SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                                    FORM 10-K
(Mark One)

[X]  ANNUAL  REPORT  PURSUANT  TO  SECTION  13 OR  15(d) OF THE  SECURITIES  AND
     EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

                   For the fiscal year ended December 31, 2001

                                       OR

[ ]  TRANSITION  REPORT   PURSUANT  TO  SECTION  13  OR 15(d) OF THE  SECURITIES
     EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

                         Commission file number 11-22667

                   KANEB PIPE LINE OPERATING PARTNERSHIP, L.P.

             (Exact name of Registrant as specified in its Charter)

Delaware                                                         75-2287683
---------------------------------                            -------------------
(State or other jurisdiction                                   (IRS Employer
of incorporation or organization)                            Identification No.)

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

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


                               Title of each class
                  --------------------------------------------
                      7.75% Senior Unsecured Notes due 2012


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

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

     Indicate  by check mark  whether the  Registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
Registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes X No

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


<PAGE>
                                     PART I


Item 1.    Business


GENERAL
-------

     Kaneb Pipe Line Operating Partnership, L.P., a Delaware limited partnership
(the  "Partnership"),  owns and operates a refined  petroleum  products pipeline
business and a petroleum  products and specialty liquids storage and terminaling
business.  Kaneb Pipe Line Partners,  L.P. ("KPP") (NYSE: KPP), a master limited
partnership,  holds 99% interest as a limited partner in the Partnership.  Kaneb
Pipe  Line  Company  LLC,  a  Delaware  limited  liability  company  ("KPL"),  a
wholly-owned  subsidiary  of Kaneb  Services LLC, a Delaware  limited  liability
company ("KSL") (NYSE:  KSL),  holds the 1% general partner interest in both the
Partnership  and KPP. At December 31, 2001,  KPL,  together with its affiliates,
owned an  approximate  25%  interest  as a limited  partner  and a  combined  2%
interest  as  a  general  partner  in  KPP.  The  terminaling  business  of  the
Partnership is conducted through Support Terminals Operating  Partnership,  L.P.
("STOP"), and its affiliated partnerships and corporate entities,  which operate
under the trade names "ST Services" and "StanTrans," among others.


PRODUCTS PIPELINE BUSINESS
--------------------------

Introduction

     The   Partnership's   pipeline   business   consists   primarily   of   the
transportation  of refined  petroleum  products  as a common  carrier in Kansas,
Nebraska,   Iowa,  South  Dakota,  North  Dakota,   Colorado  and  Wyoming.  The
Partnership  owns and operates two common carrier  pipelines  (the  "Pipelines")
described below.

East Pipeline

     Construction  of the East Pipeline  commenced in the 1950s with a line from
southern  Kansas to Geneva,  Nebraska.  During the 1960s,  the East Pipeline was
extended  north to its  present  terminus at  Jamestown,  North  Dakota.  In the
1980's, the 8" line from Geneva,  Nebraska to North Platte, Nebraska and the 16"
line from McPherson,  Kansas to Geneva,  Nebraska were built and the Partnership
acquired a 6" pipeline from Champlin Oil Company,  a portion of which originally
ran  south  from  Geneva,   Nebraska  through  Windom,   Kansas  terminating  in
Hutchinson,  Kansas. In 1997, the Partnership completed construction of a new 6"
pipeline from Conway,  Kansas to Windom, Kansas (approximately 22 miles north of
Hutchinson)  that allows the  Hutchinson  terminal to be supplied  directly from
McPherson;  a significantly  shorter route than was previously used. As a result
of this pipeline becoming operational, a 158 mile segment of the former Champlin
line was shut down,  including a terminal  located at  Superior,  Nebraska.  The
other end of the line runs northeast  approximately 175 miles, crossing the main
pipeline  near  Osceola,  Nebraska,  continuing  through a terminal at Columbus,
Nebraska, and later interconnecting with the Partnership's  Yankton/Milford line
to terminate at Rock Rapids,  Iowa. In December 1998, the  Partnership  acquired
from Amoco Oil Company a 175 mile pipeline that runs from Council  Bluffs,  Iowa
to Sioux Falls,  South  Dakota and the terminal at Sioux Falls.  On December 31,
1998 the  Partnership,  pursuant  to its  option,  purchased  the 203 mile North
Platte line for approximately $5 million at the end of a lease. In January 1999,
a connection was completed to service the Sioux Falls terminal  through the main
East Pipeline.

     The East Pipeline  system also consists of 17 product  terminals in Kansas,
Nebraska,  Iowa,  South Dakota and North Dakota with total  storage  capacity of
approximately  3.5 million barrels and an additional 22 product tanks with total
storage   capacity  of  approximately   1,006,000   barrels  at  its  tank  farm
installations at McPherson and El Dorado, Kansas. The system also has six origin
pump  stations in Kansas and 38 booster  pump  stations  throughout  the system.
Additionally,  the system maintains various office and warehouse facilities, and
an extensive quality control  laboratory.  The Partnership owns the entire 2,090
mile East  Pipeline.  The  Partnership  leases  office  space for its  operating
headquarters in Wichita, Kansas.

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

West Pipeline

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

     The West  Pipeline  originates  at Casper,  Wyoming and travels east to the
Strouds Station,  where it serves as a connecting  point with Sinclair's  Little
America Refinery and the Seminoe Pipeline that transports product from Billings,
Montana area  refineries.  From Strouds,  the West Pipeline  continues  easterly
through its 8" line to Douglas,  Wyoming,  where a 6" pipeline  branches  off to
serve the  Partnership's  Rapid City,  South Dakota terminal  approximately  190
miles away. The Rapid City terminal has a three bay,  bottom-loading  truck rack
and storage tank  capacity of 256,000  barrels.  The 6" pipeline  also  receives
product  from  Wyoming  Refining's  pipeline at a  connection  located  near the
Wyoming/South Dakota border,  approximately 30 miles south of Wyoming Refining's
Newcastle,  Wyoming  Refinery.  From  Douglas,  the  Partnership's  8"  pipeline
continues southward through a delivery point at the Burlington Northern junction
to the  terminal at  Cheyenne,  Wyoming.  The  Cheyenne  terminal has a two bay,
bottom-loading  truck rack,  storage tank capacity of 345,000 barrels and serves
as a receiving  point for  products  from the  Frontier  Oil & Refining  Company
refinery at Cheyenne,  as well as a product delivery point to Conoco's  Cheyenne
Pipeline.  From the  Cheyenne  terminal,  the 8"  pipeline  extends  south  into
Colorado to the Dupont  Terminal  located in the Denver  metropolitan  area. The
Dupont Terminal is the largest terminal on the West Pipeline system,  with a six
bay,  bottom-loading  truck rack and tankage capacity of 692,000 barrels. The 8"
pipeline  continues to the Commerce  City  Station,  where the West Pipeline can
receive from and transfer  product to the Ultramar  Diamond  Shamrock and Conoco
refineries and the Phillips  Petroleum  Terminal.  From Commerce City, a 6" line
continues south 90 miles where the system  terminates at the Fountain,  Colorado
Terminal  serving the Colorado  Springs area.  The Fountain  Terminal has a five
bay, bottom-loading truck rack and storage tank capacity of 366,000 barrels.

     The West Pipeline system parallels the  Partnership's  East Pipeline to the
west.  The East  Pipeline's  North Platte line  terminates in western  Nebraska,
approximately 200 miles east of the West Pipeline's Cheyenne,  Wyoming Terminal.
Conoco's  Cheyenne Pipeline runs from west to east from the Cheyenne Terminal to
near the East Pipeline's North Platte  Terminal,  although a portion of the line
from Sidney,  Nebraska  (approximately  100 miles from Cheyenne) to North Platte
has been deactivated. The West Pipeline serves Denver and other eastern Colorado
markets and supplies jet fuel to Ellsworth  Air Force Base at Rapid City,  South
Dakota, as compared to the East Pipeline's  largely  agricultural  service area.
The West  Pipeline has a relatively  small  number of  shippers,  who,  with few
exceptions, are also shippers on the Partnership's East Pipeline system.

Other Systems

     The  Partnership  also  owns  three  single-use  pipelines,   located  near
Umatilla, Oregon; Rawlins, Wyoming and Pasco, Washington, each of which supplies
diesel fuel to a railroad fueling facility.  The Oregon and Washington lines are
fully  automated,  however  the  Wyoming  line  utilizes a  coordinated  startup
procedure between the refinery and the railroad. For the year ended December 31,
2001, these three systems combined transported a total of 3.2 million barrels of
diesel fuel, representing an aggregate of $1.3 million in revenues.

Pipelines Products and Activities

     The  Pipelines'  revenues are based upon  volumes and  distances of product
shipped.  The  following  table  reflects  the total  volume and barrel miles of
refined  petroleum  products shipped and total operating  revenues earned by the
Pipelines for each of the periods indicated:

<TABLE>
<CAPTION>

                                                              Year Ended December 31,
                               ------------------------------------------------------------------------------------
                                    2001             2000              1999             1998              1997
                               -------------     -------------    --------------    -------------    --------------
<S>                            <C>               <C>              <C>               <C>              <C>
Volume (1)..................          92,116            89,192            85,356           77,965            69,984
Barrel miles (2)............          18,567            17,843            18,440           17,007            16,144
Revenues (3)................         $74,976           $70,685           $67,607          $63,421           $61,320

</TABLE>
(1)  Volumes are expressed in thousands of barrels of refined petroleum product.
(2)  Barrel  miles are shown in  millions.  A barrel mile is the movement of one
     barrel of refined petroleum product one mile.
(3)  Revenues are expressed in thousands of dollars.

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

<TABLE>
<CAPTION>
                                                              Year Ended December 31,
                                                              (thousands of barrels)
                               ------------------------------------------------------------------------------------
                                    2001             2000              1999             1998              1997
                               -------------     -------------    --------------    -------------    --------------
<S>                            <C>               <C>              <C>               <C>              <C>
Gasoline....................          46,268            44,215            41,472           37,983            32,237
Diesel and fuel oil.........          42,354            41,087            40,435           36,237            33,541
Propane.....................           3,494             3,890             3,449            3,745             4,206
                               -------------     -------------    --------------    -------------    --------------
Total.......................          92,116            89,192            85,356           77,965            69,984
                               =============     =============    ==============    =============    ==============
</TABLE>

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

Maintenance and Monitoring

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

     The  Partnership  uses a  state-of-the-art  Supervisory  Control  and  Data
Acquisition remote supervisory control software program to continuously  monitor
and control the  Pipelines  from the Wichita,  Kansas  headquarters.  The system
monitors  quantities  of refined  petroleum  products  injected in and delivered
through  the  Pipelines  and  automatically  signals  the  Wichita  headquarters
personnel upon deviations from normal operations that requires attention.

Pipeline Operations

     Both the East Pipeline and the West Pipeline are  interstate  pipelines and
thus subject to Federal regulation by such governmental  agencies as the Federal
Energy Regulatory Commission ("FERC"), the Department of Transportation, and the
Environmental Protection Agency.  Additionally,  the West Pipeline is subject to
state  regulation  of certain  intrastate  rates in Colorado and Wyoming and the
East Pipeline is subject to state regulation in Kansas. See "Regulation."

     Except for the three single-use  pipelines and certain ethanol  facilities,
all  of  the  Partnership's   pipeline  operations   constitute  common  carrier
operations  and are  subject  to Federal  tariff  regulation.  In May 1998,  the
Partnership  was  authorized  by  the  FERC  to  adopt   market-based  rates  in
approximately  one-half of its markets.  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  is
available at published tariffs filed, in the case of interstate shipments,  with
the  FERC,  or in the case of  intrastate  shipments  in  Kansas,  Colorado  and
Wyoming, with the relevant state authority,  to any shipper of refined petroleum
products  who  requests  such  services  and   satisfies  the   conditions   and
specifications for transportation.

     In  general,  a shipper on one of the  Pipelines  delivers  products to the
pipeline from refineries or third party pipelines that connect to the Pipelines.
The Pipelines'  operations also include 21 truck loading terminals through which
refined  petroleum  products are delivered to storage tanks and then loaded into
petroleum  transport trucks.  Five of the 20 terminals also receive propane into
storage tanks and then load it into transport trucks. Tariffs for transportation
are charged to shippers based upon  transportation from the origination point on
the  pipeline to the point of delivery.  Such  tariffs also include  charges for
terminaling  and storage of product at the Pipeline's  terminals.  Pipelines are
generally  the  lowest  cost  method for  intermediate  and  long-haul  overland
transportation of refined petroleum products.

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

     The following  table shows the number of tanks owned by the  Partnership at
each terminal location at December 31, 2001, the storage capacity in barrels and
truck capacity of each terminal location.
<TABLE>
<CAPTION>

                Location of                     Number                Tankage          Truck
                  Terminals                    of Tanks               Capacity       Capacity(a)
              --------------------             --------               --------       -----------
<S>           <C>                              <C>                    <C>            <C>
              Colorado:
                    Dupont                         18                  692,000              6
                    Fountain                       13                  366,000              5
              Iowa:
                    LeMars                          9                  103,000              2
                    Milford(b)                     11                  172,000              2
                    Rock Rapids                    12                  366,000              2
              Kansas:
                    Concordia(c)                    7                   79,000              2
                    Hutchinson                      9                  162,000              2
                    Salina                         10                   98,000              3
              Nebraska:
                    Columbus(d)                    12                  191,000              2
                    Geneva                         39                  678,000              8
                    Norfolk                        16                  187,000              4
                    North Platte                   22                  198,000              5
                    Osceola                         8                   79,000              2
              North Dakota:
                    Jamestown                      13                  188,000              2
              South Dakota:
                    Aberdeen                       12                  181,000              2
                    Mitchell                        8                   72,000              2
                    Rapid City                     13                  256,000              3
                    Sioux Falls                     9                  394,000              2
                    Wolsey                         21                  149,000              4
                    Yankton                        25                  246,000              4
              Wyoming:
                    Cheyenne                       15                  345,000              2
                                               ------              -----------
              Totals                              302                5,202,000
                                               ======              ===========
</TABLE>

(a)  Number of trucks that may be simultaneously loaded.
(b)  This  terminal  is situated  on land  leased  through  August 7, 2007 at an
     annual rental of $2,400.  The  Partnership has the right to renew the lease
     upon its expiration  for an additional  term of 20 years at the same annual
     rental rate.
(c)  This terminal is situated on land leased  through the year 2060 for a total
     rental of $2,000.
(d)  Also loads rail tank cars.


     The East Pipeline also has intermediate storage facilities consisting of 12
storage tanks at El Dorado,  Kansas and 10 storage  tanks at McPherson,  Kansas,
with  aggregate  capacities  of  approximately   472,000  and  534,000  barrels,
respectively.  During 2001,  approximately  53.3% and 92.2% of the deliveries of
the East Pipeline and the West Pipeline,  respectively,  were made through their
terminals,  and the  remainder of the  respective  deliveries of such lines were
made to other pipelines and customer owned storage tanks.

     Storage of product at  terminals  pending  delivery  is  considered  by 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.

Demand for and Sources of Refined Petroleum Products

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

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

     The Pipelines  are also  dependent  upon  adequate  levels of production of
refined petroleum products by refineries connected to the Pipelines, directly or
through  connecting  pipelines.  The  refineries  are, in turn,  dependent  upon
adequate  supplies of suitable  grades of crude oil.  The  refineries  connected
directly to the East Pipeline  obtain crude oil from  producing  fields  located
primarily in Kansas,  Oklahoma  and Texas,  and, to a much lesser  extent,  from
other domestic or foreign sources. In addition,  refineries in Kansas,  Oklahoma
and Texas are also connected to the East Pipeline through other pipelines. These
refineries  obtain  their  supplies of crude oil from a variety of sources.  The
refineries  connected  directly to the West  Pipeline  are located in Casper and
Cheyenne,  Wyoming  and Denver,  Colorado.  Refineries  in Billings  and Laurel,
Montana are  connected  to the West  Pipeline  through  other  pipelines.  These
refineries  obtain their  supplies of crude oil  primarily  from Rocky  Mountain
sources.  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.

     The majority of the refined petroleum product  transported through the East
Pipeline in 2001 was produced at three  refineries  located at McPherson  and El
Dorado,  Kansas and Ponca City,  Oklahoma,  and operated by National Cooperative
Refining Association ("NCRA"),  Frontier Refining and Conoco, Inc. respectively.
The NCRA and Frontier  Refining  refineries  are connected  directly to the East
Pipeline.  The  McPherson,  Kansas  refinery  operated  by  NCRA  accounted  for
approximately  30.6%  of the  total  amount  of  product  shipped  over the East
Pipeline  in 2001.  The East  Pipeline  also has  direct  access by third  party
pipelines  to four other  refineries  in Kansas,  Oklahoma and Texas and to Gulf
Coast supplies of products  through  connecting  pipelines that receive products
from pipelines  originating  on the Gulf Coast.  Five  connecting  pipelines can
deliver propane from gas processing  plants in Texas,  New Mexico,  Oklahoma and
Kansas to the East Pipeline for shipment.

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

Principal Customers

     The  Partnership  had a total of  approximately  46 shippers  in 2001.  The
principal  shippers  include  four  integrated  oil  companies,  three  refining
companies, two large farm cooperatives and one railroad. Transportation revenues
attributable  to the top 10 shippers of the Pipelines were $51.5 million,  $48.7
million  and  $42.7  million,  which  accounted  for  69%,  69% and 63% of total
revenues shipped for each of the years 2001, 2000 and 1999, respectively.

Competition and Business Considerations

     The East Pipeline's  major  competitor is an independent,  regulated common
carrier pipeline system owned by The Williams Companies,  Inc. ("Williams") that
operates  approximately 100 miles east of and parallel to the East Pipeline. The
Williams system is a substantially more extensive system than the East Pipeline.
Furthermore,  Williams and its affiliates  have capital and financial  resources
that are 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.
Sixteen of the East Pipeline's 17 delivery terminals are located within 2 to 145
miles of, and in direct competition with Williams' terminals.

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

     Because pipelines are generally the lowest cost method for intermediate and
long-haul   movement  of  refined  petroleum   products,   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 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 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.  However,  trucking costs render that mode of
transportation  not  competitive  for  longer  hauls  or  larger  volumes.   The
Partnership does not believe that trucks are, or will be, effective  competition
to its long-haul volumes over the long term.


LIQUIDS TERMINALING BUSINESS
----------------------------

Introduction

     The  Partnership's  Support Terminal  Services  operation ("ST Services" or
"ST") is one of the largest independent petroleum products and specialty liquids
terminaling  companies  in the United  States.  For the year ended  December 31,
2001, the Partnership's  terminaling business accounted for approximately 64% of
the Partnership's  revenues.  As of December 31, 2001, ST operated 41 facilities
in 20 states and the  District of  Columbia,  with a total  storage  capacity of
approximately  33.5 million barrels.  ST owns and operates six terminals located
in the United  Kingdom,  having a total  capacity of  approximately  5.5 million
barrels. ST Services and its predecessors have a long history in the terminaling
business  and handle a wide  variety  of  liquids  from  petroleum  products  to
specialty chemicals to edible liquids.

     On January 3, 2001,  the  Partnership  completed the  acquisition  of Shore
Terminals LLC. Shore Terminals owns seven terminals,  four in California  (three
in the San  Francisco  Bay area and one in Los  Angeles) and one each in Tacoma,
Washington,  Portland, Oregon and Reno, Nevada, with a total storage capacity of
7.8 million barrels.  All of the terminals  handle petroleum  products and, with
the exception of the Nevada terminal, have deep water access. The purchase price
was   approximately   $107,000,000  in  cash  and  1,975,090  units  of  limited
partnership in the Partnership (valued at $56.5 million on the date of agreement
and its announcement).  The acquisition,  which became a part of the ST Services
terminaling  operations,  significantly  increased ST Services'  presence on the
West Coast.

     ST's terminal  facilities  provide  storage and handling  services on a fee
basis for petroleum products,  specialty  chemicals and other liquids.  ST's six
largest  domestic  terminal  facilities  are located in Piney  Point,  Maryland;
Linden, New Jersey (50% owned joint venture);  Crockett,  California;  Martinez,
California;  Jacksonville,  Florida  and Texas  City,  Texas.  These  facilities
accounted  for  approximately  44.5% of ST's  revenues  and 49.2% of its tankage
capacity in 2001.

Description of Largest Domestic Terminal Facilities

Piney Point, Maryland

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

Linden, New Jersey

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

Crockett, California

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

Martinez, California

     The Martinez Terminal, also acquired in January 2001 as a part of the Shore
acquisition,  is located  in the  refinery  area of San  Francisco  Bay.  It has
approximately  2.8  million  barrels of tankage and  handles  refined  petroleum
products as well as crude oil.  The  terminal is  connected to a pipeline and to
area refineries by pipelines and can also receive and deliver products by vessel
or barge. It also has a truck rack for product delivery.

Jacksonville, Florida

     The Jacksonville terminal, also acquired as part of the Steuart transaction
in 1995,  is  located  on  approximately  86 acres on the St.  John's  River and
consists of a main  terminal and two annexes with combined  storage  capacity of
approximately 2.1 million barrels in 30 tanks. The terminal is currently used to
store  petroleum  products  including  gasoline,  No. 2 oil, No. 6 oil,  diesel,
kerosene and  asphalt.  This  terminal has a tanker berth with a 38-foot  draft,
four barge  berths and also  offers  truck and rail car loading  facilities  and
facilities to blend residual fuels for ship bunkering.

Texas City, Texas

     The Texas City  facility  is  situated  on 39 acres of land leased from the
Texas City Terminal  Railway Company  ("TCTRC") with long-term  renewal options.
Located  on  Galveston   Bay  near  the  mouth  of  the  Houston  Ship  Channel,
approximately sixteen miles from open water, the Texas City terminal consists of
124 tanks with a total capacity of approximately 2 million barrels.  The eastern
end of the Texas City site is adjacent to three deep-water  docking  facilities,
which are also owned by TCTRC.  The three  deep-water  docks include two 36-foot
draft docks and a 40-foot draft dock. The docking facilities can accommodate any
ship or barge  capable of  navigating  the  40-foot  draft of the  Houston  Ship
Channel.  ST is charged  dockage and wharfage  fees on a per vessel and per unit
basis, respectively, by TCTRC, which it passes on to its customers.

     The Texas City facility is designed to  accommodate a diverse  product mix,
including specialty chemicals, such as petrochemicals and has tanks equipped for
the specific storage needs of the various products  handled;  piping and pumping
equipment for moving the product between the tanks and the transportation modes;
and, an extensive  infrastructure of support equipment. ST receives and 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 and has direct  pipeline  connections  to  refineries in Texas
City.

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

Other Terminal Sites

     In  addition to the six major  facilities  described  above,  ST now has 35
other  terminal   facilities  located  throughout  the  United  States  and  six
facilities  in  the  United   Kingdom.   These  other   facilities   represented
approximately  50.8% of ST's total tankage capacity and  approximately  55.5% of
its total revenue for 2001.  With the  exception of the  facilities in Columbus,
Georgia,  which  handles  aviation  gasoline and  specialty  chemicals;  Winona,
Minnesota, which handles nitrogen fertilizer solutions; Savannah, Georgia, which
handles  chemicals  and  caustic  solutions,  as  well  as  petroleum  products;
Vancouver,  Washington,  which handles  chemicals and bulk fertilizer;  Eastham,
United  Kingdom which handles  chemicals  and animal fats;  and Runcorn,  United
Kingdom,   which  handles  molten  sulphur,  these  facilities  primarily  store
petroleum products for a variety of customers. Overall, these facilities provide
ST  locations  which are  diverse  geographically,  in  products  handled and in
customers served.

     The following table outlines ST's terminal locations, capacities, tanks and
primary products handled:

<TABLE>
<CAPTION>
                                     Tankage         No. of                 Primary Products
           Facility                  Capacity         Tanks                     Handled
 -------------------------------   -------------   -----------       ------------------------------------
<S>                                <C>             <C>               <C>
 Major U. S. Terminals:
 Piney Point, MD                    5,403,000            28          Petroleum
 Linden, NJ(a)                      3,884,000            22          Petroleum
 Crockett, CA                       3,048,000            24          Petroleum
 Martinez, CA                       2,800,000            16          Petroleum
 Jacksonville, FL                   2,066,000            30          Petroleum
 Texas City, TX                     2,002,000           124          Chemicals and Petrochemicals

 Other U. S. Terminals:
 Montgomery, AL(b)                    162,000             7          Petroleum, Jet Fuel
 Moundville, AL(b)                    310,000             6          Jet Fuel
 Tuscon, AZ(a)                        181,000             7          Petroleum
 Los Angeles, CA                      597,000            20          Petroleum
 Richmond, CA                         617,000            25          Petroleum
 Stockton, CA                         706,000            32          Petroleum
 M Street, DC                         133,000             3          Petroleum
 Homestead, FL(b)                      72,000             2          Jet Fuel
 Augusta, GA                          110,000             8          Petroleum
 Bremen, GA                           180,000             8          Petroleum, Jet Fuel
 Brunswick, GA                        302,000             3          Petroleum, Pulp Liquor
 Columbus, GA                         180,000            25          Petroleum, Chemicals
 Macon, GA(b)                         307,000            10          Petroleum, Jet Fuel
 Savannah, GA                         861,000            19          Petroleum, Chemicals
 Blue Island, IL                      752,000            19          Petroleum
 Chillicothe, IL(a)                   270,000             6          Petroleum
 Peru, IL                             221,000             8          Petroleum, Fertilizer
 Indianapolis, IN                     410,000            18          Petroleum
 Westwego, LA                         849,000            53          Molasses, Fertilizer, Caustic
 Andrews AFB Pipeline, MD(b)           72,000             3          Jet Fuel
 Baltimore, MD                        832,000            50          Chemicals, Asphalt, Jet Fuel
 Salisbury, MD                        177,000            14          Petroleum
 Winona, MN                           229,000             7          Fertilizer
 Reno, NV                             107,000             7          Petroleum
 Paulsboro, NJ                      1,580,000            18          Petroleum
 Alamogordo, NM(b)                    120,000             5          Jet Fuel
 Drumright, OK                        315,000             4          Petroleum, Jet Fuel
 Portland, OR                       1,119,000            31          Petroleum
 Philadelphia, PA                     894,000            11          Petroleum
 San Antonio, TX                      207,000             4          Jet Fuel
 Dumfries, VA                         554,000            16          Petroleum, Asphalt
 Virginia Beach, VA(b)                 40,000             2          Jet Fuel
 Tacoma, WA                           377,000            15          Petroleum
 Vancouver, WA                        166,000            42          Chemicals, Fertilizer
 Milwaukee, WI                        308,000             7          Petroleum

 Foreign Terminals:
 Grays, England                     1,945,000            53          Petroleum
 Eastham, England                   2,185,000           162          Chemicals, Petroleum, Animal Fats
 Runcorn, England                     146,000             4          Molten sulphur
 Glasgow, Scotland                    344,000            16          Petroleum
 Leith, Scotland                      459,000            34          Petroleum, Chemicals
 Belfast, Northern Ireland            407,000            41          Petroleum
                                  ---------------  --------------
                                   39,006,000         1,069
                                  ===============  ==============

</TABLE>

 (a)  The terminal is 50% owned by ST.
 (b)  Facility  also  includes  pipelines  to  U.S.  government   military  base
      locations.


Customers

     The storage and transport of jet fuel for the U.S. Department of Defense is
an important part of ST's  business.  Eleven of ST's terminal sites are involved
in the terminaling or transport (via pipeline) of jet fuel for the Department of
Defense and six of the eleven  locations  have been utilized  solely by the U.S.
Government.  One of these locations is presently without government business. Of
the eleven locations,  five include pipelines which deliver jet fuel directly to
nearby military bases,  while another location  supplies Andrews Air Force Base,
Maryland and consists of a barge receiving dock, and an 11.3 mile pipeline, with
three 24,000 barrel double-bottomed tanks and an administration building located
on the base.

Competition and Business Considerations

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

     Independent  terminal owners generally compete on the basis of the location
and versatility of terminals,  service and price. A favorably  located  terminal
will have access to various cost effective transportation modes both to and from
the  terminal.  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";  though some inland facilities are served by
barges on navigable rivers.

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

     Several companies offering liquid terminaling facilities have significantly
more capacity than ST. However, much 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 have  facilities  used primarily for
petroleum related products.  As a result, many of ST's terminals compete against
other  large  petroleum  products  terminals,   rather  than  specialty  liquids
facilities.  Such specialty or "niche"  tankage is less abundant in the U.S. and
"specialty" liquids typically command higher terminal fees than lower-price bulk
terminaling for petroleum products.


RECENT DEVELOPMENTS
-------------------

     On  February  28,  2002,  the  Partnership  acquired  all  of  the  liquids
terminaling   subsidiaries   of  Statia   Terminals   Group  NV  ("Statia")  for
approximately  $194  million in cash.  The  acquired  Statia  subsidiaries  have
approximately $107 million in outstanding debt, including $101 million of 11.75%
notes due in November 2003. The cash portion of the purchase price was funded by
the Partnership's  $275 million revolving credit agreement and proceeds from the
Partnership's  February  2002  public  debt  offering.  On  March 1,  2002,  the
Partnership  announced  that it had  commenced  the  procedure  to redeem all of
Statia's  11.75%  notes  at  102.938%  of the  principal  amount,  plus  accrued
interest.  The  redemption  is expected to be funded by the  Partnership's  $275
million revolving credit facility.

     Statia's terminaling  operations  encompass two world-class,  strategically
located facilities.  The storage and transshipment facility on the island of St.
Eustatius,  which is located east of Puerto Rico,  has tankage  capacity of 11.3
million barrels.  The facility located at Point Tupper, Nova Scotia,  Canada has
tankage capacity of 7.4 million barrels.  Both facilities  produce a broad range
of products and services, including storage and throughput,  marine services and
product sales of bunker fuels and bulk oil products.


CAPITAL EXPENDITURES
--------------------

     Capital expenditures by the Pipelines,  excluding  acquisitions,  were $4.3
million,  $3.4 million and $3.6 million for 2001,  2000 and 1999,  respectively.
During these periods,  adequate capacity existed on the Pipelines to accommodate
volume  growth,  and the  expenditures  required  for  environmental  and safety
improvements  were not  material  in  amount.  Capital  expenditures,  excluding
acquisitions, by ST were $12.9 million, $6.1 million and $11.0 million for 2001,
2000 and 1999, respectively.

     Capital  expenditures  of the  Pipelines  during  2002 are  expected  to be
approximately  $15  million  to  $20  million,  excluding  capital  expenditures
relating to Statia.  See  "Management's  Discussion  and  Analysis of  Financial
Condition  and  Results  of  Operations  -  Liquidity  and  Capital  Resources."
Additional   expansion-related   capital  expenditures  will  depend  on  future
opportunities  to expand the  Partnership's  operations.  KPL intends to finance
future expansion capital expenditures primarily through Partnership  borrowings.
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, 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 have the ability to finance
such expenditures through borrowings or choose to do so.


REGULATION
----------

Interstate Regulation

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

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

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

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

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

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

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

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.  The  Partnership  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.


ENVIRONMENTAL MATTERS
---------------------

General

     The operations of the Partnership  are subject to Federal,  state and local
laws and regulations relating to the protection of the environment in the United
States and, since February 1999, the  environmental  laws and regulations of the
United Kingdom in regard to the terminals acquired from GATX Terminals, Limited,
in the United Kingdom. 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, past and present, could result
in substantial costs and liabilities to the Partnership.

     See "Item 3 - Legal  Proceedings"  for information  concerning two lawsuits
against  certain   subsidiaries  of  the   Partnership   involving   claims  for
environmental damages.

Water

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

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

     Groundwater  remediation  efforts  are  ongoing  at all  four  of the  West
Pipeline's  terminals and at a Wyoming pump station.  Regulatory  officials have
been consulted in the  development of remediation  plans. In connection with the
purchase of the West Pipeline,  the Partnership agreed to implement  remediation
plans at these  specific  sites over the  succeeding  five years  following  the
acquisition in return for the payment by the seller,  Wyco Pipe Line Company, of
$1,312,000 to the Partnership to cover the discounted  estimated future costs of
these  remediations.  The  Partnership has accrued $2.1 million for these future
remediation expenses.

     In May 1998, the West  Pipeline,  at a point between  Dupont,  Colorado and
Fountain,  Colorado  ruptured,  and  approximately  1,000 barrels of product was
released.  Containment  and  remedial  action was  immediately  commenced.  Upon
investigation,  it appeared  that the failure of the  pipeline was due to damage
caused by third party  excavations.  The Partnership has made claim to the third
party as well as to its insurance  carriers.  The Partnership has entered into a
Compliance  Order on  Consent  with the State of  Colorado  with  respect to the
remediation.  As of December 31, 2001, the Partnership has incurred $1.2 million
of costs in connection  with this incident.  Future costs are not anticipated to
be significant.  The Partnership  has recovered  substantially  all of its costs
from its insurance carrier.

     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.

Aboveground Storage Tank Acts

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

Air Emissions

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

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

     Although the  Partnership is in substantial  compliance with applicable air
pollution laws, in anticipation  of the  implementation  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  selected  terminal  sites  along  the East
Pipeline  that do not  already  have such  emissions  control  equipment.  These
modifications  will  substantially  reduce the total air emissions  from each of
these  facilities.  Having begun in 1993, this project is being phased in over a
period of years.

Solid Waste

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

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

Superfund

     The Comprehensive  Environmental  Response,  Compensation and Liability Act
("CERCLA" or  "Superfund")  imposes  liability,  without  regard to fault or the
legality of the original act, on certain classes of persons that  contributed to
the release of a  "hazardous  substance"  into the  environment.  These  persons
include  the  owner or  operator  of the site and  companies  that  disposed  or
arranged for the disposal of the hazardous  substances found at the site. CERCLA
also authorizes the EPA and, in some instances, third parties to act in response
to threats to the public health or the  environment  and to seek to recover from
the  responsible  classes of persons the costs they incur.  In the course of its
ordinary  operations,  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.

Environmental Impact Statement

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

Indemnification

     KPL has agreed to indemnify 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  change in
environmental laws or regulations. Under such indemnity, KPL is presently liable
for the  remediation  of  contamination  at  certain  East  Pipeline  sites.  In
addition,  the  Partnership  was wholly or partially  indemnified  under certain
acquisition  contracts  for some  environmental  costs.  Most of such  contracts
contain  time and amount  limitations  on the  indemnities.  To the extent  that
environmental  liabilities exceed the amount of such indemnity,  the Partnership
has affirmatively assumed the excess environmental liabilities.


SAFETY REGULATION
-----------------

     The Pipelines are subject to regulation by the United States  Department of
Transportation  (the "DOT") under the Hazardous  Liquid  Pipeline  Safety Act of
1979  ("HLPSA")  relating to the design,  installation,  testing,  construction,
operation,  replacement and management of their pipeline  facilities.  The HLPSA
covers petroleum and petroleum  products  pipelines and requires any entity that
owns or operates pipeline  facilities to comply with such safety regulations and
to permit  access to and  copying of records  and to make  certain  reports  and
provide information as required by the Secretary to Transportation.  The Federal
Pipeline  Safety Act of 1992  amended the HLPSA to include  requirements  of the
future use of internal inspection devices. 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.

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

     The Partnership is subject to the requirements of the United States Federal
Occupational  Safety and Health Act ("OSHA") and comparable  state statutes that
regulate the  protection of the health and safety of workers.  In addition,  the
OSHA  hazard  communication   standard  requires  that  certain  information  be
maintained  about  hazardous  materials  used or produced in operations and that
this  information  be provided to  employees,  state and local  authorities  and
citizens.  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  business of the  Partnership  is
conducted by the General  Partner,  KPL,  which at December  31, 2001,  employed
approximately 605 persons. Approximately 115 of the persons employed by KPL were
subject to representation by unions for collective bargaining purposes; however,
only 91 persons employed at 5 of the Partnership's  terminal unit locations were
subject to  collective  bargaining  or  similar  contracts  at that date.  Union
contracts regarding  conditions of employment for 21, 29, 16, 19 and 6 employees
are in effect through March 31, 2002, June 28, 2002,  November 1, 2003, June 30,
2004 and September  30, 2005,  respectively.  All such  contracts are subject to
automatic  renewal for  successive one year periods unless either party provides
written notice in a timely manner to terminate or modify such agreement.


Item 2.     Properties

     The properties  owned or utilized by the Partnership  and its  subsidiaries
are  generally  described  in  Item 1 of  this  Report.  Additional  information
concerning the obligations of the Partnership and its subsidiaries for lease and
rental   commitments   is   presented   under  the  caption   "Commitments   and
Contingencies" in Note 6 to the Partnership's consolidated financial statements.
Such descriptions and information are hereby incorporated by reference into this
Item 2.

     The  properties  used in the  operations  of the Pipelines are owned by the
Partnership,  through  its  subsidiary  entities,  except for KPL's  operational
headquarters,  located  in  Wichita,  Kansas,  which is held  under a lease that
expires in 2004. The majority of ST's facilities are owned, while the remainder,
including  most  of its  terminal  facilities  located  in  port  areas  and its
operational  headquarters,  located in Dallas, Texas, are held pursuant to lease
agreements having various expiration dates, rental rates and other terms.


Item 3.     Legal Proceedings

     Grace  Litigation.  Certain  subsidiaries of the Partnership were sued in a
Texas state court in 1997 by Grace Energy Corporation ("Grace"), the entity from
which the  Partnership  acquired  ST  Services  in 1993.  The  lawsuit  involves
environmental  response and remediation costs allegedly  resulting from jet fuel
leaks in the early  1970's  from a pipeline.  The  pipeline,  which  connected a
former  Grace  terminal  with Otis Air Force  Base in  Massachusetts  (the "Otis
pipeline" or the  "pipeline"),  ceased  operations in 1973 and was abandoned not
later than 1976, when the connecting  terminal was sold to an unrelated  entity.
Grace  alleged that  subsidiaries  of the  Partnership  acquired  the  abandoned
pipeline,  as  part of the  acquisition  of ST  Services  in  1993  and  assumed
responsibility for environmental damages allegedly caused by the jet fuel leaks.
Grace  sought  a  ruling  from the  Texas  court  that  these  subsidiaries  are
responsible for all  liabilities,  including all present and future  remediation
expenses,  associated  with  these  leaks and that  Grace has no  obligation  to
indemnify  these  subsidiaries  for these expenses.  In the lawsuit,  Grace also
sought  indemnification  for  expenses of  approximately  $3.5  million  that it
incurred  since  1996 for  response  and  remediation  required  by the State of
Massachusetts  and for  additional  expenses  that it  expects  to  incur in the
future. The consistent position of the Partnership's  subsidiaries has been that
they did not  acquire  the  abandoned  pipeline  as part of the 1993 ST Services
transaction,   and  therefore  did  not  assume  any   responsibility   for  the
environmental damage nor any liability to Grace for the pipeline.

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

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

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

     By letter  dated July 26, 2001,  the United  States  Department  of Justice
("DOJ")  advised ST Services that the Government  intends to seek  reimbursement
from ST Services  under the  Massachusetts  Oil and Hazardous  Material  Release
Prevention  and  Response  Act  and  the   Declaratory   Judgment  Act  for  the
Government's  response  costs at the two spill areas  discussed  above.  The DOJ
relied in part on the judgment by the Texas state court that, in the view of the
DOJ,  held  that ST  Services  was the  current  owner of the  pipeline  and the
successor-in-interest of the prior owner and operator. The Government advised ST
Services  that it believes it has incurred  costs  exceeding  $40  million,  and
expects  to  incur  future  costs  exceeding  an  additional  $22  million,  for
remediation  of  the  two  spill  areas.  The  Partnership   believes  that  its
subsidiaries  have  substantial  defenses.  ST Services  responded to the DOJ on
September  6, 2001,  contesting  the  Government's  positions  and  declining to
reimburse any response  costs.  ST Services and the Government have continued to
exchange  correspondence  and  documents on the matter.  The DOJ has not filed a
lawsuit  against  ST  Services  seeking  cost  recovery  for  its  environmental
investigation and response costs.

     PEPCO  Litigation.  On April 7, 2000, a fuel oil pipeline in Maryland owned
by Potomac Electric Power Company ("PEPCO") ruptured.  The pipeline was operated
by a  partnership  of which ST Services is general  partner.  PEPCO has reported
that it expects to incur  total  cleanup  costs of $70  million to $75  million.
Since May 2000, ST Services has  provisionally  contributed a minority  share of
the cleanup expense,  which has been funded by ST Services'  insurance carriers.
The Partnership and PEPCO have not, however, reached a final agreement regarding
the proportionate  responsibility  for this cleanup effort and have reserved all
rights to assert claims for  contribution  against each other.  The  Partnership
cannot  predict the amount,  if any, that  ultimately may be determined to be ST
Services'  share of the  remediation  expense,  but it believes that such amount
will be  covered  by  insurance  and will not  materially  adversely  affect the
Partnership's financial condition.

     As a result of the rupture, purported class actions have been filed against
PEPCO and ST Services in federal and state court in Maryland by property  and/or
business owners alleging damages in unspecified  amounts under various theories,
including  under the Oil Pollution Act ("OPA").  The court  consolidated  all of
these cases in a case styled as In re Swanson  Creek Oil Spill  Litigation.  The
trial  judge  recently  granted  preliminary  approval  of  a  $2,250,000  class
settlement,  with ST Services and PEPCO each contributing half of the settlement
fund.  Notice of the proposed  settlement will be sent to putative class members
and putative  class members have until March 26, 2002 to opt out. ST Services or
PEPCO can void the  settlement  if too many  putative  class members opt out and
elect to pursue separate litigation.  A hearing on final settlement will be held
on April 15, 2002. If the settlement is finally approved, this litigation should
be  concluded  in 2002.  It is expected  that most class  members  will elect to
participate in the class  settlement,  but it is possible that even if the In re
Swanson Creek Oil Spill  Litigation  settlement  becomes final,  ST Services may
still face litigation from opt-out  plaintiffs.  ST Services' insurance carriers
have assumed the defense of these actions.  While the Partnership cannot predict
the amount,  if any, of any  liability it may have in these  suits,  it believes
that such amounts will be covered by insurance  and that these  actions will not
have a material adverse effect on our financial condition.

     PEPCO and ST  Services  have agreed with the State of Maryland to pay costs
of assessing  natural  resource damages arising from the Swanson Creek oil spill
under OPA,  but they cannot  predict at this time the amount of any damages that
may be claimed by Maryland.  The  Partnership  believes that both the assessment
costs  and such  damages  are  covered  by  insurance  and  will not  materially
adversely affect the Partnership's financial condition.

     The U.S.  Department  of  Transportation  ("DOT")  has  issued a Notice  of
Proposed  Violation to PEPCO and ST Services  alleging  violations  over several
years of pipeline safety  regulations and proposing a civil penalty of $674,000.
ST  Services  and PEPCO have  contested  the DOT  allegations  and the  proposed
penalty.  A  hearing  was held  before  the DOT in late  2001,  and ST  Services
anticipates  that the DOT  will  rule  during  the  first  quarter  of 2002.  In
addition, by letter dated January 4, 2002, the Attorney General's Office for the
State of  Maryland  advised ST Services  that it plans to exercise  its right to
seek penalties from ST Services in connection with the April 7, 2000 spill.  The
ultimate amount of any penalty  attributable to ST Services cannot be determined
at this time,  but the  Partnership  believes  that this  matter will not have a
material adverse effect on its financial condition.

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


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

         None.


<PAGE>
                                     PART II

Item 5.   Market for Registrant's Common Equity and Related Partnership Interest
          Matters

     KPP owns a 99% interest as sole limited partner  interest and KPL owns a 1%
general  partner  interest in the  Partnership.  There is no established  public
trading market for the Partnership ownership interests.

     The Partnership  makes regular cash  distributions,  in accordance with its
partnership  agreement,  within 45 days after the end of each quarter to limited
partner and general partner interests.

     The  Partnership  is a limited  partnership  that is not subject to federal
income tax.  Instead,  the partners are required to report their allocable share
of the Partnership's  income,  gain, loss,  deduction and credit,  regardless of
whether the Partnership makes distributions.


Item 6.   Summary Historical Financial and Operating Data

     The following table sets forth, for the periods and at the dates indicated,
selected  historical  financial and operating data for Kaneb Pipe Line Operating
Partnership,  L.P. and subsidiaries (the  "Partnership").  The data in the table
(in  thousands)  is derived  from the  historical  financial  statements  of the
Partnership  and should be read in conjunction  with the  Partnership's  audited
financial  statements.   See  also  "Management's  Discussion  and  Analysis  of
Financial Condition and Results of Operations."

<TABLE>
<CAPTION>
                                                                 Year Ended December 31,
                                         --------------------------------------------------------------------
                                           2001(a)       2000            1999          1998          1997
                                         ----------    ----------      ---------     ---------     ----------
<S>                                      <C>           <C>             <C>           <C>           <C>
Income Statement Data:
Revenues..............................   $  207,796    $  156,232      $ 158,028     $  125,812    $  121,156
                                         ----------    ----------      ---------     ----------    ----------
Operating costs.......................       90,632        69,653         69,148         52,200        50,183
Depreciation and amortization.........       23,184        16,253         15,043         12,148        11,711
General and administrative............       11,889        11,881          9,424          6,261         5,793
Gain on sale of assets................         -           (1,126)          -             -              -
                                         ----------    ----------      ---------     ----------    ----------
    Total costs and expenses..........      125,705        96,661         93,615         70,609        67,687
                                         ----------    ----------      ---------     ----------    ----------

Operating income......................       82,091        59,571         64,413         55,203        53,469
Interest and other income.............        4,277           316            408            626           562
Interest expense......................      (14,783)      (12,283)       (13,390)       (11,304)      (11,332)
                                          ---------    ----------      ---------     ----------    ----------
Income before income taxes............       71,585        47,604         51,431         44,525        42,699
Income tax provision..................         (981)         (943)        (1,496)          (418)         (718)
                                          ---------    ----------      ---------     ----------    -----------
Income before extraordinary item......       70,604        46,661         49,935         44,107        41,981

Extraordinary item - loss on debt
    extinguishment, net of minority
    interest and income taxes.........       (5,815)         -              -             -              -
                                         ----------    ----------      ---------     ----------    ----------
Net income............................   $   64,789    $   46,661      $  49,935     $   44,107    $   41,981
                                         ==========    ==========      =========     ==========    ==========
Cash distributions declared...........   $   62,156    $   53,485      $  51,850     $   42,900    $   40,225
                                         ==========    ==========      =========     ==========    ==========
Balance Sheet Data (at year end):
Property and equipment, net...........   $  481,274    $  321,355      $ 316,883     $  268,626    $  247,132
Total assets..........................      548,371       375,063        365,953        308,432       269,032
Long-term debt........................      262,624       166,900        155,987        153,000       132,118
Partners' capital.....................      220,527       161,735        169,321        106,437       105,230

</TABLE>
(a)  Includes the  operations  of Shore  Terminals LLC from January 3, 2001 (See
     Note 3 to Consolidated Financial Statements).



<PAGE>


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

     This  discussion  should  be  read in  conjunction  with  the  consolidated
financial  statements  of Kaneb  Pipe  Line  Operating  Partnership,  L.P.  (the
"Partnership")  and notes  thereto  and the  summary  historical  financial  and
operating data included elsewhere in this report.


GENERAL
-------

     Kaneb Pipe Line Operating Partnership, L.P. (the "Partnership"),  a limited
partnership,  owns and operates a refined  petroleum  products pipeline business
and a petroleum products and specialty liquids storage and terminaling business.
Kaneb Pipe Line Partners,  L.P. ("KPP"), a master limited  partnership,  holds a
99% interest as limited partner in the Partnership.  Kaneb Pipe Line Company LLC
("KPL"),  a wholly-owned  subsidiary of Kaneb  Services LLC ("KSL"),  as general
partner, holds a 1% general partner interest in both the Partnership and KPP. At
December 31, 2001, KPL,  together with its affiliates,  owned an approximate 25%
interest as a limited partner and a combined 2% interest as a general partner in
KPP. The  Partnership is engaged through  operating  subsidiaries in the refined
petroleum products pipeline business and, since 1993, terminaling and storage of
petroleum products and specialty liquids.

     The   Partnership's   pipeline   business   consists   primarily   of   the
transportation  through the East  Pipeline and the West  Pipeline  (collectively
referred  to as the  "Pipelines"),  as common  carriers,  of  refined  petroleum
products. Common carrier activities are those under which transportation through
the pipelines is available at published tariffs filed, in the case of interstate
shipments, with the Federal Energy Regulatory Commission (the "FERC"), or in the
case of intrastate shipments in Kansas,  Colorado and Wyoming, with the relevant
state authority,  to any shipper of refined petroleum products who requests such
services and satisfies the conditions and specifications for transportation. The
Pipelines primarily transport  gasoline,  diesel oil, fuel oil and propane.  The
products are transported from refineries connected to the Pipeline,  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 regulations.  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's  business of terminaling  petroleum products and specialty liquids
is conducted under the name ST Services ("ST").

     On January 3, 2001, the Partnership  acquired Shore Terminals LLC ("Shore")
for $107  million in cash and  1,975,090  units  issued by KPP  (valued at $56.5
million on the date of agreement and its  announcement).  Financing for the cash
portion  of the  purchase  price was  supplied  under a $275  million  unsecured
revolving  credit  agreement  with a group of banks.  See "Liquidity and Capital
Resources".  Shore owns seven  terminals,  located in four states,  with a total
tankage capacity of 7.8 million  barrels.  All of the terminals handle petroleum
products and, with the exception of one, have deep water access.

     On February 1, 1999, the  Partnership,  through two  wholly-owned  indirect
subsidiaries,  acquired six  terminals in the United  Kingdom from GATX Terminal
Limited for (pound)22.6 million  (approximately  $37.2 million) plus transaction
costs and the  assumption of certain  liabilities.  The  acquisition  of the six
locations,  which have an aggregate tankage capacity of 5.4 million barrels, was
initially  financed by term loans from a bank.  $13.3  million of the term loans
were  repaid in July 1999 with the  proceeds  from a public unit  offering.  See
"Liquidity and Capital  Resources".  Three of the terminals,  handling petroleum
products,  chemicals and molten sulfur,  respectively,  operate in England.  The
remaining three  facilities,  two in Scotland and one in Northern  Ireland,  are
primarily petroleum terminals.  All six terminals are served by deepwater marine
docks.

     The  Partnership  is the  third  largest  independent  liquids  terminaling
company in the United States. At December 31, 2001, ST operated 41 facilities in
20 states,  the District of Columbia and six  facilities  in the United  Kingdom
with an aggregate tankage capacity of approximately 39.0 million barrels.


PIPELINE OPERATIONS
-------------------
<TABLE>
<CAPTION>
                                                                         Year Ended December 31,
                                                          ---------------------------------------------------
                                                             2001                 2000                1999
                                                          -----------        -----------          -----------
                                                                             (in thousands)

<S>                                                       <C>                <C>                  <C>
Revenues.............................................     $    74,976        $    70,685          $    67,607
Operating costs......................................          28,844             25,223               23,579
Depreciation and amortization........................           5,478              5,180                5,090
General and administrative...........................           3,881              4,069                3,102
                                                          -----------        -----------          -----------
Operating income.....................................     $    36,773        $    36,213          $    35,836
                                                          ===========        ===========          ===========
</TABLE>

     Pipelines  revenues  are based on volumes  shipped and the  distances  over
which such  volumes  are  transported.  For the year ended  December  31,  2001,
revenues increased by $4.3 million, compared to 2000, due to increases in barrel
miles shipped and increases in terminaling  charges. For the year ended December
31,  2000,  revenues  increased  by $3.1  million,  compared to 1999,  due to an
increase in terminaling charges. 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  totaled 18.6  billion,  17.8 billion and 18.4
billion for the years ended December 31, 2001, 2000 and 1999, respectively.

     Operating  costs,  which  include  fuel  and  power  costs,  materials  and
supplies,  maintenance and repair costs, salaries,  wages and employee benefits,
and property and other taxes, increased by $3.6 million in 2001 and $1.6 million
in 2000.  The  increase in 2001 was due to increases in fuel and power costs and
expenses  from  pipeline  relocation  projects.  The increase in 2000 was due to
increases in materials and supplies costs, including additives,  that are volume
related. General and administrative costs, which include managerial,  accounting
and   administrative   personnel  costs,   office  rental  expense,   legal  and
professional costs and other non-operating  costs,  decreased by $0.2 million in
2001 and  increased by $1.0 million in 2000,  compared to the  respective  prior
year. The increase in 2000 was the result of a one-time  benefit  resulting from
the favorable elimination of a contingency in 1999.


TERMINALING OPERATIONS
----------------------
<TABLE>
<CAPTION>
                                                                         Year Ended December 31,
                                                          ---------------------------------------------------
                                                             2001                 2000                1999
                                                          -----------        -----------          -----------
                                                                            (in thousands)

<S>                                                       <C>                <C>                  <C>
Revenues.............................................     $   132,820        $    85,547          $    90,421
Operating costs......................................          61,788             44,430               45,569
Depreciation and amortization........................          17,706             11,073                9,953
General and administrative...........................           8,008              7,812                6,322
Gain on sale of assets...............................          -                  (1,126)               -
                                                          -----------        -----------          -----------
Operating income.....................................     $    45,318        $    23,358          $    28,577
                                                          ===========        ===========          ===========
</TABLE>

     For the year ended December 31, 2001,  revenues increased by $47.3 million,
compared  to  2000,  due to the  Shore  acquisition  and  overall  increases  in
utilization at existing  locations,  the result of relatively  favorable  market
conditions.  Approximately  $36.0  million of the 2001  revenue  increase  was a
result  of the Shore  acquisition.  2000  revenues  decreased  by $4.9  million,
compared to 1999, as revenue  increases  resulting  from the United  Kingdom and
other 1999  terminal  acquisitions  were more than offset by  decreases  in tank
utilization  due  to  unfavorable  domestic  market  conditions  resulting  from
declines in forward  product  pricing.  Average annual tankage  utilized for the
years ended December 31, 2001, 2000 and 1999  aggregated  30.1 million  barrels,
21.0 million barrels and 22.6 million barrels,  respectively.  The 2001 increase
in average annual tankage utilized  resulted from the Shore  acquisition and the
favorable  market  conditions.  The 2000 decrease  resulted from the unfavorable
domestic market conditions.  Average revenues per barrel of tankage utilized for
the years ended  December  31, 2001,  2000 and 1999 was $4.41,  $4.12 and $4.00,
respectively.  The  increase  in 2001  average  revenues  per  barrel of tankage
utilized was due to favorable market conditions, when compared to 2000. The 2000
increase,   when  compared  to  1999,  was  due  to  the  storage  of  a  larger
proportionate  volume of specialty  chemicals,  which are historically at higher
per barrel rates than petroleum products.

     In 2001 operating costs increased by $17.4 million,  when compared to 2000,
due to the Shore  acquisition  and increases in volumes  stored.  2000 operating
costs  decreased  by $1.1  million,  when  compared to 1999,  due to lower costs
resulting from the overall decline in volumes stored. General and administrative
expense  increased  by $0.2  million in 2001 and by $1.5  million  in 2000.  The
increase in general and administrative  costs in 2001,  compared to 2000, is due
to the Shore acquisition  partially offset by the extraordinary  high litigation
costs in 2000.  The increase in 2000,  compared to 1999, was due entirely to the
extraordinarily  high litigation  costs.  In 2000 the Partnership  sold land and
other  terminaling  business  assets  for  approximately  $2.0  million  in  net
proceeds, recognizing a gain on disposition of assets of $1.1 million.

     Total  tankage  capacity  (39.0  million  barrels at December 31, 2001) 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.


INTEREST AND OTHER INCOME
-------------------------

     In  March of 2001,  the  Partnership  entered  into two  contracts  for the
purpose of locking in interest  rates on $100  million of  anticipated  ten-year
public debt offerings. As the interest rate locks were not designated as hedging
instruments  pursuant to the  requirements of Statement of Financial  Accounting
Standards  ("SFAS")  No. 133,  increases  or  decreases in the fair value of the
contracts are included as a component of interest and other income,  net. On May
22, 2001, the contracts were settled resulting in a gain of $3.8 million.


INTEREST EXPENSE
----------------

     For the year ended December 31, 2001,  interest  expense  increased by $2.5
million,  compared to 2000,  due to increases in debt  resulting  from the Shore
acquisition  (see  "Liquidity  and  Capital  Resources"),  partially  offset  by
declines in interest  rates on variable rate debt.  For the year ended  December
31, 2000,  interest expense decreased by $1.1 million,  compared to 1999, due to
repayments  of debt  from a  portion  of the 1999 unit  offering  proceeds  (see
"Liquidity and Capital Resources").


LIQUIDITY AND CAPITAL RESOURCES
-------------------------------

     Cash provided by operating activities was $102.2 million, $62.0 million and
$63.6 million for the years 2001, 2000 and 1999,  respectively.  The increase in
2001,  compared  to  2000,  is due to  increases  in  terminaling  revenues  and
operating  income,  a  result  of  the  Shore  acquisition,   and  increases  in
utilization at existing terminaling locations. The decrease in 2000, compared to
1999, is a result of the decrease in terminaling  revenues and operating  income
due to unfavorable domestic market conditions.

     Capital expenditures,  excluding expansion capital expenditures, were $17.2
million,  $9.5 million and $14.6 million for 2001, 2000 and 1999,  respectively.
During all periods,  adequate  pipeline  capacity existed to accommodate  volume
growth, and the expenditures  required for environmental and safety improvements
were not, and are not expected in the future to be,  significant.  Environmental
damages  caused by sudden and  accidental  occurrences  are  included  under the
Partnership's  insurance  coverages  (subject to  deductibles  and limits).  The
Partnership anticipates that routine maintenance capital expenditures (excluding
acquisitions) will total  approximately $15 million to $20 million in 2002. 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, 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 have the ability to finance
such expenditures through borrowings, or choose to do so.

     The Partnership  expects to fund future cash  distributions and maintenance
capital   expenditures   with  existing  cash  and  cash  flows  from  operating
activities.  Expansionary capital expenditures are expected to be funded through
additional  Partnership  bank  borrowings  and/or  future debt  offerings or KPP
public unit offerings.

     The Partnership  makes regular cash  distributions,  in accordance with its
partnership  agreement,  within 45 days after the end of each quarter to limited
partner and general partner interests.  Aggregate distributions of approximately
$62.2 million, $53.5 million and $51.9 million, were declared to limited partner
interests and general partner interests in 2001, 2000 and 1999, respectively.

     In December 2000, the  Partnership  entered into a credit  agreement with a
group of banks that  provides  for a $275  million  unsecured  revolving  credit
facility  through  December 2003. The credit facility bears interest at variable
rates and has a  variable  commitment  fee on  unutilized  amounts.  The  credit
facility  contains  certain  financial  and  operational  covenants,   including
limitations on investments,  sales of assets and  transactions  with affiliates,
and, absent an event of default, the covenants do not restrict  distributions to
partners. In January 2001, proceeds from the facility were used to repay in full
the  Partnership's  $128 million of mortgage  notes and $15 million  outstanding
under its $25 million revolving credit facility.  An additional $107 million was
used to finance the cash portion of the Shore acquisition.  Under the provisions
of the  mortgage  notes,  the  Partnership  incurred a $6.5  million  prepayment
penalty before income taxes, which was recognized as an extraordinary expense in
the first quarter of 2001. At December 31, 2001, $238.9 million was drawn on the
facility, at an interest rate of 2.69%, which is due in December of 2003.

     In January 1999, the Partnership,  through two  wholly-owned  subsidiaries,
entered into a credit  agreement  with a bank that  provided for the issuance of
$39.2  million of term loans in  connection  with the  United  Kingdom  terminal
acquisition and $5.0 million for general Partnership purposes.  $18.3 million of
the term loans were repaid in July 1999 with the proceeds from KPP's public unit
offering.  The remaining  portion ($23.7  million at December 31, 2001),  with a
fixed rate of 7.25%,  is due in December  2003.  The term loans under the credit
agreement,  as amended,  are  unsecured and are pari passu with the $275 million
revolving  credit  facility.  The term loans also contain certain  financial and
operational covenants.

     In July 1999, KPP issued 2.25 million limited partnership units in a public
offering  at $30.75  per unit,  generating  approximately  $65.6  million in net
proceeds.  A portion of the proceeds was used to repay in full the Partnership's
$15.0 million  promissory note, the $25.0 million  revolving credit facility and
$18.3 million in term loans  (including  $13.3  million in term loans  resulting
from the United Kingdom terminal acquisition).

     In January of 2002, KPP issued 1.25 million limited  partnership units in a
public offering at $41.65 per unit,  generating  approximately  $49.7 million in
net  proceeds.  The  proceeds  were used to reduce  the  amount of  indebtedness
outstanding under the Partnership's $275 million revolving credit facility.

     In February  2002,  the  Partnership  issued $250  million of 7.75%  senior
unsecured  notes  due  February  15,  2012.  The net  proceeds  from the  public
offering,  $248.2  million,  were used to repay the $188.9  million  outstanding
under the $275 million  revolving  credit  agreement  and to partially  fund the
acquisition of all of the liquids  terminaling  subsidiaries of Statia Terminals
Group NV ("Statia").

     On February 28, 2002, the  Partnership  acquired  Statia for  approximately
$194 million in cash. The acquired Statia  subsidiaries have  approximately $107
million in  outstanding  debt,  including  $101  million of 11.75%  notes due in
November  2003.  The cash  portion  of the  purchase  price  was  funded  by the
Partnership's  $275 million  revolving  credit  agreement  and proceeds from the
Partnership's  February  2002  public  debt  offering.  On  March 1,  2002,  the
Partnership  announced  that it had  commenced  the  procedure  to redeem all of
Statia's  11.75%  notes  at  102.938%  of the  principal  amount,  plus  accrued
interest.  The  redemption  is expected to be funded by the  Partnership's  $275
million revolving credit facility.

     See also "Item 1 - Regulation", regarding the FERC's Lakehead decision.


CRITICAL ACCOUNTING POLICIES
----------------------------

     The carrying  value of property and  equipment  is  periodically  evaluated
using  management's  estimates of  undiscounted  future cash flows,  or, in some
cases, third-party appraisals,  as the basis of determining if impairment exists
under  the  provisions  of SFAS  No.  121,  "Accounting  for the  Impairment  of
Long-Lived  Assets and for  Long-lived  Assets to be Disposed Of". To the extent
that impairment is indicated to exist,  an impairment  loss is recognized  under
SFAS No. 121 based on fair value. The application of SFAS No. 121 did not have a
material  impact on the results of operations of the  Partnership  for the years
ended December 31, 2001, 2000 or 1999.  However,  future evaluations of carrying
value are dependent of many factors,  some of which are out of the Partnership's
control,  including  demand  for  refined  petroleum  products  and  terminaling
services  in the  Partnership's  market  areas,  and  local,  state and  Federal
governmental regulations.  To the extent that such factors or conditions change,
it is possible that future  impairments might occur, which could have a material
effect on the results of operations of 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  application  of the  Partnership's  environmental
accounting  policies did not have a material impact on the results of operations
of the Partnership for the years ended December 31, 2001, 2000 or 1999. 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 terminaling  operations.  Moreover,  it is possible
that  other  developments,  such  as  increasingly  strict  environmental  laws,
regulations and enforcement policies thereunder, and legal claims for damages to
property or persons resulting from operations of the Partnership could result in
substantial costs and liabilities,  any of which could have a material effect on
the results of operations of the Partnership.


RECENT ACCOUNTING PRONOUNCEMENTS
--------------------------------

     In July of 2001,  the  Financial  Accounting  Standards  Board (the "FASB")
issued SFAS No. 141 "Business  Combinations",  which  requires that all business
combinations  initiated  after June 30, 2001 be accounted for under the purchase
method of  accounting.  SFAS No. 141 also  specifies  the criteria for recording
intangible assets other than goodwill in a business combination. The Partnership
is currently assessing the impact of SFAS No. 141 on its financial statements.

     Additionally,  in July of 2001,  the FASB issued SFAS No. 142 "Goodwill and
Other Intangible Assets", which requires that goodwill no longer be amortized to
earnings,  but instead be reviewed for impairment.  The Partnership is currently
assessing the impact of SFAS No. 142, which must be adopted in the first quarter
of 2002.

     Also,  the FASB  issued  SFAS No.  143  "Accounting  for  Asset  Retirement
Obligations",   which  establishes   requirements  for  the  removal-type  costs
associated with asset  retirements.  The Partnership is currently  assessing the
impact of SFAS No. 143, which must be adopted in the first quarter of 2003.

     On October 3, 2001,  the FASB  issued  SFAS No.  144,  "Accounting  for the
Impairment  or  Disposal  of  Long-Lived  Assets",   which  addresses  financial
accounting  and reporting for the  impairment or disposal of long-lived  assets.
SFAS No. 144,  which  supercedes  SFAS No. 121, is  effective  for fiscal  years
beginning  after December 15, 2001 and interim periods within those fiscal years
with earlier application encouraged.  The Partnership is currently assessing the
impact on its financial statements.


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

     The principal market risks (i.e., the risk of loss arising from the adverse
changes in market  rates and  prices) to which the  Partnership  is exposed  are
interest  rates  on  the  Partnership's  debt  and  investment  portfolios.  The
Partnership  centrally  manages its debt and investment  portfolios  considering
investment  opportunities  and  risks  and  overall  financing  strategies.  The
Partnership's  investment  portfolio consists of cash equivalents;  accordingly,
the carrying amounts  approximate fair value. The Partnership's  investments are
not material to its financial  position or performance.  Assuming  variable rate
debt of $238.9 million at December 31, 2001, a one percent  increase in interest
rates would increase net interest expense by approximately $2.4 million.


Item 8.     Financial Statements and Supplementary Data

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


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

     None.


                                    PART III

Item 10.    Directors and Executive Officers of the Registrant

     The Partnership  does not have directors or officers.  All directors of the
general  partner  are  elected  annually  by  KPL.  All  officers  serve  at the
discretion of the directors.  The information contained in Item 10 of KPP's Form
10-K, for the year ended December 31, 2001, is incorporated by reference in this
report.


Item 11.    Executive Compensation

     The officers of the general  partner  manage and operate the  Partnership's
business.   The  Partnership  does  not  directly  employ  any  of  the  persons
responsible for managing or operating the Partnership's operations,  but instead
reimburses the General Partner for the services of such persons. The information
contained in Item 11 of KPP's Form 10-K,  for the year ended  December 31, 2001,
is incorporated by reference in this report.


Item 12.    Security Ownership of Certain Beneficial Owners and Management

     KPP owns a 99% interest as the sole limited partner interest and KPL owns a
1% general partner interest in the Partnership. Information identifying security
ownership by the  Directors and Officers of KPL is contained in Item 12 of KPP's
Form  10-K,  for the year  ended  December  31,  2001,  and is  incorporated  by
reference in this report.


Item 13.    Certain Relationships and Related Transactions

     KPL is entitled to certain  reimbursements under the Partnership Agreement.
For   additional   information   regarding   the   nature  and  amount  of  such
reimbursements,   see  Note  7  to  the  Partnership's   consolidated  financial
statements.


<PAGE>
                                     PART IV


Item 14.    Exhibits, Financial Statement Schedules, and Reports on Form 8-K
<TABLE>
<CAPTION>
    (a)(1)  Financial Statements                                                                        Beginning
                                                                                                           Page

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

<S>      <C>                                                                                               <C>

         Kaneb Pipe Line Operating Partnership, L.P. and Subsidiaries Financial Statements:
            Independent Auditors' Report..............................................................     F - 1
            Consolidated Statements of Income - Three Years Ended December 31, 2001...................     F - 2
            Consolidated Balance Sheets - December 31, 2001 and 2000..................................     F - 3
            Consolidated Statements of Cash Flows - Three Years Ended December 31, 2001...............     F - 4
            Consolidated Statements of Partners' Capital - Three Years ended December 31, 2001........     F - 5
            Notes to Consolidated Financial Statements................................................     F - 6

    (a)(2)  Financial Statement Schedules

            All  schedules  for  which  provision  is  made  in  the  applicable
            accounting  regulation of the Securities and Exchange Commission are
            not required under the related instructions or are inapplicable, and
            therefore have been omitted.

</TABLE>

    (a)(3)  List of Exhibits

      3.1   Amended  and  Restated  Agreement  of  Limited  Partnership,   dated
            September 27, 1989, filed herewith.

      10.1  ST  Agreement  and Plan of Merger  dated  December  21,  1992 by and
            between Grace Energy Corporation,  Support Terminal Services,  Inc.,
            Standard Transpipe Corp., and Kaneb Pipe Line Operating Partnership,
            NSTS,  Inc.  and NSTI,  Inc. as amended by  Amendment  of STS Merger
            Agreement dated March 2, 1993, filed as Exhibit 10.1 of the exhibits
            to KPP's Current  Report on Form 8-K ("Form  8-K"),  dated March 16,
            1993, which exhibit is hereby incorporated by reference.

      10.2  Agreement  for Sale and  Purchase of Assets  between  Wyco Pipe Line
            Company and the  Partnership,  dated  February  19,  1995,  filed as
            Exhibit  10.1 of the  exhibits to KPP's  March 1995 Form 8-K,  which
            exhibit is hereby incorporated by reference.

      10.3  Asset  Purchase  Agreements  between  and  among  Steuart  Petroleum
            Company, SPC Terminals, Inc., Piney Point Industries,  Inc., Steuart
            Investment Company,  Support Terminals Operating  Partnership,  L.P.
            and the  Partnership,  as amended,  dated August 27, 1995,  filed as
            Exhibits 10.1, 10.2, 10.3, and 10.4 of the exhibits to KPP's Current
            Report on Form 8-K dated January 3, 1996,  which exhibits are hereby
            incorporated by reference.

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

      10.5  Agreement,  between and among, GATX Terminals Limited,  ST Services,
            Ltd.,  ST  Eastham,  Ltd.,  GATX  Terminals   Corporation,   Support
            Terminals Operating Partnership,  L.P. and Kaneb Pipe Line Partners,
            L.P.,  dated January 26, 1999,  filed as Exhibit 10.10 to KPP's Form
            10-K for the year ended  December 31, 1998,  which exhibit is hereby
            incorporated by reference.

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

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

      10.8  Securities  Purchase Agreement Among Shore Terminals LLC, Kaneb Pipe
            Line  Partners,  L.P.  and the Sellers  Named  Therein,  dated as of
            September  22,  2000,   Amendment  No.  1  To  Securities   Purchase
            Agreement,  dated as of November  28, 2000 and  Registration  Rights
            Agreement, dated as of January 3, 2001, filed as Exhibits 10.1, 10.2
            and 10.3 of the exhibits to KPP's  Current  Report on Form 8-K dated
            January  3,  2001,   which  exhibits  are  hereby   incorporated  by
            reference.

      10.9  Stock  Purchase  Agreement,  dated as of November 12,  2001,  by and
            between  Kaneb Pipe Line  Operating  Partnership,  L.P.,  and Statia
            Terminals  Group  NV,  a  public  company  with  limited   liability
            organized  under  the  laws of the  Netherlands  Antilles,  filed as
            Exhibit 10.1 to the exhibits to Registrant's  Current Report on Form
            8-K, dated January 24, 2002, and incorporated herein by reference.

      10.10 Voting and Option  Agreement  dated as of November 12, 2001,  by and
            between  Kaneb Pipe Line  Operating  Partnership,  L.P.,  and Statia
            Terminals  Holdings  N.V.,  a  Netherlands  Antilles  company  and a
            shareholder  of Statia  Terminals  Group NV, a Netherlands  Antilles
            company  filed  as  Exhibit  10.1 to the  exhibits  to  Registrant's
            Current Report on Form 8-K, dated January 24, 2002, and incorporated
            herein by reference.

      21    List of Subsidiaries, filed herewith.

      23    Consent of KPMG LLP, filed herewith.

      24    Powers of Attorney (included in this report and incorporated  herein
            by reference.)

      (b)   Reports on Form 8-K

            None.


<PAGE>

                          INDEPENDENT AUDITORS' REPORT





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


We have  audited  the  consolidated  financial  statements  of Kaneb  Pipe  Line
Operating  Partnership,  L.P. and its subsidiaries (the "Partnership") as listed
in the  index  appearing  under  Item  14(a)(1).  These  consolidated  financial
statements  are  the  responsibility  of  the  Partnership's   management.   Our
responsibility is to express an opinion on the consolidated financial statements
based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects,  the financial position of the Partnership and
its  subsidiaries  as of December  31,  2001 and 2000,  and the results of their
operations  and their cash flows for each of the years in the three year  period
ended  December 31, 2001, in conformity  with  accounting  principles  generally
accepted in the United States of America.


                                    KPMG LLP
Dallas, Texas
February 11, 2002



                                     F - 1

<PAGE>
          KANEB PIPE LINE OPERATING PARTNERSHIP, L.P. AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>

                                                                           Year Ended December 31,
                                                        -----------------------------------------------------------
                                                               2001                 2000                 1999
                                                        -----------------    -----------------    -----------------

<S>                                                       <C>                <C>                  <C>
Revenues..............................................  $     207,796,000    $     156,232,000    $     158,028,000
                                                        -----------------    -----------------    -----------------
Costs and expenses:
   Operating costs....................................         90,632,000           69,653,000           69,148,000
   Depreciation and amortization......................         23,184,000           16,253,000           15,043,000
   General and administrative.........................         11,889,000           11,881,000            9,424,000
   Gain on sale of assets.............................            -                 (1,126,000)             -
                                                        -----------------    -----------------    -----------------
      Total costs and expenses........................        125,705,000           96,661,000           93,615,000
                                                        -----------------    -----------------    -----------------
Operating income......................................         82,091,000           59,571,000           64,413,000

Interest and other income.............................          4,277,000              316,000              408,000
Interest expense......................................        (14,783,000)         (12,283,000)         (13,390,000)
                                                        -----------------    -----------------    -----------------

Income before income taxes and extraordinary item.....         71,585,000           47,604,000           51,431,000

Income tax provision..................................           (981,000)            (943,000)          (1,496,000)
                                                        -----------------    -----------------    -----------------
Income before extraordinary item......................         70,604,000           46,661,000           49,935,000

Extraordinary item - loss on debt
   extinguishment, net of income taxes................         (5,815,000)             -                     -
                                                        -----------------    -----------------    -----------------
Net income............................................  $      64,789,000    $      46,661,000    $      49,935,000
                                                        =================    =================    =================
</TABLE>



                 See notes to consolidated financial statements.

                                      F - 2

<PAGE>
          KANEB PIPE LINE OPERATING PARTNERSHIP, L.P. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>

                                                                                           December 31,
                                                                                -----------------------------------
                                                                                    2001                  2000
                                                                                -------------        --------------
                                     ASSETS
<S>                                                                             <C>                  <C>
Current assets:
   Cash and cash equivalents...............................................     $   7,903,000        $    4,758,000
   Accounts receivable.....................................................        24,005,000            21,091,000
   Prepaid expenses........................................................         2,721,000             5,291,000
                                                                                -------------        --------------
      Total current assets.................................................        34,629,000            31,140,000
                                                                                -------------        --------------

Property and equipment.....................................................       639,084,000           458,926,000
Less accumulated depreciation..............................................       157,810,000           137,571,000
                                                                                -------------        --------------
      Net property and equipment...........................................       481,274,000           321,355,000
                                                                                -------------        --------------

Investments in affiliates..................................................        22,252,000            22,568,000

Excess of cost over fair value of net assets of acquired business and
   other assets............................................................        10,216,000                 -
                                                                                -------------        --------------
                                                                                $ 548,371,000        $  375,063,000
                                                                                =============        ==============


                        LIABILITIES AND PARTNERS' CAPITAL

Current liabilities:
   Accounts payable........................................................     $   6,541,000        $    3,706,000
   Accrued expenses........................................................         9,963,000             7,705,000
   Accrued distributions payable...........................................        16,263,000            13,372,000
   Accrued taxes, other than income taxes..................................         2,635,000             2,363,000
   Deferred terminaling fees...............................................         6,503,000             3,717,000
   Payable to general partner..............................................         4,701,000             1,889,000
                                                                                -------------        --------------
      Total current liabilities............................................        46,606,000            32,752,000
                                                                                -------------        --------------

Long-term debt.............................................................       262,624,000           166,900,000

Other liabilities and deferred taxes.......................................        18,614,000            13,676,000

Commitments and contingencies

Partners' capital:
   Limited partner.........................................................       221,363,000           162,288,000
   General partner.........................................................         1,030,000               984,000
   Accumulated other comprehensive income (loss)
      - foreign currency translation adjustment............................        (1,866,000)           (1,537,000)
                                                                                -------------        --------------
      Total partners' capital..............................................       220,527,000           161,735,000
                                                                                -------------        --------------
                                                                                $ 548,371,000        $  375,063,000
                                                                                =============        ==============
</TABLE>


                 See notes to consolidated financial statements.

                                      F - 3


<PAGE>
          KANEB PIPE LINE OPERATING PARTNERSHIP, L.P. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>

                                                                           Year Ended December 31,
                                                          ---------------------------------------------------------
                                                              2001                  2000                  1999
                                                          -------------         -------------        --------------
<S>                                                       <C>                   <C>                  <C>
Operating activities:
   Net income ........................................    $  64,789,000         $  46,661,000        $   49,935,000
   Adjustments to reconcile net income to net
      cash provided by operating activities:
      Depreciation and amortization...................       23,184,000            16,253,000            15,043,000
      Equity in earnings of affiliates, net of
        distributions.................................           (5,000)             (154,000)           (1,072,000)
      Gain on sale of assets..........................            -                (1,126,000)                 -
      Deferred income taxes...........................          981,000               943,000             1,487,000
      Extraordinary item..............................        5,815,000                 -                      -
      Other liabilities...............................       (5,422,000)              841,000                  -
      Changes in working capital components:
        Accounts receivable...........................         (824,000)           (4,162,000)           (3,012,000)
        Prepaid expenses..............................        1,601,000              (255,000)             (995,000)
        Accounts payable and accrued expenses.........        6,512,000             1,869,000             3,028,000
        Deferred terminaling fees.....................        2,786,000               642,000              (451,000)
        Payable to general partner....................        2,812,000               478,000              (374,000)
                                                         --------------         -------------        --------------
           Net cash provided by operating activities..      102,229,000            61,990,000            63,589,000
                                                         --------------         -------------        --------------


Investing activities:
   Acquisitions of terminals, net of cash acquired....     (111,562,000)          (12,053,000)          (44,390,000)
   Capital expenditures...............................      (17,246,000)           (9,483,000)          (14,568,000)
   Proceeds from sale of assets.......................        2,807,000             1,961,000                  -
   Other, net.........................................         (111,000)             (212,000)           (2,064,000)
                                                         --------------         -------------        --------------
           Net cash used in investing activities......     (126,112,000)          (19,787,000)          (61,022,000)
                                                         --------------         -------------        --------------
Financing activities:
   Issuance of debt...................................      260,500,000            14,613,000            51,319,000
   Payments of debt...................................     (171,316,000)           (3,700,000)          (58,332,000)
   Distributions......................................      (62,156,000)          (53,485,000)          (51,850,000)
   Changes in payable to general partner..............            -                     -                (5,000,000)
   Net proceeds from issuance of units by KPP.........            -                     -                65,574,000
                                                         --------------         -------------        --------------
           Net cash provided by (used in) financing
               activities.............................       27,028,000           (42,572,000)            1,711,000
                                                         --------------         -------------        --------------


Increase (decrease) in cash and cash equivalents......        3,145,000              (369,000)            4,278,000
Cash and cash equivalents at beginning of period......        4,758,000             5,127,000               849,000
                                                         --------------         -------------        --------------
Cash and cash equivalents at end of period............   $    7,903,000         $   4,758,000        $    5,127,000
                                                         ==============         =============        ==============
Supplemental cash flow information:
   Cash paid for interest.............................   $   14,028,000         $  12,438,000        $   12,881,000
                                                         ==============         =============        ==============
   Non-cash investing and financing activities -
      Issuance of units by KPP in connection with
      acquisition of terminals........................   $   56,488,000         $       -            $         -
                                                         ==============         =============        ==============
</TABLE>

                 See notes to consolidated financial statements.

                                      F - 4

<PAGE>
          KANEB PIPE LINE OPERATING PARTNERSHIP, L.P. AND SUBSIDIARIES
                  CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL

<TABLE>
<CAPTION>
                                                                            Accumulated
                                                                               Other
                                                Limited        General     Comprehensive                    Comprehensive
                                                Partner        Partner     Income (Loss)      Total            Income
                                            --------------   -----------   ------------- --------------   ---------------


<S>                                         <C>              <C>           <C>           <C>              <C>
Partners' capital at January 1, 1999.....   $  105,388,000   $ 1,049,000   $       -     $  106,437,000

  1999 income allocation.................       49,436,000       499,000           -         49,935,000   $    49,935,000

  Distributions declared.................      (51,342,000)     (508,000)          -        (51,850,000)             -

  Issuance of units by KPP...............       65,574,000           -             -         65,574,000              -

  Foreign currency translation
    adjustment...........................            -               -        (775,000)        (775,000)         (775,000)
                                            --------------   -----------   -----------   --------------   ---------------
  Comprehensive income for the year......                                                                 $    49,160,000
                                                                                                          ===============

Partners' capital at December 31, 1999...      169,056,000     1,040,000      (775,000)     169,321,000

  2000 income allocation.................       46,194,000       467,000           -         46,661,000   $    46,661,000

  Distributions declared.................      (52,962,000)     (523,000)          -        (53,485,000)             -

  Foreign currency translation
    adjustment...........................            -               -        (762,000)        (762,000)         (762,000)
                                            --------------   -----------   -----------   --------------   ---------------
  Comprehensive income for the year......                                                                 $    45,899,000
                                                                                                          ===============

Partners' capital at December 31, 2000...      162,288,000       984,000    (1,537,000)     161,735,000

  2001 income allocation.................       64,141,000       648,000           -         64,789,000   $    64,789,000

  Distributions declared.................      (61,554,000)     (602,000)          -        (62,156,000)             -

  Issuance of units by KPP...............       56,488,000           -             -         56,488,000              -

  Foreign currency translation
    adjustment...........................            -               -        (329,000)        (329,000)         (329,000)
                                            --------------   -----------   -----------   --------------   ---------------
  Comprehensive income for the year......                                                                 $    64,460,000
                                                                                                          ===============
Partners' capital at December 31, 2001...   $  221,363,000  $  1,030,000   $(1,866,000)  $  220,527,000
                                            ==============  ============   ===========   ==============
</TABLE>


                 See notes to consolidated financial statements.

                                      F - 5

<PAGE>
          KANEB PIPE LINE OPERATING PARTNERSHIP, L.P. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



1.       PARTNERSHIP ORGANIZATION

         Kaneb Pipe Line  Operating  Partnership,  L.P. (the  "Partnership"),  a
         limited  partnership,  owns and operates a refined  petroleum  products
         pipeline  business  and a  petroleum  products  and  specialty  liquids
         storage  and  terminaling  business.  Kaneb  Pipe Line  Partners,  L.P.
         ("KPP"), a master limited partnership,  holds a 99% interest as limited
         partner in the  Partnership.  Kaneb Pipe Line  Company LLC  ("KPL"),  a
         wholly-owned  subsidiary  of Kaneb  Services  LLC  ("KSL"),  as general
         partner,  holds a 1% general  partner  interest in both the Partnership
         and KPP. At December 31, 2001, KPL, together with its affiliates, owned
         an  approximate  25%  interest  as a limited  partner and a combined 2%
         interest as a general partner in KPP.

         In July 1999, KPP issued 2.25 million  limited  partnership  units in a
         public  offering  at $30.75 per unit,  generating  approximately  $65.6
         million in net proceeds. A portion of the proceeds was used to repay in
         full the Partnership's $15.0 million promissory note, the $25.0 million
         revolving  credit  facility and $18.3 million in term loans  (including
         $13.3 million in term loans resulting from the United Kingdom  terminal
         acquisition referred to in Note 3).


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  original  maturities  of  three  months  or  less.   Accordingly,
         uninvested cash balances are kept at minimum levels.  Such  investments
         are valued at cost, which  approximates  market,  and are classified as
         cash  equivalents.   The  Partnership  does  not  have  any  derivative
         financial instruments.

         Property and Equipment

         Property and equipment are carried at historical cost. Additions of new
         equipment and major renewals and replacements of existing equipment are
         capitalized.  Repairs  and minor  replacements  that do not  materially
         increase  values or extend useful lives are expensed.  Depreciation  of
         property and  equipment is provided on a  straight-line  basis at rates
         based  upon  expected  useful  lives of various  classes of assets,  as
         disclosed in Note 4. The rates used for pipeline and storage facilities
         of the Partnership are the same as those which have been promulgated by
         the Federal Energy Regulatory Commission.

         The carrying value of property and equipment is periodically  evaluated
         using  undiscounted  future cash flows as the basis for  determining if
         impairment  exists  under the  provisions  of  Statement  of  Financial
         Accounting  Standards ("SFAS") No. 121,  "Accounting for the Impairment
         of Long-Lived  Assets and for Long-Lived  Assets to be Disposed Of". To
         the extent impairment is indicated to exist, an impairment loss will be
         recognized under SFAS No. 121 based on fair value.

         Revenue and Income Recognition

         The Partnership  provides pipeline  transportation of refined petroleum
         products  and  liquified   petroleum  gases.   Pipeline   revenues  are
         recognized as services are provided. The Partnership's Support Terminal
         Services  operation  ("ST  Services")  provides  terminaling  and other
         ancillary  services.  Storage  fees are billed one month in advance and
         are reported as deferred income. Terminaling revenues are recognized in
         the month services are provided.


         Foreign Currency Translation

         The Partnership  translates the balance sheet of its foreign subsidiary
         using year-end  exchange rates and translates  income statement amounts
         using the average  exchange  rates in effect during the year. The gains
         and losses  resulting  from the change in  exchange  rates from year to
         year have been reported  separately as a component of accumulated other
         comprehensive  income  (loss) in  Partners'  Capital.  Gains and losses
         resulting  from  foreign  currency  transactions  are  included  in the
         statements of income.

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

         The excess of cost over the fair value of net assets  acquired is being
         amortized  on a  straight-line  basis  over a period of 20  years.  The
         Partnership  periodically  evaluates  the  proprietary  of the carrying
         amount  of the  excess of cost  over  fair  value of net  assets of the
         acquired  business,  as well as the amortization  period,  to determine
         whether  current  events or  circumstances  warrant  adjustments to the
         carrying value and/or revised estimates of the amortization period. The
         Partnership  believes that no such  impairment has occurred and that no
         reduction in the amortization period is warranted.

         Environmental Matters

         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.

         Comprehensive Income

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

         Income Tax Considerations

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

<TABLE>
<CAPTION>
                                                                              Year Ended December 31,
                                                          ---------------------------------------------------------
                                                              2001                  2000                  1999
                                                          -------------         -------------        --------------

<S>                                                       <C>                   <C>                  <C>
         Partnership operations......................     $  67,119,000         $  43,538,000        $   46,741,000
         Corporate operations:
            Domestic.................................           477,000               510,000               501,000
            Foreign..................................         3,989,000             3,556,000             4,189,000
                                                          -------------         -------------        --------------
                                                          $  71,585,000         $  47,604,000        $   51,431,000
                                                          =============         =============        ==============
</TABLE>

         Partnership  operations  are not  subject to  Federal  or state  income
         taxes. However, certain operations of ST Services are conducted through
         wholly-owned  corporate  subsidiaries  which are taxable entities.  The
         provision  for income  taxes for the periods  ended  December 31, 2001,
         2000 and 1999  primarily  consists of deferred U.S. and foreign  income
         taxes of $1.0 million, $0.9 million and $1.5 million, respectively. The
         net deferred tax liability of $6.1 million and $5.9 million at December
         31, 2001 and 2000,  respectively,  consists of deferred tax liabilities
         of $12.5  million and $12.0  million,  respectively,  and  deferred tax
         assets of $6.4 million and $6.1 million, respectively. The deferred tax
         liabilities  consist  primarily of tax  depreciation  in excess of book
         depreciation  and the  deferred  tax assets  consist  primarily  of net
         operating losses. The U.S. corporate operations have net operating loss
         carryforwards  for tax purposes  totaling  approximately  $20.7 million
         which   expire  in  years  2008   through   2021.   Additionally,   the
         Partnership's  foreign operations have net operating loss carryforwards
         for tax purposes totaling  approximately $2.7 million which do not have
         an expiration date.

         Since the income or loss of the operations which are conducted  through
         limited  partnerships  will  be  included  in the  tax  returns  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 any 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 interests. 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.  SFAS 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.

         Cash Distributions

         The Partnership  makes regular cash  distributions,  in accordance with
         its partnership agreement, within 45 days after the end of each quarter
         to  limited   partner  and   general   partner   interests.   Aggregate
         distributions of approximately  $62.2 million,  $53.5 million and $51.9
         million, were declared to limited partner interests and general partner
         interests in 2001, 2000 and 1999, respectively.

         Derivative Instruments

         Effective  January 1, 2001, the  Partnership  adopted the provisions of
         SFAS No.  133,  "Accounting  for  Derivative  Instruments  and  Hedging
         Activities",  which establishes the accounting and reporting  standards
         for such activities.  Under SFAS No. 133,  companies must recognize all
         derivative instruments on their balance sheet at fair value. Changes in
         the value of derivative  instruments,  which are considered hedges, are
         offset  against  the change in fair value of the  hedged  item  through
         earnings,  or recognized in other comprehensive income until the hedged
         item is recognized  in earnings,  depending on the nature of the hedge.
         SFAS No. 133 requires that  unrealized  gains and losses on derivatives
         not  qualifying  for  hedge  accounting  be  recognized   currently  in
         earnings.  On January 1, 2001, the  Partnership  was not a party to any
         derivative contracts;  accordingly, initial adoption of SFAS No. 133 at
         that  date did not have  any  effect  on the  Partnership's  result  of
         operations or financial position.

         In March of 2001,  the  Partnership  entered into two contracts for the
         purpose of locking in  interest  rates on $100  million of  anticipated
         ten-year  public debt  offerings.  As the interest  rate locks were not
         designated as hedging instruments  pursuant to the requirements of SFAS
         No. 133, increases or decreases in the fair value of the contracts were
         included as a component of interest and other  income,  net. On May 22,
         2001, the contracts were settled resulting in a gain of $3.8 million.

         Change in Presentation

         Certain prior year financial  statement items have been reclassified to
         conform with the 2001 presentation.

         Estimates

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

         Recent Accounting Pronouncements

         In July of 2001, the Financial  Accounting Standards Board (the "FASB")
         issued SFAS No. 141 "Business  Combinations",  which  requires that all
         business  combinations  initiated  after June 30, 2001 be accounted for
         under the purchase  method of  accounting.  SFAS No. 141 also specifies
         the criteria for recording  intangible  assets other than goodwill in a
         business combination. The Partnership is currently assessing the impact
         of SFAS No. 141 on its financial statements.

         Additionally,  in July of 2001,  the FASB issued SFAS No. 142 "Goodwill
         and Other Intangible Assets", which requires that goodwill no longer be
         amortized to  earnings,  but instead be reviewed  for  impairment.  The
         Partnership  is currently  assessing the impact of SFAS No. 142,  which
         must be adopted in the first quarter of 2002.

         Also,  the FASB issued SFAS No. 143  "Accounting  for Asset  Retirement
         Obligations", which establishes requirements for the removal-type costs
         associated  with  asset  retirements.   The  Partnership  is  currently
         assessing  the  impact of SFAS No.  143,  which  must be adopted in the
         first quarter of 2003.

         On October 3, 2001, the FASB issued SFAS No. 144,  "Accounting  for the
         Impairment or Disposal of Long-Lived Assets", which addresses financial
         accounting  and reporting for the  impairment or disposal of long-lived
         assets.  SFAS No. 144, which  supercedes SFAS No. 121, is effective for
         fiscal years  beginning  after  December  15, 2001 and interim  periods
         within  those fiscal years with  earlier  application  encouraged.  The
         Partnership  is  currently   assessing  the  impact  on  its  financial
         statements.


3.       ACQUISITIONS

         On  January 3, 2001,  the  Partnership  acquired  Shore  Terminals  LLC
         ("Shore")  for $107 million in cash and  1,975,090  units issued by KPP
         (valued   at  $56.5   million  on  the  date  of   agreement   and  its
         announcement). Financing for the cash portion of the purchase price was
         supplied under a $275 million unsecured revolving credit agreement with
         a group of banks (see Note 5). The  acquisition  has been accounted for
         using the  purchase  method of  accounting.  Assuming  the  acquisition
         occurred at January 1, 2000,  unaudited pro forma 2000 revenues and net
         income would be $189.6 million and $49.7 million, respectively.

         On February 1, 1999, the Partnership, through two wholly-owned indirect
         subsidiaries,  acquired six  terminals in the United  Kingdom from GATX
         Terminal Limited for (pound)22.6 million  (approximately $37.2 million)
         plus transaction costs and the assumption of certain  liabilities.  The
         acquisition,  which was initially financed with term loans from a bank,
         has been accounted for using the purchase  method of accounting.  $13.3
         million of the term loans  were  repaid in July 1999 with the  proceeds
         from KPP's 1999 public unit offering (see Notes 1 and 5).


4.       PROPERTY AND EQUIPMENT

         The cost of property and equipment is summarized as follows:
<TABLE>
<CAPTION>

                                                        Estimated
                                                         Useful                             December 31,
                                                          Life                -------------------------------------
                                                         (Years)                    2001                  2000
                                                     --------------           ---------------        --------------

<S>                                                  <C>                      <C>                    <C>
         Land....................................           -                 $    43,005,000        $   23,360,000
         Buildings...............................          35                      10,834,000             9,144,000
         Furniture and fixtures..................          16                       3,900,000             3,445,000
         Transportation equipment................           6                       5,092,000             4,469,000
         Machinery and equipment.................        20 - 40                   32,750,000            32,996,000
         Pipeline and terminaling equipment......        20 - 40                  534,292,000           378,123,000
         Construction work-in-progress...........           -                       9,211,000             7,389,000
                                                                              ---------------        --------------
         Total property and equipment............                                 639,084,000           458,926,000
           Less accumulated depreciation.........                                 157,810,000           137,571,000
                                                                              ---------------        --------------
         Net property and equipment..............                             $   481,274,000        $  321,355,000
                                                                              ===============        ==============
</TABLE>

5.       LONG-TERM DEBT

         Long-term debt is summarized as follows:
<TABLE>
<CAPTION>

                                                                                           December 31,
                                                                              -------------------------------------
                                                                                    2001                  2000
                                                                              ---------------        --------------
<S>      <C>                                                                  <C>                    <C>
         $275 million revolving credit facility, due in December 2003...      $   238,900,000        $        -
         Term loan, due in December 2003................................           23,724,000            23,900,000
         First mortgage notes, repaid in January 2001...................                -               128,000,000
         $25 million revolving credit facility, repaid in January 2001..                -                15,000,000
                                                                              ---------------        --------------
         Total long-term debt...........................................      $   262,624,000        $  166,900,000
                                                                              ===============        ==============
</TABLE>

         In December 2000, the Partnership  entered into a credit agreement with
         a group of banks that provides for a $275 million  unsecured  revolving
         credit facility  through  December 2003. The facility bears interest at
         variable  interest  rates  and  has a  variable  commitment  fee on the
         unutilized amounts.  The credit facility contains certain financial and
         operational  covenants,  including certain  limitations on investments,
         sales of assets and  transactions  with affiliates and, absent an event
         of default,  such covenants do not restrict  distributions to partners.
         In January 2001,  proceeds from the facility were used to repay in full
         the  Partnership's  $128  million  of  mortgage  notes and $15  million
         outstanding  under  its  $25  million  revolving  credit  facility.  An
         additional  $107  million was used to finance  the cash  portion of the
         Shore  acquisition.  Under the  provisions of the mortgage  notes,  the
         Partnership incurred $6.5 million in prepayment penalties which, before
         income taxes, was recognized as an  extraordinary  expense in the first
         quarter of 2001. At December 31, 2001,  $238.9 million was drawn on the
         facility  at an  interest  rate of 2.69%,  which is due in  December of
         2003.

         In  January   1999,   the   Partnership,   through   two   wholly-owned
         subsidiaries, entered into a credit agreement with a bank that provided
         for the issuance of $39.2 million in term loans in connection  with the
         United  Kingdom  terminal  acquisition  and $5.0  million  for  general
         Partnership  purposes.  $18.3  million of the term loans were repaid in
         July 1999 with the  proceeds  from  KPP's  public  unit  offering.  The
         remaining  portion ($23.7  million at December 31, 2001),  with a fixed
         rate of 7.25%, is due in December 2003. The term loans under the credit
         agreement,  as amended,  are unsecured and are pari passu with the $275
         million revolving credit facility.  The term loans also contain certain
         financial and operational covenants.


6.       COMMITMENTS AND CONTINGENCIES

         The following is a schedule by years of future  minimum lease  payments
         under operating leases as of December 31, 2001:

         Year ending December 31:
            2002...............................................    $   2,664,000
            2003...............................................        2,433,000
            2004...............................................        1,979,000
            2005...............................................        1,411,000
            2006...............................................        1,383,000
                                                                   -------------
            Total minimum lease payments.......................    $   9,870,000
                                                                   =============

         Total rent expense  under  operating  leases  amounted to $4.2 million,
         $3.1  million and $2.2  million for the years ended  December 31, 2001,
         2000 and 1999, respectively.

         The  operations of the  Partnership  are subject to Federal,  state and
         local laws and  regulations in the United States and the United Kingdom
         relating to protection  of the  environment.  Although the  Partnership
         believes  its  operations  are in general  compliance  with  applicable
         environmental  regulations,  risks of additional  costs and liabilities
         are inherent in pipeline and terminal  operations,  and there can be no
         assurance that  significant  costs and liabilities will not be incurred
         by 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.   The
         Partnership  has  recorded an  undiscounted  reserve for  environmental
         claims in the amount of $13.5  million at December 31, 2001,  including
         $12.8  million  related to  acquisitions  of pipelines  and  terminals.
         During  2001 and 2000,  respectively,  the  Partnership  incurred  $5.2
         million and $2.3 million of costs related to such acquisition  reserves
         and reduced the liability accordingly.

         KPL has indemnified the Partnership  against  liabilities for damage to
         the  environment  resulting  from  operations of the pipeline  prior to
         October  3,  1989  (the  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 December  1995,  the  Partnership  acquired the liquids  terminaling
         assets of Steuart Petroleum Company and certain of its affiliates.  The
         asset purchase  agreement  includes a provision for an earn-out payment
         based upon  revenues  of one of the  terminals  exceeding  a  specified
         amount for a seven-year  period ending in December  2002. No amount was
         payable under the earn-out provision in 1999, 2000 or 2001.

         Certain  subsidiaries  of the  Partnership  were sued in a Texas  state
         court in 1997 by Grace Energy  Corporation  ("Grace"),  the entity from
         which  the  Partnership  acquired  ST  Services  in 1993.  The  lawsuit
         involves   environmental   response  and  remediation  costs  allegedly
         resulting from jet fuel leaks in the early 1970's from a pipeline.  The
         pipeline,  which  connected a former Grace terminal with Otis Air Force
         Base in Massachusetts  (the "Otis pipeline" or the "pipeline"),  ceased
         operations  in 1973 and was  abandoned  not later than  1976,  when the
         connecting terminal was sold to an unrelated entity. Grace alleged that
         subsidiaries of the  Partnership  acquired the abandoned  pipeline,  as
         part  of  the   acquisition   of  ST   Services  in  1993  and  assumed
         responsibility  for  environmental  damages allegedly caused by the jet
         fuel  leaks.  Grace  sought a ruling  from the Texas  court  that these
         subsidiaries are responsible for all liabilities, including all present
         and future remediation  expenses,  associated with these leaks and that
         Grace has no  obligation  to  indemnify  these  subsidiaries  for these
         expenses.  In  the  lawsuit,  Grace  also  sought  indemnification  for
         expenses of approximately  $3.5 million that it incurred since 1996 for
         response and remediation required by the State of Massachusetts and for
         additional  expenses  that it  expects  to  incur  in the  future.  The
         consistent  position of the  Partnership's  subsidiaries  has been that
         they did not  acquire  the  abandoned  pipeline  as part of the 1993 ST
         Services  transaction,  and therefore did not assume any responsibility
         for  the  environmental  damage  nor any  liability  to  Grace  for the
         pipeline.

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

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

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

         By letter dated July 26, 2001, the United States  Department of Justice
         ("DOJ")  advised  ST  Services  that  the  Government  intends  to seek
         reimbursement   from  ST  Services  under  the  Massachusetts  Oil  and
         Hazardous   Material  Release  Prevention  and  Response  Act  and  the
         Declaratory Judgment Act for the Government's response costs at the two
         spill areas discussed  above. The DOJ relied in part on the judgment by
         the  Texas  state  court  that,  in the view of the DOJ,  held  that ST
         Services   was   the   current   owner   of  the   pipeline   and   the
         successor-in-interest  of the prior owner and operator.  The Government
         advised ST Services  that it believes it has incurred  costs  exceeding
         $40 million,  and expects to incur future costs exceeding an additional
         $22 million,  for  remediation of the two spill areas.  The Partnership
         believes that its subsidiaries have substantial  defenses.  ST Services
         responded to the DOJ on September 6, 2001,  contesting the Government's
         positions and declining to reimburse  any response  costs.  The DOJ has
         not filed a lawsuit  against ST Services  seeking cost recovery for its
         environmental investigation and response costs.

         On April 7, 2000,  a fuel oil  pipeline  in  Maryland  owned by Potomac
         Electric Power Company ("PEPCO") ruptured. The pipeline was operated by
         a  partnership  of which ST  Services  is  general  partner.  PEPCO has
         reported that it expects to incur total cleanup costs of $70 million to
         $75 million. Since May 2000, ST Services has provisionally  contributed
         a minority  share of the cleanup  expense,  which has been funded by ST
         Services'  insurance  carriers.  The  Partnership  and PEPCO  have not,
         however,   reached  a  final  agreement   regarding  the  proportionate
         responsibility  for this cleanup effort and have reserved all rights to
         assert  claims for  contribution  against each other.  The  Partnership
         cannot predict the amount, if any, that ultimately may be determined to
         be ST Services' share of the remediation  expense, but it believes that
         such  amount  will be  covered  by  insurance  and will not  materially
         adversely affect the Partnership's financial condition.

         As a result of the  rupture,  purported  class  actions have been filed
         against PEPCO and ST Services in federal and state court in Maryland by
         property and/or business owners alleging damages in unspecified amounts
         under various theories,  including under the Oil Pollution Act ("OPA").
         The court  consolidated  all of these  cases in a case  styled as In re
         Swanson Creek Oil Spill  Litigation.  The trial judge recently  granted
         preliminary approval of a $2,250,000 class settlement, with ST Services
         and PEPCO each  contributing half of the settlement fund. Notice of the
         proposed settlement will be sent to putative class members and putative
         class  members  have until  March 26,  2002 to opt out.  ST Services or
         PEPCO can void the  settlement if too many  putative  class members opt
         out and  elect  to  pursue  separate  litigation.  A  hearing  on final
         settlement will be held on April 15, 2002. If the settlement is finally
         approved,  this litigation  should be concluded in 2002. It is expected
         that  most  class  members  will  elect  to  participate  in the  class
         settlement, but it is possible that even if the In re Swanson Creek Oil
         Spill Litigation  settlement  becomes final, ST Services may still face
         litigation from opt-out  plaintiffs.  ST Services'  insurance  carriers
         have assumed the defense of these actions. While the Partnership cannot
         predict  the  amount,  if any,  of any  liability  it may have in these
         suits,  it believes  that such amounts will be covered by insurance and
         that  these  actions  will not have a  material  adverse  effect on our
         financial condition.

         PEPCO and ST  Services  have  agreed  with the State of Maryland to pay
         costs of assessing  natural  resource  damages arising from the Swanson
         Creek oil spill  under OPA,  but they  cannot  predict at this time the
         amount of any damages that may be claimed by Maryland.  The Partnership
         believes that both the assessment costs and such damages are covered by
         insurance and will not materially  adversely  affect the  Partnership's
         financial condition.

         The U.S.  Department of  Transportation  ("DOT") has issued a Notice of
         Proposed  Violation to PEPCO and ST Services  alleging  violations over
         several  years of pipeline  safety  regulations  and  proposing a civil
         penalty of  $674,000.  ST  Services  and PEPCO have  contested  the DOT
         allegations and the proposed penalty. A hearing was held before the DOT
         in late 2001, and ST Services anticipates that the DOT will rule during
         the first  quarter of 2002.  In addition,  by letter  dated  January 4,
         2002, the Attorney  General's  Office for the State of Maryland advised
         ST Services that it plans to exercise its right to seek  penalties from
         ST Services in  connection  with the April 7, 2000 spill.  The ultimate
         amount of any penalty  attributable to ST Services cannot be determined
         at this time,  but the  Partnership  believes that this matter will not
         have a material adverse effect on its financial condition.

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

7.       RELATED PARTY TRANSACTIONS

         The  Partnership has no employees and is managed and controlled by KPL.
         KPL and KSL are  entitled to  reimbursement  of all direct and indirect
         costs  related to the business  activities  of the  Partnership.  These
         costs, which totaled $18.1 million, $17.8 million and $14.2 million for
         the years ended December 31, 2001, 2000 and 1999, respectively, include
         compensation  and benefits  paid to officers  and  employees of KPL and
         KSL,  insurance  premiums,   general  and  administrative   costs,  tax
         information and reporting costs, legal and audit fees. Included in this
         amount  is  $14.3   million,   $12.3   million  and  $11.6  million  of
         compensation  and  benefits,  paid to officers and employees of KPL and
         KSL for the years ended December 31, 2001, 2000 and 1999, respectively.
         In addition, the Partnership paid $0.5 million in 2001 and $0.2 million
         in 2000 and 1999 for an allocable  portion of KPL's overhead  expenses.
         At December 31, 2001 and 2000,  the  Partnership  owed KPL and KSL $4.7
         million and $1.9 million,  respectively,  for these  expenses which are
         due under normal invoice terms.

<PAGE>
8.       BUSINESS SEGMENT DATA

         The Partnership conducts business through two principal operations; the
         "Pipeline  Operations,"  which consists primarily of the transportation
         of refined  petroleum  products  in the  Midwestern  states as a common
         carrier,  and the "Terminaling  Operations,"  which provide storage for
         petroleum products, specialty chemicals and other liquids.

         The  Partnership  measures  segment profit as operating  income.  Total
         assets are those assets controlled by each reportable segment.

<TABLE>
<CAPTION>
                                                                                  Year Ended December 31,
                                                                ------------------------------------------------------
                                                                       2001                2000              1999
                                                                ----------------    ---------------     --------------
<S>                                                             <C>                 <C>                 <C>
         Business segment revenues:
           Pipeline operations................................  $     74,976,000    $    70,685,000     $   67,607,000
           Terminaling operations.............................       132,820,000         85,547,000         90,421,000
                                                                ----------------    ---------------     --------------
                                                                $    207,796,000    $   156,232,000     $  158,028,000
                                                                ================    ===============     ==============
         Business segment profit:
           Pipeline operations................................  $     36,773,000    $    36,213,000     $   35,836,000
           Terminaling operations.............................        45,318,000         23,358,000         28,577,000
                                                                ----------------    ---------------     --------------
              Operating income................................        82,091,000         59,571,000         64,413,000
           Interest expense...................................       (14,783,000)       (12,283,000)       (13,390,000)
           Interest and other income .........................         4,277,000            316,000            408,000
                                                                ----------------    ---------------     --------------
              Income before income taxes and
                extraordinary item............................  $     71,585,000    $    47,604,000     $   51,431,000
                                                                ================    ===============     ==============

         Business segment assets:
           Depreciation and amortization:
              Pipeline operations.............................  $      5,478,000    $     5,180,000     $    5,090,000
              Terminaling operations..........................        17,706,000         11,073,000          9,953,000
                                                                ----------------    ---------------     --------------
                                                                $     23,184,000    $    16,253,000     $   15,043,000
                                                                ================    ===============     ==============
</TABLE>

<PAGE>
<TABLE>
<CAPTION>

                                                                                  Year Ended December 31,
                                                                ------------------------------------------------------
                                                                       2001                2000              1999
                                                                ----------------    ---------------     --------------
<S>                                                             <C>                 <C>                 <C>
         Capital expenditures (excluding acquisitions):
           Pipeline operations................................  $      4,309,000    $     3,439,000     $    3,547,000
           Terminaling operations.............................        12,937,000          6,044,000         11,021,000
                                                                ----------------    ---------------     --------------
                                                                $     17,246,000    $     9,483,000     $   14,568,000
                                                                ================    ===============     ==============

                                                                                       December 31,
                                                                ------------------------------------------------------
                                                                      2001                2000               1999
                                                                ----------------    ---------------     --------------
         Total assets:
           Pipeline operations................................  $    105,156,000    $   102,656,000     $  104,774,000
           Terminaling operations.............................       443,215,000        272,407,000        261,179,000
                                                                ----------------    ---------------     --------------
                                                                $    548,371,000    $   375,063,000     $  365,953,000
                                                                ================    ===============     ==============
</TABLE>

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

<TABLE>
<CAPTION>
                                                                                  Year Ended December 31,
                                                                ------------------------------------------------------
                                                                       2001                2000              1999
                                                                ----------------    ---------------     --------------
<S>                                                             <C>                 <C>                 <C>
         Geographical area revenues:
           United States......................................  $    186,734,000    $   136,729,000     $  136,197,000
           United Kingdom.....................................        21,062,000         19,503,000         21,831,000
                                                                ----------------    ---------------     --------------
                                                                $    207,796,000    $   156,232,000     $  158,028,000
                                                                ================    ===============     ==============

         Geographical area operating income:
           United States......................................  $     76,575,000    $    55,122,000     $   58,539,000
           United Kingdom.....................................         5,516,000          4,449,000          5,874,000
                                                                ----------------    ---------------     --------------
                                                                $     82,091,000    $    59,571,000     $   64,413,000
                                                                ================    ===============     ==============

                                                                                       December 31,
                                                                ------------------------------------------------------
                                                                      2001                2000               1999
                                                                ----------------    ---------------     --------------
         Geographical area net property and equipment:
           United States......................................  $    440,104,000    $   282,685,000     $  275,178,000
           United Kingdom.....................................        41,170,000         38,670,000         41,705,000
                                                                ----------------    ---------------     --------------
                                                                $    481,274,000    $   321,355,000     $  316,883,000
                                                                ================    ===============     ==============
</TABLE>


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

         The  estimated  fair value of debt as of December 31, 2001 and 2000 was
         approximately  $263  million  and  $174  million,  as  compared  to the
         carrying  value of $263 million and $167 million,  respectively.  These
         fair values were estimated using  discounted cash flow analysis,  based
         on the Partnership's  current  incremental  borrowing rates for similar
         types of borrowing  arrangements.  These  estimates are not necessarily
         indicative  of the amounts  that would be realized in a current  market
         exchange. The Partnership has no derivative financial instruments.

         The  Partnership  markets  and sells its  services  to a broad  base of
         customers and performs ongoing credit evaluations of its customers. The
         Partnership  does not  believe it has a  significant  concentration  of
         credit risk at December 31, 2001. No customer constituted 10 percent or
         more of consolidated revenues in 2001, 2000 and 1999.



10.      QUARTERLY FINANCIAL DATA (unaudited)

         Quarterly  operating  results  for  2001 and  2000  are  summarized  as
         follows:
<TABLE>
<CAPTION>

                                                                            Quarter Ended
                                            --------------------------------------------------------------------------
                                                March 31,           June 30,         September 30,       December 31,
                                            ----------------    ----------------    ---------------     --------------
<S>      <C>                                <C>                 <C>                 <C>                 <C>
         2001:
         Revenues.......................    $     48,069,000    $     52,952,000    $    53,403,000     $   53,372,000
                                            ================    ================    ===============     ==============

         Operating income...............    $     18,335,000    $     21,871,000    $    22,076,000     $   19,809,000
                                            ================    ================    ===============     ==============

         Net income.....................    $      8,272,000(a) $     21,144,000(b) $    18,523,000     $   16,850,000
                                            ================    ================    ===============     ==============

         2000:
         Revenues.......................    $     36,680,000    $     38,438,000    $    41,051,000     $   40,063,000
                                            ================    ================    ===============     ==============

         Operating income...............    $     12,922,000    $     14,959,000    $    17,466,000     $   14,224,000
                                            ================    ================    ===============     ==============

         Net income.....................    $      9,664,000    $     12,002,000    $    14,261,000     $   10,734,000 (c)
                                            ================    ================    ===============     ==============
</TABLE>
         (a)      Includes extraordinary item - loss on debt extinguishment, net
                  of income  taxes,  of  approximately  $5.8 million and gain on
                  interest rate lock transaction of approximately $0.6 million.
         (b)      Includes   gain  on   interest   rate  lock   transaction   of
                  approximately $3.2 million.
         (c)      Includes  approximately  $1.9  million of  accrued  litigation
                  costs.

11.      SUBSEQUENT EVENTS (unaudited)

         In January of 2002, KPP issued 1.25 million limited  partnership  units
         in a public offering at $41.65 per unit, generating approximately $49.7
         million in net proceeds. The proceeds were used to reduce the amount of
         indebtedness outstanding under the Partnership's $275 million revolving
         credit facility.

         In February 2002, the  Partnership  issued $250 million of 7.75% senior
         unsecured notes due February 15, 2012. The net proceeds from the public
         offering,  $248.2  million,  were  used to  repay  the  $188.9  million
         outstanding  under the $275 million  revolving  credit agreement and to
         partially  fund  the  acquisition  of all of  the  liquids  terminaling
         subsidiaries of Statia Terminals Group NV ("Statia").

         On February 28, 2002, the Partnership acquired Statia for approximately
         $194  million  in  cash.   The  acquired   Statia   subsidiaries   have
         approximately $107 million in outstanding debt,  including $101 million
         of 11.75% notes due in November  2003. The cash portion of the purchase
         price was funded by the  Partnership's  $275 million  revolving  credit
         agreement and proceeds from the Partnership's February 2002 public debt
         offering.  On March 1,  2002,  the  Partnership  announced  that it had
         commenced  the  procedure  to redeem all of  Statia's  11.75%  notes at
         102.938% of the principal amount, plus accrued interest. The redemption
         is expected to be funded by the  Partnership's  $275 million  revolving
         credit facility.



<PAGE>
                                   SIGNATURES

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

                                   KANEB PIPE LINE OPERATING
                                   PARTNERSHIP, L.P.
                                   By:      Kaneb Pipe Line Company LLC
                                            General Partner

                                   By:       EDWARD D. DOHERTY
                                      ------------------------------------------
                                            Chairman of the Board and
                                            Chief  Executive Officer
                                   Date: March 27, 2002


                               POWERS OF ATTORNEY

         KNOW ALL MEN BY THESE PRESENTS,  that each  individual  whose signature
appears below  constitutes  and appoints each of Edward D. Doherty and Howard C.
Wadsworth  his true and lawful  attorney-in-fact  and agent,  with full power of
substitution  and  resubstitution,  for him and in his name, place and stead, in
any and all  capacities,  to sign any and all amendments to this report,  and to
file  the  same  and all  exhibits  thereto,  and all  documents  in  connection
therewith,   with  the  Securities  and  Exchange   Commission,   granting  said
attorney-in-fact  and agent full power and  authority to do and perform each and
every  act and  thing  requisite  and  necessary  to be done  in and  about  the
premises,  as  fully  to all  intents  and  purposes  as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and agent
or his or their  substitute or substitutes,  may lawfully do or cause to be done
by virtue hereof.

         Pursuant to the  requirements  of the  Securities  and  Exchange Act of
1934,  this report has been signed below by the  following  persons on behalf of
Kaneb Pipe Line Operating  Partnership,  L.P. and in the  capacities  with Kaneb
Pipe Line Company LLC and on the date indicated.
<TABLE>
<CAPTION>

      Signature                                                       Title                      Date
----------------------------------------                     ---------------------------    --------------
<S>                                                          <C>                            <C>
Principal Executive Officer
           EDWARD D. DOHERTY                                 Chairman of the Board           March 27, 2002
----------------------------------------                     and Chief Executive Officer

Principal Accounting Officer
          HOWARD C. WADSWORTH                                Vice President                  March 27, 2002
----------------------------------------                     Treasurer & Secretary

Directors

             SANGWOO AHN                                       Director                      March 27, 2002
----------------------------------------

           JOHN R. BARNES                                      Director                      March 27, 2002
----------------------------------------

           MURRAY R. BILES                                     Director                      March 27, 2002
----------------------------------------

         FRANK M. BURKE, JR.                                   Director                      March 27, 2002
----------------------------------------

           CHARLES R. COX                                      Director                      March 27, 2002
----------------------------------------

            HANS KESSLER                                       Director                      March 27, 2002
----------------------------------------

          JAMES R. WHATLEY                                     Director                      March 27, 2002
----------------------------------------

</TABLE>