KANEB PIPE LINE PARTNERS L P, S-3/A, 1995-08-07

KANEB PIPE LINE PARTNERS L P
S-3/A, 1995-08-07
PIPE LINES (NO NATURAL GAS)

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<PAGE> 1

As filed with the Securities and Exchange Commission on August 7, 1995

Registration No. 33-59373

================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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

AMENDMENT NO. 1

FORM S-3

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

--------------
KANEB PIPE LINE PARTNERS, L.P.
(Exact name of registrant as specified in its charter)

DELAWARE 75-2287571
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

2435 NORTH CENTRAL EXPRESSWAY

RICHARDSON, TX 75080

(214) 699-4000

(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)

--------------
EDWARD D. DOHERTY
2435 NORTH CENTRAL EXPRESSWAY

RICHARDSON, TX 75080

(214) 699-4000

(Name, address, including zip code, and telephone number,
including area code, of agent for service)

--------------
Copies to:

FULBRIGHT & JAWORSKI L.L.P. ANDREWS & KURTH L.L.P.
1301 MCKINNEY, SUITE 5100 TEXAS COMMERCE TOWER
HOUSTON, TX 77010 HOUSTON, TX 77002
(713) 651-5151 (713) 220-4200
ATTENTION: JOHN A. WATSON ATTENTION: WILLIAM N. FINNEGAN, IV

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practicable after the Registration Statement becomes effective.

If the only securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. / /

If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. / /

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

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

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /

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

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(A)
MAY DETERMINE.

================================================================================
<PAGE> 2

***************************************************************************
* *
* Information contained herein is subject to completion or amendment. A *
* registration statement relating to these securities has been filed *
* with the Securities and Exchange Commission. These securities may not *
* be sold nor may offers to buy be accepted prior to the time the *
* registration statement becomes effective. This prospectus shall not *
* constitute an offer to sell or the solicitation of an offer to buy *
* nor shall there be any sale of these securities in any State in which *
* such offer, solicitation or sale would be unlawful prior to *
* registration or qualification under the securities laws of any State. *
* *
***************************************************************************

SUBJECT TO COMPLETION, DATED AUGUST 7, 1995

PROSPECTUS

3,500,000 UNITS
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 partner 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 16 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 SEC-
URITIES 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>
======================================================================================
Price to Underwriting Discounts Proceeds to
Public and Commissions(1) KPPLP(2)
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Preference Unit ............. $ $ $
-------------------------------------------------------------------------------------
Total(3) ........................ $ $ $
======================================================================================
</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 $ , $ and $ , 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 , 1995, at the
offices of Smith Barney Inc., 388 Greenwich Street, New York, New York 10013.

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

SMITH BARNEY INC. PAINEWEBBER INCORPORATED

, 1995

<PAGE> 3

(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 June 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 of distributions
of Available Cash.

Prior to this offering there has been no public market for the Preference
Units. Application will be made to list the Preference Units on the New York
Stock Exchange. For the factors to be considered in determining the initial
public offering price, see "Underwriting".

<PAGE> 4

KANEB PIPE LINE PARTNERS, L.P.

PARTNERSHIP FACILITIES

[maps showing locations of pipeline systems and terminals]

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

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.

2
<PAGE> 5

TABLE OF CONTENTS

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

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

PROSPECTUS SUMMARY ..................................... 5
Kaneb Pipe Line Partners, L.P ...................... 5
Risk Factors ....................................... 6
Business Strategy .................................. 6
The Offering ....................................... 7
Partnership Structure .............................. 9
Summary Historical and Pro Forma
Financial and Operating Data .................... 11
Cash Distributions ................................. 13
Tax Considerations ................................. 15

RISK FACTORS ........................................... 16
Considerations Relating to the
Partnership's Business .......................... 16
Considerations Relating to Partnership
Structure ....................................... 18
Tax Considerations ................................. 22

USE OF PROCEEDS ........................................ 24

CAPITALIZATION ......................................... 25

DISTRIBUTIONS .......................................... 26

SELECTED HISTORICAL AND PRO FORMA FINANCIAL
AND OPERATING DATA ................................. 28

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS ......................................... 31
General ............................................ 31

Pipeline Operations .................................... 32
Terminaling Operations ............................. 32
Liquidity and Capital Resources .................... 33

BUSINESS AND PROPERTIES OF THE PARTNERSHIP ............. 35
Products Pipeline Business ......................... 35
Liquids Terminaling Business ....................... 43
Capital Expenditures ............................... 47
Regulation ......................................... 48
Legal Proceedings .................................. 51
Environmental Matters .............................. 51
Safety Regulation .................................. 56
Employees .......................................... 56

CASH DISTRIBUTIONS ..................................... 57
General ............................................ 57
Quarterly Distributions of Available Cash .......... 59
Distributions of Cash from Interim
Capital Transactions ............................ 60
Distribution Restriction on Preference
Units, Preference B Units and Common
Units ........................................... 60
Exchange of Preference Units and
Preference B Units .............................. 61
Exchange of Preference Units and Preference B
Units for Senior Preference Units ............... 61
Status of LP Units at End of Preference
Period .......................................... 61
Adjustment of Minimum Quarterly
Distribution and Target Distribution
Levels .......................................... 62
Distributions of Cash Upon Liquidation ............. 62

CONFLICTS OF INTEREST AND FIDUCIARY
RESPONSIBILITIES ................................... 64
Fiduciary Responsibility of the General
Partner ......................................... 67

DESCRIPTION OF THE PREFERENCE UNITS .................... 68
General ............................................ 68
Transfer of Preference Units ....................... 68

DESCRIPTION OF THE PARTNERSHIP AGREEMENTS .............. 69
Organization and Duration .......................... 70
Purpose ............................................ 70
Power of Attorney .................................. 70
Restrictions on Authority of the General
Partner ......................................... 70
Withdrawal or Removal of the General
Partner ......................................... 71
Status as Limited Partner or Assignee .............. 72
Non-citizen Assignees; Redemption .................. 73
Issuance of Additional LP Units and
Securities ...................................... 73
Limited Call Right ................................. 74
Amendment of Partnership Agreements ................ 74
Meetings; Voting ................................... 75
Indemnification .................................... 76
Limited Liability .................................. 77
Books and Reports .................................. 77
Right to Inspect Partnership Books and
Records ......................................... 78
Termination, Dissolution and Liquidation ........... 78

FEDERAL INCOME TAX CONSIDERATIONS ...................... 79
Partnership Status ................................. 80
Partner Status ..................................... 82
Tax Consequences of Preference Unit
Ownership ....................................... 83
Allocation of Partnership Income, Gain,
Loss and Deduction .............................. 85
Tax Treatment of Operations ........................ 86
Uniformity of Preference Units ..................... 91
Disposition of Preference Units .................... 91
Administrative Matters ............................. 93

STATE AND OTHER TAXES .................................. 96

INVESTMENT IN THE PARTNERSHIP BY EMPLOYEE
BENEFIT PLANS ...................................... 96

SELLING UNITHOLDER AND LP UNITS ELIGIBLE FOR
FUTURE SALE ........................................ 97

UNDERWRITING ........................................... 99

LEGAL .................................................. 101

EXPERTS ................................................ 101

GLOSSARY ............................................... 101
</TABLE>

3
<PAGE> 6

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, and Quarterly Report on Form 10-Q for the fiscal quarter
ended June 30, 1995, 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.

<PAGE> 7

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.

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.

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.

<PAGE> 8

RECENT DEVELOPMENTS

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:

- 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.

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.

<PAGE> 9

THE OFFERING

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 June 30, 1997,
for purposes of determining the priority
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 34.4%
interest in the Partnership (32.4% if the
Underwriters' over-allotment option is
exercised in full).

7
<PAGE> 10

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 June 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 of
distributions of Available Cash.

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.

Proposed New York Stock
Exchange symbol ................. KPU

<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 of the Partnership]

<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".

<PAGE> 13

SUMMARY HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA

The following table sets forth, for the periods and at the dates
indicated, summary (i) historical financial and operating data for the
Partnership and (ii) pro forma financial data for the Partnership after giving
effect to the acquisition of the West Pipeline. 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 and the West Pipeline assuming certain adjustments to
reflect the acquisition of the West Pipeline 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>
SIX MONTHS ENDED JUNE 30,
YEAR ENDED DECEMBER 31, (UNAUDITED)
---------------------------------------------- ----------------------------------
HISTORICAL PRO FORMA HISTORICAL PRO FORMA
--------------------------------- --------- --------------------- ---------
1992 1993(A) 1994 1994 1994 1995(B) 1995
--------- --------- --------- --------- --------- --------- ---------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues ................................ $ 42,179 $ 69,235 $ 78,745 $ 92,439 $ 37,207 $ 43,724 $ 45,439
--------- --------- --------- --------- --------- --------- ---------
Costs and expenses:
Operating costs ........................ 14,507 29,012 33,586 40,721 15,865 18,269 19,427
Depreciation and amortization .......... 4,124 6,135 7,257 7,961 3,511 4,161 4,267
General and administrative expenses .... 2,752 4,673 4,924 5,705 2,506 2,571 2,854
--------- --------- --------- --------- --------- --------- ---------
Total costs and expenses ............... 21,383 39,820 45,767 54,387 21,882 25,001 26,548
--------- --------- --------- --------- --------- --------- ---------
Operating income ........................ 20,796 29,415 32,978 38,052 15,325 18,723 18,881
Interest income (expense), net .......... (617) (2,045) (2,407) (4,667) (1,085) (2,590) (2,755)
Minority interest ....................... (200) (266) (295) (322) (137) (157) (157)
--------- --------- --------- --------- --------- --------- ---------
Income before income taxes .............. 19,979 27,104 30,276 33,063 14,103 15,976 15,979
Income taxes (c) ........................ -- (450) (818) (818) (435) (219) (219)
--------- --------- --------- --------- --------- --------- ---------
Net income .............................. $ 19,979 $ 26,654 $ 29,458 $ 32,245 $ 13,668 $ 15,757 $ 15,760
========= ========= ========= ========= ========= ========= =========
Allocation of net income and cash
distributions per Senior Preference
Unit (d) ............................... $ 2.20 $ 2.20 $ 2.20 $ 2.20 $ 1.10 $ 1.10 $ 1.10
========= ========= ========= ========= ========= ========= =========
Allocation of net income and cash
distributions per Preference
Unit (d)(e) ............................ $ 2.20 $ 2.20 $ 2.20 $ 2.20 $ 1.10 $ 1.10 $ 1.10
========= ========= ========= ========= ========= ========= =========

BALANCE SHEET DATA (AT PERIOD END):
Property and equipment, net ............. $ 66,956 $ 133,436 $ 145,646 $ 173,807 $ 143,815 $ 173,306 $ 173,306
Total assets ............................ 86,409 162,407 163,105 193,313 162,033 191,434 191,434
Current portion of long-term debt ....... 1,177 3,850 1,548 1,548 16,646 1,658 1,658
Long-term debt, less current portion .... 20,864 41,814 43,265 70,265 28,566 69,408 69,408
Partners' capital ....................... 55,657 100,598 99,754 99,754 100,055 99,259 99,259

OTHER DATA:
Net cash provided by operating activities
before changes in working capital
components (f) ......................... 24,303 33,469 37,636 17,780 20,291
Capital expenditures (f)(g) ............. 3,183 8,132 7,147 13,924 4,721
Distributions to: (h)
Senior preference unitholders .......... 11,000 13,475 15,950 15,950 7,975 7,976
Preference unitholders (e) ............. 12,430 12,430 12,430 12,430 6,093 6,216
Common unitholders ..................... -- -- 2,686 5,300(i) -- 1,896
--------- --------- --------- --------- --------- ---------
Total distributions to unitholders ... 23,430 25,905 31,066 33,680 14,068 16,088
========= ========= ========= ========= ========= =========
</TABLE>

11
<PAGE> 14

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
YEAR ENDED DECEMBER 31, (UNAUDITED)
--------------------------------------------- ---------------------------------
HISTORICAL PRO FORMA HISTORICAL PRO FORMA
------------------------------- --------- -------------------- ---------
1992 1993(A) 1994 1994 1994 1995(B) 1995
--------- --------- --------- --------- --------- --------- ---------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Volumes (j) ................... 55,111 56,234 54,546 27,210 34,549
Barrel miles (k) .............. 14,287 14,160 14,460 7,019 7,568
</TABLE>

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

(a) Includes the operations of ST since its acquisition on March 2, 1993.

(b) 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.

(d) 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.

(e) 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.

(f) 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".

(g) 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 $12.6 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 and approximately
$27.1 million related to the acquisition of the West Pipeline in the first
quarter of 1995.

(h) Consists of distributions paid with respect to the periods shown,
excluding arrearages (see note (e) above). Payment of distributions with
respect to a calendar quarter is made in the next succeeding calendar
quarter.

(i) Pro forma 1994 distributions to Common Unitholders is based on the General
Partner's estimate of the distributions of Available Cash that would have
been available to the Common Unitholders had the acquisition of the West
Pipeline occurred on January 1, 1994. See "Distributions".

(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.

12
<PAGE> 15

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 June 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 of distributions of Available Cash.

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

<PAGE> 16

Partnership since October 2, 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 2, 1989 were approximately $116.0
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 September 30, 1995. Such
distribution is expected to be made on or before November 14, 1995 to holders of
record of such LP Units as of October 31, 1995. All record holders of Preference
Units on such record date would be entitled to a full distribution.

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 were paid on the Common Units with respect to the final
three calendar quarters of 1994. 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.

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".

<PAGE> 17

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 two and one-half year period ending December 31,
1997, in an amount averaging approximately 38% of the cash distributions with
respect to such period. 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.

<PAGE> 18

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. 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, rates must be just and reasonable and not unduly
discriminatory. The lawfulness of new or changed rates may be protested by
shippers and investigated by the FERC, which can suspend such rates for a period
of up to seven months, and require refunds of amounts collected under rates
ultimately found to be unlawful. 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 and offers several alternative methodologies. The
primary ratemaking methodology is a rate indexing mechanism, tied 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, 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. Lakehead 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, 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".

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

<PAGE> 19

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 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 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

<PAGE> 20

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.

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".

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

<PAGE> 21

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 and Issuance of Senior
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 June 30, 1997,
the Preference B Units shall be deemed to be Preference Units for purposes of
determining the priority of distributions of Available Cash. 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 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 June 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.

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

<PAGE> 22

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 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".

<PAGE> 23

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
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".

<PAGE> 24

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 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.

<PAGE> 25

(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.

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.

<PAGE> 26

USE OF PROCEEDS

The net proceeds from the sale of the Preference Units are estimated to
be approximately $72.8 million ($79.6 million if the Underwriters'
over-allotment option is exercised in full), assuming an offering price of
$22.00 per Preference Unit. 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 by KPPLP. After the offering, KPL
and its affiliates will own an aggregate 34.4% interest in the Partnership
(32.2% if the Underwriters' over-allotment option is exercised in full).

<PAGE> 27

CAPITALIZATION

The following table sets forth the capitalization of the Partnership as
of June 30, 1995 and as adjusted to give effect to the exchange by KPL of
1,000,000 Preference Units for an equal number of Preference B Units. The table
should be read in conjunction with the historical financial statements and notes
thereto included elsewhere in this Prospectus.

AS OF JUNE 30, 1995
------------------------
HISTORICAL AS ADJUSTED
(in thousands)

<S> <C> <C>
Current portion of long-term debt ............................... $ 1,658 $ 1,658
======== ========

Long-term debt:
First mortgage notes ......................................... 60,000 60,000
Obligations under capitalized leases,
including current portion .................................. 11,066 11,066
-------- --------
Total long-term debt, including current portion ................. 71,066 71,066
Less current portion of long-term debt ....................... 1,658 1,658
-------- --------
Total long-term debt, less current portion ...................... $ 69,408 $ 69,408
======== ========

Partners' capital:
Senior preference unitholders ................................ $ 47,288 $ 47,288
Preference unitholders ....................................... 45,247 37,239
Preference B unitholders ..................................... -- 8,008
Common unitholders ........................................... 5,739 5,739
General partner .............................................. 985 985
-------- --------
Total partners' capital ......................................... $ 99,257 $ 99,959
======== ========

Total capitalization ......................................... $170,325 $170,325
======== ========
</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 $45 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 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

<PAGE> 28

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).

DISTRIBUTIONS

Prior to this offering there has been no public market for the
Preference Units. Application will be made to list the Preference Units on the
New York Stock Exchange (the "NYSE").

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 June 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 of
distributions of Available Cash. 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 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.

<PAGE> 29

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 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 were paid on the Common Units with respect to the final
three calendar quarters of 1994. 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.

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 2, 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 2, 1989 were approximately $116.0 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.

<PAGE> 30

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 and (ii) pro forma financial data for the Partnership after giving
effect to the acquisition of the West Pipeline. 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 and the West Pipeline assuming certain adjustments to
reflect the acquisition of the West Pipeline 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>
SIX MONTHS ENDED JUNE 30,
YEAR ENDED DECEMBER 31, (UNAUDITED)
------------------------------------------------------------- ---------------------------------
HISTORICAL PRO FORMA HISTORICAL PRO FORMA
------------------------------------------------- --------- ------------------- ---------
1990 1991 1992 1993(A) 1994 1994 1994 1995(B) 1995
------- ------- ------- -------- -------- -------- -------- -------- ---------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues .................... $37,618 $39,415 $42,179 $ 69,235 $ 78,745 $ 92,439 $ 37,207 $ 43,724 $ 45,439
------- ------- ------- -------- -------- -------- -------- -------- --------
Costs and expenses:
Operating costs ............. 12,588 14,337 14,507 29,012 33,586 40,721 15,865 18,269 19,427
Depreciation and
amortization ............... 3,333 3,519 4,124 6,135 7,257 7,961 3,511 4,161 4,267
General and administrative
expenses ................... 2,916 2,861 2,752 4,673 4,924 5,705 2,506 2,571 2,854
Legal expenses for tariff
protest .................... 400 2,172 -- -- -- -- -- -- --
------- ------- ------- -------- -------- -------- -------- -------- --------
Total costs and expenses .... 19,237 22,889 21,383 39,820 45,767 54,387 21,882 25,001 26,548
------- ------- ------- -------- -------- -------- -------- -------- --------
Operating income ............ 18,381 16,526 20,796 29,415 32,978 38,052 15,325 18,723 18,891
Interest and other income ... 2,093 1,751 1,721 1,331 1,299 1,299 656 447 632
Interest expense ............ (2,321) (2,259) (2,338) (3,376) (3,706) (5,966) (1,741) (3,037) (3,387)
Minority interest ........... (183) (159) (200) (266) (295) (322) (137) (157) (157)
------- ------- ------- -------- -------- -------- -------- -------- --------
Income before income taxes .. 17,970 15,859 19,979 27,104 30,276 33,063 14,103 15,976 15,979
Income taxes (c) ............ -- -- -- (450) (818) (818) (435) (219) (219)
------- ------- ------- -------- -------- -------- -------- -------- --------
Net income .................. $17,970 $15,859 $19,979 $ 26,654 $ 29,458 $ 32,245 $ 13,668 $ 15,757 $ 15,760
======= ======= ======= ======== ======== ======== ======== ======== ========
Allocation of net income and
cash distributions per
Senior Preference
Unit (d) ................... $ 2.20 $ 2.20 $ 2.20 $ 2.20 $ 2.20 $ 2.20 $ 1.10 $ 1.10 $ 1.10
======= ======= ======= ======== ======== ======== ======== ======== ========
Allocation of net income and
cash distributions per
Preference Unit(d) ......... $ 2.20 $ 2.20 $ 2.20 $ 2.20 $ 2.20 $ 2.20 $ 1.10 $ 1.10 $ 1.10
======= ======= ======= ======== ======== ======== ======== ======== ========
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 $173,807 $143,815 $173,306 $173,306
Total assets ................ 88,610 88,530 86,409 162,407 163,105 193,313 162,033 191,434 191,434
Current portion of long-term
debt ....................... 895 1,027 1,177 3,850 1,548 1,548 16,646 1,658 1,658
Long-term debt, less
current portion ............ 15,368 16,941 20,864 41,814 43,265 70,265 28,566 69,408 69,408
Partners' capital ........... 60,310 61,918 55,657 100,598 99,754 99,754 100,055 99,259 99,259
</TABLE>

<PAGE> 31

(a) Includes the operations of ST since its acquisition on March 2, 1993.

(e) 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".

(f) 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 $12.6 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 and approximately
$27.1 million related to the acquisition of the West Pipeline in the first
quarter of 1995.

(g) Consists of distributions paid with respect to the periods shown,
excluding arrearages (see note (e) above). Payment of distributions with
respect to a calendar quarter is made in the next succeeding calendar
quarter.

(h) Allocation of net income and cash distributions declared per Preference
Unit exclude $1.65 attributable to the creation of arrearages in 1991 and
$0.45 and $1.20 attributable to the payment of such arrearages in 1992 and
1993, respectively.

<PAGE> 32

(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.

<PAGE> 33

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.

<PAGE> 34

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 approximately 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.

TERMINALING OPERATIONS

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- -------------------
1992 1993 1994 1994 1995
------- ------- ------- ------- -------
PRO FORMA 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>

32
<PAGE> 35

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 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.

33
<PAGE> 36
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.

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. Lakehead has
filed a motion for rehearing and, if unsuccessful, may ultimately seek judicial
review 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, 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.

34
<PAGE> 37

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.

---------------
(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 decreased from 1993 to 1994 because of a 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.

35
<PAGE> 38
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 12,311 16,427
Diesel and fuel oil . . 18,991 20,047 23,374 25,308 26,340 12,063 14,169
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 56,234 54,546 27,209 32,843
======= ======= ====== ======= ======= ======= =======
</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 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

36
<PAGE> 39
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.

37
<PAGE> 40
<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 1
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.

38
<PAGE> 41

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 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.

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

<PAGE> 42

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

<PAGE> 43

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 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.

<PAGE> 44

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
July 1, 1995 and on the East Pipeline before the end of 1995.

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.

<PAGE> 45

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.

<PAGE> 46

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 . . . . . . . 90(d) 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.

<PAGE> 47

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.

<PAGE> 48

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.

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.

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).

<PAGE> 49

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, Petroleum
Fuel & Terminal and Steuart Petroleum, have facilities used primarily for
petroleum related products. 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. Such future expenditures,
however, will depend on many factors beyond the Partnership's control,
including, without limitation, demand for refined petroleum products 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".

<PAGE> 50

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.

The Partnership's current rates became final and effective in April
1994. Under Title XVIII of the Energy Policy Act of 1992, 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. 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 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.

<PAGE> 51

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 Energy Policy Act of 1992 ("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 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

<PAGE> 52

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 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. Lakehead is expected to file a Motion for Rehearing of this
decision by July 17, 1995. It is unlikely, however, that the FERC will reverse
itself on this issue on rehearing. Lakehead may also 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

<PAGE> 53

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, 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.

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

<PAGE> 54

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 $540,000 has been expended to
date 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 $153,000 to date 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 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 $350,000 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

<PAGE> 55

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 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.

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.

<PAGE> 56

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 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.

<PAGE> 57

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.

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.

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,

<PAGE> 58

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 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

<PAGE> 59

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 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 June 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 of
distributions of Available Cash. 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 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 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

<PAGE> 60

the next two years, although no assurance can be given with respect to such
distributions. Distributions totalling $2,686,000 were paid on the Common Units
with respect to the final three calendar quarters of 1994. 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 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 September 30, 1995. Such
distribution is expected to be made on or before November 14, 1995 to holders of
record of such LP Units as of October 31, 1995. 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

<PAGE> 61

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 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.

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
June 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.

<PAGE> 62

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
[Arefund 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 2, 1989 was approximately $116.0 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 June 30, 1997, for purposes of determining the priority 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 second quarter of 1997, the Preference B Units shall
be deemed to be Preference Units for purposes of deterring the priority of
distributions of Available Cash. 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 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 June
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

<PAGE> 63

immediately prior to such exchange. The effect of 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 to be 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 June
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; provided, that, 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.
At June 30, 1995, the Partnership's consolidated indebtedness was $71.1 million,
and its aggregate Expansive Capital Expenditures since October 2, 1989 were
approximately $116.0 million. 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.

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.

<PAGE> 64

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 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

<PAGE> 65

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 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.

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 June 30, 1997, exchange Preference B Units for an equal number of
Preference Units. See "--Exchange of Preference Units and Preference B Units".

<PAGE> 66

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.

CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES

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

<PAGE> 67

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 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

<PAGE> 68

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 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.

<PAGE> 69

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 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.

<PAGE> 70

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.

Application has been made for listing the Preference Units on the NYSE.

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 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

<PAGE> 71

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 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.

<PAGE> 72

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
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%

<PAGE> 73

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.

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.

<PAGE> 74

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.

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

<PAGE> 75

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.

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.

<PAGE> 76

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.

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

<PAGE> 77

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 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

<PAGE> 78

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 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

<PAGE> 79

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. 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

<PAGE> 80

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 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.

<PAGE> 81

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
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".

<PAGE> 82

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".

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 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.

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,

<PAGE> 83

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 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

<PAGE> 84

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.

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

<PAGE> 85

(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 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.

<PAGE> 86

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
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.

<PAGE> 87

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 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

<PAGE> 88

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 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

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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 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

<PAGE> 90

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 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.

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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
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.

<PAGE> 92

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".

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

<PAGE> 93

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.

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.

<PAGE> 94

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.

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.

<PAGE> 95

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 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

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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 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

<PAGE> 97

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 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

<PAGE> 98

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 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(3)(1) of the Code, andy 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 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 in the
Partnership, representing all of the outstanding Preference B Units and Common
Units. KPL and KPPLP do not hold 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".

<PAGE> 99

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.

NUMBER OF
UNDERWRITER PREFERENCE UNITS
----------------

Smith Barney Inc ..........................................
PaineWebber Incorporated ..................................
---------
Total .................................................... 3,500,000
=========

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 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 $ per Preference Unit. The
Underwriters may allow, and such dealers may reallow, a concession not in
excess of $ 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 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.

KPL 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.

<PAGE> 100

An application for listing will be filed with the NYSE with respect to
the Preference Units. 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. Investor suitability with
respect to the Preference Units should be judged similarly to the suitability of
other securities that are listed for trading on a national securities exchange.
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.

<PAGE> 101

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 of Kaneb Pipe Line Partners, L.P. for the year
ended December 31, 1994 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 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.

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.

"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.

<PAGE> 102

"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 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.

100

<PAGE> 103

"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.

"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

101

<PAGE> 104

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.

102

<PAGE> 105
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 - 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
Notes to Pro Forma Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-21

KANEB PIPE LINE COMPANY

Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-22
Consolidated Balance Sheet -- December 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-23
Notes to Consolidated Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-24
</TABLE>

F-1
<PAGE> 106

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> 107

KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS - EXCEPT PER UNIT AMOUNTS)

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> 108

KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1993
(IN THOUSANDS)

<TABLE>
<CAPTION>
ASSETS 1994 1993
----------------- ------------------
<S> <C> <C>
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> 109

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> 110

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> 111

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 SPU 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 of 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> 112

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> 113

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> 114

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> 115

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> 116

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 period presented. These pro forma results have been
prepared for comparative purposes only and do not

F-12
<PAGE> 117

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
<PAGE> 118

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> 119

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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 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> 120

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 Wyco pipeline assets . . . . . . . . . . . . . . (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> 121

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. 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 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 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.

Net Income . . . . . . . . . . . . . . . . . 8,458 7,550 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 is payable on August 14,
1995.

F-17
<PAGE> 122

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 of Wyco Pipe Line Company (the "West Pipeline") 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 or 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.

The following unaudited pro forma financial statements for the
Partnership have been derived from the historical financial statements of the
Partnership and the West Pipeline for the year ended December 31, 1994 and the
financial statements for the six-month period ended June 30, 1995. The
following unaudited pro forma financial statements have been compiled as if the
Partnership acquired the pipeline assets of the West Pipeline as of the
beginning of the period for income statement 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, and the historical financial statements and related notes of Wyco
Pipe Line Company 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 on the dates indicated or which will be
obtained in the future.

F-18
<PAGE> 123

KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENTS OF INCOME

SIX MONTHS ENDED JUNE 30, 1995

(IN THOUSANDS - EXCEPT PER UNIT AMOUNTS)
(UNAUDITED)

<TABLE>
<CAPTION>
PARTNERSHIP WEST
HISTORICAL PIPELINE
SIX MONTHS HISTORICAL
ENDED PERIOD ENDED
JUNE 30, FEBRUARY 24, ACQUISITION PRO
1995 1995 ADJUSTMENTS FORMA
---------------- -------------- -------------- ----------------
<S> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . . $ 43,724 $ 1,715 $ - $ 45,439

Costs and expenses:
Operating costs . . . . . . . . . . 18,269 1,158 - 19,427
Depreciation and amortization . . . 4,161 128 (22)(a) 4,267
General and administrative . . . . 2,571 283 - 2,854
---------------- -------------- -------------- ----------------
Total costs and expenses . . . . 25,001 1,569 (22) 26,548
---------------- -------------- -------------- ----------------

Operating income . . . . . . . . . . 18,723 146 22 18,891

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

Interest expense . . . . . . . . . . (3,037) - (350)(c) (3,387)

Minority interest in net income . . . (157) - - (157)

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

Net income . . . . . . . . . . . . . $ 15,757 $ 11,231 $ (11,228) $ 15,760
================ ============== ============ ================

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

See notes to pro forma consolidated financial statements.

F-19
<PAGE> 124

KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 1994
(IN THOUSANDS - EXCEPT PER UNIT AMOUNTS)
(UNAUDITED)

<TABLE>
<CAPTION>
PARTNERSHIP WEST PIPELINE ACQUISITION PRO
HISTORICAL HISTORICAL ADJUSTMENTS FORMA
---------------- -------------- ----------- ----------------
<S> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . . $ 78,745 $ 13,694 $ -- $ 92,439
---------------- -------------- ----------- ----------------

Costs and expenses:
Operating costs . . . . . . . . . . 33,586 7,135 -- 40,721
Depreciation and amortization . . . 7,257 1,042 (338)(a) 7,961
General and administrative . . . . 4,924 781 -- 5,705
---------------- -------------- ----------- ----------------

Total costs and expenses . . . . 45,767 8,958 (338) 54,387
---------------- -------------- ----------- ----------------

Operating income . . . . . . . . . . 32,978 4,736 338 38,052

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

Interest expense . . . . . . . . . . (3,706) -- (2,260)(c) (5,966)

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

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

Net income . . . . . . . . . . . . . $ 29,458 $ 2,886 $ (99) $ 32,245
================ ============== =========== ================

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

See notes to pro forma consolidated financial statements.

F-20
<PAGE> 125

KANEB PIPE LINE PARTNERS, L.P. AND SUBSIDIARIES

NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

(a) 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 taxed as a partnership.

F-21
<PAGE> 126

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-22
<PAGE> 127

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-23
<PAGE> 128

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. ("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 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-24
<PAGE> 129

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-25
<PAGE> 130

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-26
<PAGE> 131

<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 taxes 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.

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-27
<PAGE> 132
================================================================================
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.

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

TABLE OF CONTENTS

PAGE
----
<S> <C>
Available Information.................................................... 4
Incorporation of Certain Documents....................................... 4
Prospectus Summary....................................................... 5
Risk Factors............................................................. 16
Use of Proceeds.......................................................... 24
Capitalization........................................................... 25
Distributions............................................................ 26
Selected Historical and Pro Forma Financial and Operating Data........... 28
Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................ 31
Business and Properties of the Partnership............................... 35
Cash Distributions....................................................... 57
Conflicts of Interest and Fiduciary Responsibilities..................... 64
Description of the Preference Units...................................... 68
Description of the Partnership Agreements................................ 69
Federal Income Tax Considerations........................................ 79
State and Other Taxes.................................................... 90
Investment in the Partnership by Employee Benefit Plans.................. 90
Underwriting............................................................. 92
Experts.................................................................. 93
Glossary................................................................. 93
Index to Financial Statements............................................ F-1
</TABLE>

================================================================================

3,500,000 UNITS

KANEB PIPE LINE PARTNERS, L.P.

REPRESENTING PREFERENCE
LIMITED PARTNER INTERESTS

----------

PROSPECTUS

, 1995

----------

SMITH BARNEY INC.

PAINEWEBBER INCORPORATED

================================================================================
<PAGE> 133

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following sets forth the estimated expenses and costs (other than
underwriting discounts and commissions) expected to be incurred in connection
with the issuance and distribution of the securities registered hereby:

<TABLE>
<S> <C>
Securities and Exchange Commission registration fee . . . . . . . . . $ 29,018
NASD filing fee . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,915
New York Stock Exchange listing fees . . . . . . . . . . . . . . . . 31,300
Printing and engraving costs . . . . . . . . . . . . . . . . . . . . 45,000
Legal fees and expenses . . . . . . . . . . . . . . . . . . . . . . . 175,000
Accounting fees and expenses . . . . . . . . . . . . . . . . . . . . 25,000
Blue Sky fees and expenses . . . . . . . . . . . . . . . . . . . . . 10,000
Registrar and transfer agent fees . . . . . . . . . . . . . . . . . . 10,000
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,767
--------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $340,000
========
</TABLE>

ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS

The section of the Prospectus entitled "Description of the Partnership
Agreements--Indemnification" is incorporated herein by reference.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) Exhibits

*1.1 -- Form of Underwriting Agreement.
*4.1 -- Form of Amended and Restated Agreement of Limited
Partnership of the Partnership.
4.2 -- Certificate of Limited Partnership of the Partnership
(filed as Exhibit 3.2 to the Partnership's Registration
Statement on Form S-1 (Reg. No. 33-30330) and
incorporated by reference herein).
4.3 -- Form of Amended and Restated Agreement of Limited
Partnership of KPOP filed as Exhibit 4.1 to the
Partnership's Registration Statement on Form S-1 (Reg.
No. 33-30370) and incorporated by reference herein).
4.4 -- Certificate of Limited Partnership of KPOP filed as
Exhibit 4.2 to the Partnership's Registration Statement
on Form S-1 (Reg. No. 33-30370) and incorporated by
reference herein).
**5.1 -- Opinion of Fulbright & Jaworski L.L.P.
**8.1 -- Opinion of Fulbright & Jaworski L.L.P. relating to tax
matters.

***23.1 -- Consent of Independent Accountants.

***23.2 -- Consent of Independent Accountants.

**23.3 -- Consent of Counsel (the consent of Fulbright & Jaworski
L.L.P. to the use of their opinion as an exhibit to the
Registration Statement and the reference to their firm
in this Registration Statement is contained in their
opinion filed as Exhibit 8.1 hereto).

II-1
<PAGE> 134

*24.1 -- Powers of Attorney (included on page II-4 of this
Registration Statement as originally filed).

----------

* Previously filed.

** To be filed by amendment.

*** Filed herewith.

(b)Financial Statement Schedules

Not applicable.

ITEM 17. UNDERTAKINGS

(a) The undersigned registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed
to be part of this registration statement as of the time it was declared
effective.

(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.

(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Exchange Act that is incorporated by reference in the registration statement
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall deemed
to be the initial bona fide offering thereof.

(c) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the SEC such indemnification
is against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against policy
as expressed in the Securities Act and will be governed by the final
adjudication of such issue.

II-2

<PAGE> 135

SIGNATURE

Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this amendment to
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Richardson, State of Texas, on the 4th day of
August, 1995.

KANEB PIPE LINE PARTNERS, L.P., by Kaneb Pipe
Line Company, as General Partner

By: EDWARD D. DOHERTY
------------------------------------------
Edward D. Doherty, Chairman

Pursuant to the requirements of the Securities Act of 1933, this
amendment to Registration Statement has been signed by the following persons, in
the capacities and on the date indicated.

<TABLE>
<CAPTION>
POSITION WITH THE
SIGNATURE GENERAL PARTNER DATE
--------- ----------------- ----
<S> <C> <C>
Chairman of the Board and
EDWARD D. DOHERTY Director
-------------------------------------- (Principal Executive
Edward D. Doherty Officer) August 4, 1995

JIMMY L. HARRISON* Controller
-------------------------------------- (Principal Financial and
Jimmy L. Harrison Accounting Officer) August 4, 1995

SANGWOO AHN*
--------------------------------------
Sangwoo Ahn Director August 4, 1995

JOHN R. BARNES*
--------------------------------------
John R. Barnes Director August 4, 1995

C. E. BENTLEY*
--------------------------------------
C. E. Bentley Director August 4, 1995

MURRAY R. BILES*
--------------------------------------
Murray R. Biles Director August 4, 1995
</TABLE>

II-3
<PAGE> 136

POSITION WITH THE
SIGNATURE GENERAL PARTNER DATE
--------- ----------------- ----
<S> <C> <C>
PRESTON A. PEAK*
-----------------------------------------
Preston A. Peak Director August 4, 1995

RALPH A. REHM*
-----------------------------------------
Ralph A. Rehm Director August 4, 1995

JAMES R. WHATLEY*
-----------------------------------------
James R. Whatley Director August 4, 1995
</TABLE>

*By EDWARD D. DOHERTY
-----------------------------------------
Edward D. Doherty, as Attorney-In-Fact
for each of the persons indicated

II-4

<PAGE> 1
EXHIBIT 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in the Prospectus
constituting part of this Registration Statement on Form S-3 of Kaneb Pipe Line
Partners, L.P. of our report dated January 27, 1995, except as to Note 8, which
is as of February 17, 1995, relating to the financial statements of Wyco Pipe
Line Company, which appears in the Current Report on Form 8-K of Kaneb Pipe Line
Partners, L.P. dated March 13, 1995.

PRICE WATERHOUSE LLP
Chicago, Illinois

August 4, 1995

<PAGE> 1
EXHIBIT 23.2

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Amendment No. 1 to Form S-3 of our report dated March
16, 1995 relating to the financial statements of Kaneb Pipe Line Partners, L.P.
which appear in this Prospectus and incorporation by reference in the Prospectus
constituting part of this Registration Statement on Amendment No. 1 to Form S-3
of our report dated March 16, 1995, appearing on page F-1 of Kaneb Pipe Line
Partners, L.P.'s Annual Report on Form 10-K for the year ended December 31,
1994. We also consent to the use in the Prospectus constituting part of this
Registration Statement on Amendment No. 1 to Form S-3 of Kaneb Pipe Line
Partners, L.P. of our report dated March 22, 1995, relating to the consolidated
balance sheet of Kaneb Pipe Line Company, which appears in such Prospectus. We
also consent to the references to us under the heading "Experts" in such
Prospectus.

PRICE WATERHOUSE LLP
Dallas, Texas

August 4, 1995