as follows (dollars
in thousands):

<TABLE>
<CAPTION>
ESTIMATED
USEFUL
LIFE DECEMBER 31,
(YEARS) 1994
------------------ ---------------
<S> <C> <C>
Land . . . . . . . . . . . . . . . . . . . . . . . . . . - $ 4,442
Buildings . . . . . . . . . . . . . . . . . . . . . . . . 35 3,659
Furniture and fixtures . . . . . . . . . . . . . . . . . 16 1,493
Transportation equipment . . . . . . . . . . . . . . . . 6 1,193
Machinery and equipment . . . . . . . . . . . . . . . . . 20 - 40 21,967
Pipeline and terminaling equipment . . . . . . . . . . . 20 - 40 156,990
Pipeline equipment under capitalized lease . . . . . . . 20 - 40 21,901
Construction work-in-progress . . . . . . . . . . . . . . - 2,911
---------------
Total . . . . . . . . . . . . . . . . . . . . . . . . $ 214,556
===============
</TABLE>

4. LONG-TERM DEBT AND LEASES

<TABLE>
<CAPTION>
DECEMBER 31,
1994
-----------------
(IN THOUSANDS)
<S> <C>
Term loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 33,000
Obligation under capital lease . . . . . . . . . . . . . . . . . . . . . . . . . . 11,813
Line of credit expiring June 1995 . . . . . . . . . . . . . . . . . . . . . . . . 3,060
-----------------
Total long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47,873
Less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,608
-----------------
Long-term debt, less current portion . . . . . . . . . . . . . . . . . . . . . . $ 43,265
=================
</TABLE>

In 1994, a wholly-owned subsidiary of the Partnership issued $33
million of first mortgage notes to a group of insurance companies. The notes
bear interest at the rate of 8.05% per annum and are due on December 22, 2001.
In 1994, a wholly-owned subsidiary entered into a Restated Credit Agreement
with a group of banks that provides a $15 million revolving credit facility
through November 30, 1997. The credit facility bears interest at variable
interest rates and has a commitment fee of .2% per annum of the unused credit
facility. No amounts were drawn under the credit facility at December 31,
1994. The notes and credit facility are secured by a mortgage on substantially
all of the pipeline assets of the Partnership and contain certain financial and
operational covenants.

In 1993, the Company entered into a $5 million line of credit expiring
in June 1995. The line of credit is collateralized by a portion of the
Company's ownership interest in the Partnership and bears interest at the rate
of LIBOR plus 1.5% (7.8% at December 31, 1994) per annum.

F-27
<PAGE> 137
The following is a schedule by years of future minimum lease payments
under capital and operating leases together with the present value of net
minimum lease payments for capital leases as of December 31, 1994 (dollars in
thousands):

<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASE (a) LEASES
-------------- --------------
<S> <C> <C>
Year ending December 31:
1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,080 $ 738
1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,080 589
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,080 360
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,198 332
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 319
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . - 2,171
-------------- --------------
Total minimum lease payments . . . . . . . . . . . . . . . . . . 16,438 $ 4,509
==============
Less amount representing interest . . . . . . . . . . . . . . . 4,625
--------------
Present value of net minimum lease payments . . . . . . . . . . 11,813
Less current portion . . . . . . . . . . . . . . . . . . . . . 1,548
--------------
Total obligation under capital lease, less current portion . . . $ 10,265
==============
</TABLE>
----------
(a) The capital lease is secured by certain pipeline equipment
and the Partnership has accrued its option to
purchase this equipment at the termination of the lease.

Total rent expense under operating leases amounted to $.9 million for
each of the two years ended December 31, 1994.

5. INCOME TAXES

The Company participates with Kaneb in filing a consolidated federal
income tax return except for certain ST operations which are conducted through
separate taxable wholly-owned subsidiaries. Income taxes for the Company are
reported as if it had filed on a separate return basis. Kaneb has a
substantial net operating loss carryforward for U.S. Federal Income Tax
purposes which will not fully expire until the year 2006.

Deferred income tax provisions (benefits) result from temporary
differences between the tax basis of assets and their reported amounts in the
financial statements that will result in differences between income for tax
purposes and income for financial statement purposes in future years.
Substantially all of the federal current income tax provision is payable to
Kaneb. Of the amounts payable during 1994, $1,717,000 was credited to
additional paid-in capital as capital contributions from Kaneb.

6. RELATED PARTY TRANSACTIONS

Kaneb is entitled to reimbursement of all direct and indirect costs
related to the business activities of the Company. These costs, which totaled
$1.3 million for 1994, include compensation and benefits paid to officers and
employees of the Company and Kaneb, insurance premiums, general and
administrative costs, tax information and reporting costs, legal and audit
fees. In addition, the Company paid $.2 million during 1994 for an allocable
portion of Kaneb's overhead expenses.

The Company participates in Kaneb's defined contribution benefit plan
which covers substantially all domestic employees and provides for varying
levels of employer matching. Company contributions to this plan were $.5
million for 1994.

The Company advances funds to Kaneb at prevailing interest rates.
Interest earned on these advances was $.5 million in 1994.

F-28
<PAGE> 138
7. SUBSEQUENT EVENT

Effective February 24, 1995, the Partnership, through KPOP, acquired
the refined petroleum product pipeline assets of Wyco Pipe Line Company (the
"West Pipeline") for $27.1 million. The acquisition was financed by the
issuance of first mortgage notes to three insurance companies. The notes are
due February 24, 2002 and bear interest at the rate of 8.37% per annum. The
acquisition will be accounted for as a purchase and, accordingly, the results
of operations of the West Pipeline will be included in the Partnership's
consolidated statement of income subsequent to the date of acquisition.

F-29
<PAGE> 139
--------------------------------------------------------------------------------
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NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE PARTNERSHIP OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES OR AN
OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THOSE TO WHICH IT RELATES
IN ANY STATE TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE SUCH OFFER IN SUCH
STATE. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.

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TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................. 4
Incorporation of Certain Documents.... 4
Prospectus Summary.................... 5
Risk Factors.......................... 18
Use of Proceeds....................... 26
Capitalization........................ 27
Distributions......................... 28
Selected Historical and Pro Forma
Financial and Operating Data........ 30
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 34
Business and Properties of the
Partnership......................... 38
Cash Distributions.................... 61
Conflicts of Interest and Fiduciary
Responsibilities.................... 70
Description of the Preference Units... 73
Description of the Partnership
Agreements.......................... 74
Federal Income Tax Considerations..... 84
State and Other Taxes................. 100
Investment in the Partnership by
Employee Benefit Plans.............. 101
Selling Unitholder and LP Units
Eligible for Future Sale............ 102
Underwriting.......................... 103
Legal................................. 105
Experts............................... 105
Glossary.............................. 105
Index to Financial Statements......... F-1
</TABLE>

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3,500,000 UNITS

KANEB LOGO
KANEB PIPE LINE
PARTNERS, L.P.

REPRESENTING PREFERENCE
LIMITED PARTNER INTERESTS

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PROSPECTUS

SEPTEMBER 18, 1995

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SMITH BARNEY INC.

PAINEWEBBER INCORPORATED
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