FORM 10-K
  
            UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                        Washington, D.C.  20549
  
  (Mark One)
  [X]       ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 
            EXCHANGE ACT OF 1934 [FEE REQUIRED]
  
             For the fiscal year ended    December 31, 1998
                                          -----------------
                               OR        
  
      [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
      SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
  
  Commission File Number  0-12058
                          -------
                                    
                         KENAN TRANSPORT COMPANY
           ------------------------------------------------------
           (Exact name of registrant as specified in its charter)
  
           North Carolina                      56-0516485
  ------------------------------------   ---------------------------------
    (State or other jurisdiction of (IRS Employer Identification No.)
     incorporation or organization)      
  
  
             University Square - West, 143 W. Franklin Street
                 Chapel Hill, North Carolina, 27516-3910
        ------------------------------------------------------------
        (Address of principal executive offices, including Zip Code)
  
  
  Registrant's telephone number, including Area Code:  (919) 967-8221
                                                       --------------
  
  Securities registered pursuant to Section 12(b) of the Act:  None
                                                               ----
  
  Securities registered pursuant to Section 12(g) of the Act:
  
                     Common Stock, No Par Value
                     --------------------------
                          (Title of Class)
  
  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 is not contained herein, and will not be
  contained, to the best of the 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. [X]
  
  Based on the closing sales price of March 1, 1999, the aggregate market
  value of the voting stock held by persons other than those who may be
  deemed affiliates of the registrant was     $31,493,948.
                                              ------------
  
  The number of shares outstanding of the registrant's common stock was
  2,421,562 at March 1, 1999.<PAGE>
  <PAGE>
                  DOCUMENTS INCORPORATED BY REFERENCE     
  
                                 
  
     Location in Form 10-K                  Incorporated Document       
  ---------------------------        -------------------------------------
  
  Part III                           
  Items 10, 11, 12 and 13            Portions of the Company's Proxy
                                     Statement dated March 30, 1999 in
                                     connection with its Annual Meeting 
                                     to be held on May 3, 1999.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
                                    Page 2<PAGE>
  <PAGE>
  
                                     PART I
  
  Item 1.           Business
  -------------------------------------------------------------------------
       (a)  General Development of Business
       Kenan Transport Company ("Kenan") and its wholly-owned subsidiary,
  Petro-Chemical Transport, Inc. ("PCT")(together referred to as the
  "Company" or the "Registrant") are engaged in the transportation of bulk
  commodities in intrastate and interstate commerce. Kenan was incorporated
  under the laws of the State of North Carolina on April 8, 1949.
  
       Over the years, Kenan has grown to become one of the nation's
  leading transporters of petroleum, propane gas and chemicals in the
  country. Kenan entered 1998 with operations concentrated in the Southeast
  and as one of the nation's 20 largest tank truck carriers in the country.
  On February 28, 1998, Kenan acquired from Citgo Petroleum Corporation,
  100% of the outstanding stock of PCT. PCT has significantly expanded the
  Company's national presence and geographic service area. PCT operates a
  nationwide inventory control and logistics management system from its
  headquarters, located in Dallas, Texas. The system enables PCT to manage
  gasoline inventories at retail locations for current and prospective
  customers electronically and facilitates delivery of gasoline on an as-
  needed basis to those locations. Kenan Transport Company is among the ten
  largest tank truck carriers in the country. PCT accounted for 26% of the
  Company's 1998 consolidated revenue.
  
  
       (b)  Financial Information About Industry Segments
       For financial information reporting purposes, the Company is deemed
  to engage in one industry segment, the transportation of petroleum,
  propane gas and chemicals in the tank truck industry. The Company has no
  geographic presence outside the United States.
  
  
       (c)  Narrative Description of Business
       At December 31, 1998, the Company operated a network of terminals
  and a fleet of 742 tractors and 1,047 specialized trailers. The Company
  had 1,670 employees at year-end. One customer accounted for 19% of the
  Company's revenue in 1998.  
  
       The Company's business involves transportation of petroleum,
  propane gas and chemical products throughout the United States. Petroleum
  and propane gas products are typically transported from bulk storage
  facilities to local retail outlets. Chemical products are generally
  transported longer distances to manufacturing locations. 
  
       The Company has a large number of competitors with no single
  competitor being dominant in the industry. The Company competes with the
  trucking operations of the major oil and chemical companies as well as
  with independent carriers. Competition is primarily based on price and
  customer service. The Company considers its business to be somewhat
  seasonal with the winter heating season providing the highest demand
  levels.
  
       
  
  
                                    Page 3<PAGE>
  <PAGE>
  
  
       The Company operations include storage of fuel in underground
  storage tanks for use in its operations. Management is committed to the
  protection of the environment and has procedures in place to ensure
  compliance with federal and state regulations and to provide appropriate
  response to spills and leaks that occur. See "Management's Discussion and
  Analysis of Financial Condition and Results of Operations."
       
       The Company is involved in various claims and legal actions arising
  in the normal course of business. It is the opinion of management that
  these matters will have no significant impact on the financial statements
  of the Company.
  
  
  Item 2.           Properties
  -------------------------------------------------------------------------
       The Company owns twenty real properties located in five states;
  Florida, Georgia, North Carolina, South Carolina and Virginia.  At
  December 31, 1998, these properties had a net book value of $12,296,000.
  Additionally, the Company leases twenty-two real properties located in
  the Southeast and Texas, under terms of one to five years. The properties
  are used for offices, terminals and vehicle maintenance facilities
  supporting the operations of the Company.
  
     The Company transports liquid products using over-the-road tractors
  and tank trailers. At December 31, 1998, the net book value of the
  Company's owned revenue equipment, consisting of 499 tractors and 986
  trailers, was $39,042,000. Also in the Company's fleet were 64 tractors
  and 40 trailers under capital lease agreements with a net book value of
  $2,938,000. The balance of the Company's fleet, 179 tractors and 21
  trailers, consists of equipment rented under operating lease agreements
  with terms of one to six years and tractor capacity through independent
  contractors who provide a tractor and bear all associated operating and
  financing expenses.
  
     
  
  Item 3.    Legal Proceedings
  -------------------------------------------------------------------------
       There are no material pending legal proceedings.
  
  
  
     Item 4.    Submission of Matters to a Vote of Security Holders
  -------------------------------------------------------------------------
       No matters were submitted during the fourth quarter of 1998 to a
  vote of security holders, through the solicitation of proxies or
  otherwise.
  
  
  
  
  
  
  
  
  
                                    Page 4<PAGE>
  <PAGE>
  
  
  Item 4(a). Executive Officers of the Registrant
  ----------------------------------------------------------------------
       Information concerning the executive officers of the Company
  follows:
  
        Name                Age                 Position                
  --------------------     ----     ------------------------------------
  Lee P. Shaffer            60      Director, Chief Executive Officer of
                                    the Company beginning in 1996;
                                    President of the Company since 1975;
                                    Chief Operating Officer of the 
                                    Company (1975-1996).
  
  William L. Boone          59      Vice President-Finance and Secretary
                                    of the Company since 1974. Treasurer
                                    of the Company beginning in 1996;
                                    Assistant Treasurer of the Company
                                    (1981-1996).
  
  L. Avery Corning          41      Vice President-Operations of the
                                    Company beginning in 1999. Vice
                                    President-Operations and Sales of 
                                    the Company (1994-1998); President
                                    (1990-1994), Redwing Carriers, Inc.,
                                    Tampa, Florida.
  
  Gary J. Knutson           48      Vice President-Pricing and Business
                                    Analysis of the Company beginning
                                    in 1999. Vice President-Marketing
                                    of the Company  (1994-1998). Vice
                                    President-Sales of the Company 
                                    (1990-1993).
  
  John E. Krovic            43      Vice President-Human Resources and
                                    Safety of the Company since 1993.
  
  William P. Prevost        43      Vice President-Marketing beginning
                                    in 1999. Vice President of the 
                                    Company (1998). President and Chief
                                    Operating Officer (1986-1997),
                                    Transport South, Inc., Smyrna,
                                    Georgia.
  
  James H. Reid             51      Vice President of the Company
                                    beginning in 1998. President of 
                                    Petro-Chemical Transport, Inc.
                                    beginning in 1997. President (1993-
                                    1998), Citgo Pipeline & Products,
                                    Tulsa, Oklahoma. 
  
  
  
  
                                    Page 5<PAGE>
  <PAGE>
  
  
  Item 4(a). Executive Officers of the Registrant  -continued-
  ----------------------------------------------------------------------
  
        Name                Age                 Position                
  --------------------     ----     ------------------------------------
  Lee P. Shaffer, III (1)   39      Vice President-Operations Services 
                                    of the Company beginning in 1994.
                                    Director of Operations Services of 
                                    the Company (1992-1993). Director of
                                    Operations of the Company (1988-1992).
  
  (1)  Lee P. Shaffer, III is the son of Lee P. Shaffer, President and
  Chief Executive Officer of the Company.
  
  
  
  
                                   PART II
  
  
  Item 5.  Market for the Registrant's Common Equity and Related 
           Shareholder Matters
  -------------------------------------------------------------------------
      The Registrant's stock trades on the Nasdaq stock market under the
  symbol KTCO. The Company had approximately 623 shareholders, including
  holders whose shares are held in street names, on December 31, 1998.
  
      The high and low sale prices and the cash dividends paid per share
  for each quarter in the last two fiscal years are shown below:
  
                            1998                           1997
                ---------------------------    ---------------------------
  Quarter         High      Low    Dividend      High      Low    Dividend
  --------      --------  -------  --------    --------  -------  --------
  First          $39.75    $28.5    $.07        $20.5     $18.5    $.0675
  Second          35.38     32       .07         21        19       .0675 
  Third           34        29.5     .0725       22.75     19.75    .07
  Fourth          33.25     29       .0725       41        22.25    .07  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
                                    Page 6<PAGE>
<PAGE>

<TABLE>
Item 6.    Selected Financial Data
-------------------------------------------------------------------------
    Selected financial data for the past five years is presented below:

<CAPTION>
                                    1998        1997        1996        1995        1994  
------------------------------------------------------------------------------------------
<S>                                    <C>          <C>         <C>         <C>         <C>    
Operations (in thousands)
---------------------------------
Operating revenue                 $130,046     $73,308     $68,795     $61,717     $59,100
Operating income                     9,130       6,462       6,244       5,124       5,787
Net income (1)                       5,159       4,090       3,805       3,323       3,682


Per Share Data
---------------------------------
Basic and diluted earnings (1)(2)   $ 2.14     $  1.71     $  1.59     $  1.39     $  1.55
Dividends declared                   .2875       .2775       .2675       .2575       .2475
Book value                           22.37       20.61       19.19       17.86       16.72
Market value                         32.00       36.63       19.00       20.75       17.50



Financial Position (in thousands)
---------------------------------
Cash, cash equivalents and 
  short-term investments           $ 8,023     $ 3,422     $11,181     $10,106     $13,759
Working capital                      7,239       1,753      10,034       9,568      12,260
Net operating property              57,625      52,239      44,133      41,265      35,015
Total assets                        94,644      77,115      65,044      61,188      57,625
Total debt, including 
  capital lease obligations         13,164       5,570         --          --          --
Shareholders' equity                54,180      49,368      45,843      42,677      39,771


Ratios and Statistics
---------------------------------
Operating ratio                      93.0%       91.2%       90.9%       91.7%       90.2%
Return on equity (1)                   10%          9%          9%          8%          9%
Current ratio                         1.42        1.12        2.00        1.98        2.24
Debt equity ratio                      .24         .11         --          --          --
Shares outstanding (in thousands)    2,422       2,395       2,389       2,389       2,378

<FN>
<F1>
      (1)   Before the effect of an extraordinary charge in 1994 of 
            $823,000 ($.35 per share).
      (2)   All periods restated in accordance with SFAS No. 128.


</FN>
</TABLE>

    

                                          Page 7<PAGE>
  <PAGE>
  
  Item 7.  Management's Discussion and Analysis of Financial Condition and
           Results of Operations
  -------------------------------------------------------------------------
  
  General
  
      The following table sets forth the percentage relationship of expense
  items to operating revenue for the periods indicated. 
  
                                          Percentage of Operating Revenue
                                          -------------------------------
  Years Ended December 31                   1998        1997        1996 
  -----------------------------------------------------------------------
  Operating revenue                        100.0%      100.0%      100.0%
  
  Operating expenses
     Wages and employee benefits            50.6        50.2        50.3 
     Fuel and other operating expenses      21.0        20.8        20.4
     Depreciation and amortization           8.0         9.5         9.6  
     Taxes and licenses                      5.4         6.1         6.2
     Insurance and claims                    3.9         3.7         3.6
     Equipment rents                         4.1          .9          .8
                                          -------------------------------
     Total operating expenses               93.0        91.2        90.9
                                          -------------------------------
  Operating income                           7.0         8.8         9.1
  Interest expense                           (.5)         --          --
  Other income and expenses, net              .2          .2          --
  Income tax expense                        (2.7)       (3.4)       (3.6)
                                          -------------------------------
  Net income                                 4.0         5.6         5.5
                                          =============================== 
  
  
  Results of Operations - 1998 Compared to 1997
  ---------------------------------------------
      Operating revenue increased $56,738,000 (77%) in 1998 to $130,046,000
  primarily as a result of Kenan's acquisitions of Transport South, Inc.
  ("TSI") on December 1, 1997 and Petro-Chemical Transport, Inc. ("PCT") on
  February 28, 1998. Operating revenues attributable to the TSI and PCT
  acquisitions were approximately $22,093,000 and $34,193,000, respectively
  in 1998. Revenue from TSI was $2,300,000 in 1997. The average revenue per
  mile increased to $1.71 from $1.55 in 1997. Miles operated increased 61%
  to 76,232,000 in 1998.
                                                        
      Operating expenses increased $54,070,000 (81%) in 1998 to
  $120,916,000. The increase was due in large part to the acquisitions of
  TSI and PCT and the 61% increase in miles operated. Disproportional
  increases occurred in driver wages, outside vendor maintenance and
  equipment rents in 1998. The operating ratio, which represents operating
  expenses as a percentage of operating revenues, increased from 91.2% in
  1997 to 93.0% for the year ended December 31, 1998.
  
  
  
  
  
                                    Page 8
  
  
  <PAGE>
  <PAGE>
  
  
      Wages and employee benefits increased $29,041,000 (79%) in 1998 to
  $65,845,000. As a percentage of revenue, wages and employee benefits
  increased to 50.6% of revenue from 50.2% in 1997. Driver wages, the
  Company's largest operating expense item, was impacted by volume and the
  higher cost of driver wage programs associated with the PCT operation.
  Driver wages and benefits increased 88% over the prior year. 
  
      Fuel and other operating expenses increased $12,038,000 (79%) in 1998
  to $27,286,000. As a percentage of revenue, fuel and other operating
  expenses increased slightly to 21.0% in 1998 compared to 20.8% in 1997.
  Outside maintenance accounted for a $4,485,000 increase in operating
  expenses. Maintenance of PCT tractors and trailers is generally
  outsourced to support their widespread national operations. While fuel
  costs were up $1,427,000 over 1997 levels due to the 61% increase in
  miles operated, a 26% reduction in average fuel prices during the year
  allowed fuel, as a percentage of revenue, to decrease to 4.6% of revenue
  in 1998 from 6.2% in 1997. Communications expense was up $817,000 to
  support PCT's on-board computer systems installed on its trucks.
  
      Depreciation and amortization expenses increased $3,440,000 (49%) in
  1998 to $10,402,000. As a percentage of revenue, depreciation and
  amortization expense decreased to 8.0% in 1998 compared to 9.5% in 1997.
  The relative decrease in depreciation, expressed as a percentage of
  revenue, is due to the increase in leased equipment during 1998. The
  majority of PCT tractors are operated under lease agreements.
  Consequently, equipment rents increased $4,611,000 in 1998 to $5,269,000;
  4.1% of revenue in 1998 from .9% in 1997.
  
      Taxes and licenses increased $2,557,000 (57%) in 1998 to $7,039,000.
  As a percentage of revenue, taxes and licenses decreased to 5.4% from
  6.1% in 1997. The cost increase was primarily attributable to the
  increase in fleet size. The reduction in costs as a percentage of revenue
  is attributed to improved utilization and the favorable impact of leasing
  as rent expense includes the cost of taxes and licenses on the leased
  equipment.
  
      Insurance and claims costs increased $2,383,000 (89%) in 1998 to
  $5,075,000. As a percentage of revenue, insurance and claims expense
  increased slightly to 3.9% of revenue in 1998 from 3.7% in 1997 which was
  due in large part to increases in insurance premiums.
  
      Interest expense was $762,000 in 1998 compared to $40,000 in 1997.
  The average monthly balance of outstanding debt and capital lease
  obligations was $10,124,000 in 1998 compared to $352,000 in 1997.
      
      The Company's effective tax rate was 40.5% in 1998 compared to 38.0%
  in 1997. The increase was primarily attributable to nondeductible
  amortization expense related to intangible assets.
      
      
  
  
  
  
  
  
                                    Page 9<PAGE>
  <PAGE>
  
  
  Results of Operations - 1997 Compared to 1996
  ---------------------------------------------
      Revenue increased 7% in 1997 to $73,308,000. The $4,513,000 increase
  in revenue was generated by $2,300,000 of additional business resulting
  from the TSI acquisition on December 1, 1997, and $2,213,000 due to
  growth in demand for transportation services. The average revenue per
  mile decreased to $1.55 from $1.56 in 1996. Miles operated increased 7%
  to 47,252,000 in 1997.
  
      Operating expenses increased 7% in 1997 to $66,846,000. The
  $4,295,000 increase was due in large part to the 7% increase in miles
  operated, an increase in driver wage expense, higher claims experience,
  and a 6% increase in depreciation and amortization expense. The operating
  ratio increased from 90.9% to 91.2% for the year ended December 31, 1997.
  
      Wages and employee benefits increased $2,224,000 (6%) in 1997 to
  $36,804,000. Wages and employee benefits as a percentage of revenue were
  50.2% compared to 50.3% in 1996. A 10% increase in driver wages was
  offset by lower workers' compensation premiums and claims.
  
      Fuel and other operating expenses increased $1,224,000 (9%) in 1997
  to $15,248,000. As a percentage of revenue, fuel and other operating
  expenses increased to 20.8% in 1997 from 20.4% in 1996. Although fuel
  prices decreased 6% in 1997, equipment maintenance and other operating
  expenses increased 18%. 
  
      Insurance and claims costs, taxes and licenses, depreciation and
  amortization and equipment rents were unchanged as a percentage of
  revenue in 1997 compared to 1996.  
  
      Net interest income and other expenses increased $144,000 in 1997.
  Higher average cash balances and interest rates in 1997 contributed to
  the increase.
  
      The Company's effective tax rate was 38.0% in 1997 compared to 39.2%
  in 1996. The decrease was primarily attributable to the Company's
  investments in tax exempt securities in 1997.
  
  
  
  Liquidity and Capital Resources
  ---------------------------------------------
      At the end of 1998, cash and cash equivalents totaled $8,023,000, an
  increase of $4,601,000 from the end of 1997. Working capital of
  $7,239,000 increased $5,486,000 from year-end 1997, and the current ratio
  was 1.42 compared to 1.12 in 1997. Working capital needs have generally
  been met with cash flows from operations. 
  
      The continued growth of the Company's business has and will continue
  to require significant investments in new revenue equipment. The Company
  has financed revenue equipment purchases with cash flows from operations
  and through capital lease agreements. Capital lease obligations totaled
  $3,164,000 at December 31, 1998, of which $1,108,000 was classified as
  current.
  
  
                                    Page 10
  <PAGE>
  <PAGE>
  
  
      On December 22, 1998, the Company entered into a lease commitment
  (the "Lease Commitment") to facilitate the financing of tractors having
  an expected acquisition cost of $3,921,000. The Lease Commitment expires
  March 31, 1999 and provides repayment periods of 36, 48 and 60 months.
  The interest rate is based on two-year Treasury Notes and the one-year
  LIBOR rate as published by the Wall Street Journal on the funding date.
  
      Net capital expenditures planned for 1999, including equipment to be
  acquired under the Lease Commitment, will be approximately $17,000,000.
  At December 31, 1998, the Company was committed to spend $7,400,000 for
  revenue equipment in 1999. Management believes that cash flows from
  operations, the Company's line of credit, and purchases through capital
  leases will be sufficient to fund these planned expenditures as well as
  1999 working capital requirements, expansion opportunities and other
  corporate needs.
  
      The Company's long-term debt, including current portion, increased to
  $10,000,000 at December 31, 1998 from $2,500,000 at December 31, 1997.
  The increase was attributable to the Company's acquisition of PCT on
  February 28, 1998. The investment required a cash outlay of $7,880,000
  and assumption of liabilities totaling $4,048,000. To finance the
  acquisition, the Company borrowed $7,500,000 under its $20,000,000
  unsecured line of credit agreement. The credit agreement matures March
  2003, and stipulates that amounts borrowed in excess of $10,000,000 are
  subject to certain repayment provisions.    
  
  
  
  Environmental Matters
  
      The Company's operations require the storage of fuel for use in its
  tractors in both underground and aboveground tanks. The Company has a
  program to maintain its fuel storage facilities in compliance with
  environmental regulation. Under the program, the Company incurs costs to
  replace tanks, remediate soil contamination resulting from overfills,
  spills and leaks and monitor facilities on an ongoing basis. These costs
  are recorded when it is probable that a liability has been incurred and
  the related amount can be reasonably estimated. Such costs have not been
  and are not expected to be material to the Company's operations or
  liquidity. 
  
  
  
  Year 2000
  
      The Year 2000 issue is the result of computerized systems being
  programmed to store and process data using a two digit field to represent
  the year rather than a four digit field. As a result of the century
  change, businesses are at risk for possible miscalculations or system
  failures causing potentially causing disruptions in their operations.
  
  
  
  
  
  
                                    Page 11<PAGE>
  <PAGE>
  
  
      The Company has reviewed its Year 2000 issues and has completed an
  assessment of its internal information technology systems and embedded
  technology systems. The Company is currently upgrading those systems that
  it found to have date related deficiencies and testing the implementation
  of those solutions prior to any anticipated impact on its systems. Full
  compliance is expected in the second quarter of 1999. 
                                                        
      The Company's application software programs consist of both
  internally developed programs and purchased software. The Company has
  verified that substantially all of its internally developed programs are
  Year 2000 compliant. All noncompliant purchased software has been
  identified and is being upgraded. Most of these upgrades were covered by
  the Company's existing maintenance with its vendors and did not result in
  any incremental expense as a result of the Year 2000 issue.
                                 
      The total hours and cost for remediation of internal information and
  embedded technology systems are estimated to be 3,800 and $258,000,
  respectively. As of December 31, 1998, the Company has incurred and
  expensed approximately $103,000 related to Year 2000 readiness. These
  cost estimates include internal and external labor for remediation and
  testing of the Company's systems. Overall, management believes that the
  cost will not be material and the Year 2000 will not pose significant
  operational problems for the Company's internal systems.
  
      As part of its Year 2000 initiative, the Company is surveying
  selected third parties (vendors and customers) with whom it has material
  relationships to determine the status of their Year 2000 compliance
  programs. The goal is to ensure that no interruptions of service will
  occur as a result of Year 2000 issues at those companies on which the
  Company's business is materially dependent. To date, the Company's
  investigations and assessments have not revealed a material third party
  that is not expecting to be Year 2000 compliant. However, the costs and
  timing of third party compliance is not within the Company's control. The
  Company is presently unable to determine the potential effect on its
  operations, liquidity and financial condition in the event material
  vendors and customers are not Year 2000 compliant. The Company will
  continue to monitor the progress of those third parties and formulate
  contingency plans at the time that it believes a material vendor or
  customer will not become Year 2000 compliant. While there can be no
  assurance the Company will not be adversely affected by the Year 2000
  issue, it is committed to ensuring that it is fully compliant.
  
  
  
  Market Risk
  
      Market risk is the potential loss arising from adverse changes in
  market rates and prices, such as foreign currency rates, and other
  relevant market rates or price changes. In the ordinary course of
  business, Kenan is exposed to interest rate risks and the Company
  regularly evaluates its exposure to this risk. The Company does not hold
  or issue derivative instruments for trading purposes.
  
  
  
  
                                    Page 12<PAGE>
  <PAGE>
  
  
      At December 31, 1998, the Company has debt totaling $10 million and
  an interest rate swap with a notional value of $7 million. The interest
  rate swap effectively converts $7 million of the Company's outstanding
  floating rate debt to fixed interest rate debt. For fixed rate debt,
  interest rate changes affect the fair market value but do not impact
  earnings or cash flows. For floating rate debt, interest rate changes
  generally do not affect fair market values but do impact future earnings
  and cash flows, assuming other factors are held constant. 
  
      The fair value of the interest rate swap agreement represents the
  estimated receipts or payments that would be made to terminate the
  agreement. At December 31, 1998, the Company would have paid
  approximately $260,000 to terminate the agreement. Assuming a 100 basis
  point reduction in the LIBOR interest rate curve, the fair value of the
  interest rate swap agreement would decrease by approximately $268,000.
  
  
  
  Forward-Looking Statements
  
      Statements in this document that are not historical facts are hereby
  identified as "forward-looking statements" for the purpose of the safe
  harbor provided by Section 21E of the Securities Act of 1934 and Section
  27A of the Securities Act of 1933. The Company cautions readers that such
  "forward-looking statements," including without limitation, those
  relating to the Company's future business prospects, revenues, working
  capital, liquidity, capital needs, interest costs and income, wherever
  they occur in this document or in other statements attributable to the
  Company are estimates reflecting the best judgement of the Company's
  senior management and involve a number of risks and uncertainties that
  could cause actual results to differ materially from those suggested by
  the "forward-looking statements". 
  
      The Company's future operating results may be affected by a number of
  factors that include but are not limited to: general economic conditions
  such as inflation and interest rates; competitive conditions within the
  Company's markets, including adverse changes in demand for trucking
  services, pricing pressure, availability of drivers and fuel prices; the
  Company's ability to sell its services profitably, successfully increase
  market share and effectively manage expense growth relative to revenue in
  anticipation of pressure on gross margins; changes in governmental
  regulation; changes in the trucking transportation and logistic
  industries; and changes in the Company's labor relations or other
  unforeseeable circumstances. 
  
      Disclosures concerning Year 2000 issues also contain forward-looking
  statements that include assessments, timetables and cost estimates. The
  incremental costs of the Year 2000 project and the time by which the
  Company believes it will complete the Year 2000 modifications, as well as
  new system initiatives that are Year 2000 compliant and third party
  compliance, are based upon management's best estimates. There exists the
  possibility that factors outside of management's control may have a
  material impact on the Company operations.
   
  
  
                                    Page 13<PAGE>
  <PAGE>
  
  Item 8.  Financial Statements and Supplementary Data
  -------------------------------------------------------------------------
  
  REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
  
  
  To the Shareholders and Board of Directors of Kenan Transport Company:
  
      We have audited the accompanying consolidated balance sheets of Kenan
  Transport Company (a North Carolina corporation) and subsidiary as of
  December 31, 1998 and 1997, and the related consolidated statements of
  income, shareholders' equity and cash flows for each of the three years
  in the period ended December 31, 1998. These financial statements are the
  responsibility of the Company's management. Our responsibility is to
  express an opinion on these financial statements based on our audits.
  
      We conducted our audits in accordance with generally accepted
  auditing standards. 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 financial statements referred to above present
  fairly, in all material respects, the financial position of Kenan
  Transport Company and subsidiary as of December 31, 1998 and 1997, and
  the results of their operations and cash flows for each of the three
  years in the period ended December 31, 1998, in conformity with generally
  accepted accounting principles.
  
  
  
                               Arthur Andersen LLP
  
  
  
  
  Raleigh, North Carolina,
  February 19, 1999.
  
  
  
  
  
  
  
  
  
  
  
  
  
  
                                    Page 14<PAGE>
  <PAGE>
                           KENAN TRANSPORT COMPANY
                         CONSOLIDATED BALANCE SHEETS
                            (Dollars in thousands)
  
                                                         December 31
                                                  -------------------------
                                                     1998            1997
  -------------------------------------------------------------------------
  ASSETS
  ---------------------------------------------
  Current Assets
     Cash and cash equivalents                      $ 8,023        $ 3,422 
     Accounts receivable, net                        10,441          8,020 
     Operating supplies and parts                       572            521 
     Prepaid tires                                    1,851          1,471 
     Prepaid insurance, licenses and other            1,353            886 
     Deferred income taxes                            2,164          1,747 
                                                    -----------------------
         Total Current Assets                        24,404         16,067 
  
  Operating Property
     Land                                             3,464          3,464 
     Buildings and leasehold improvements            11,412         10,968 
     Revenue equipment                               72,703         65,974 
     Other equipment                                  6,490          4,755 
                                                    -----------------------
                                                     94,069         85,161 
     Accumulated depreciation and amortization      (36,444)       (32,922)
                                                    -----------------------
         Net Operating Property                      57,625         52,239 
  
  Intangible Assets, net                             10,944          7,559
  Other Assets                                        1,671          1,250 
                                                    ----------------------- 
                                                    $94,644        $77,115
                                                    =======================
  LIABILITIES AND SHAREHOLDERS' EQUITY
  ---------------------------------------------
  Current Liabilities
     Current maturities of long-term debt           $   --         $   500
     Capital lease obligations                        1,108            995
     Accounts payable                                 2,784          2,517 
     Wages and employee benefits payable              9,331          6,641 
     Claims payable                                   3,942          3,553 
     Income taxes currently payable                     --             108 
                                                    -----------------------
         Total Current Liabilities                   17,165         14,314 
  
  Long-term Debt                                     10,000          2,000
  Capital Lease Obligations                           2,056          2,075  
  Deferred Income Taxes                              11,243          9,358 
  
  Shareholders' Equity
     Common stock; no par; 20,000,000 shares
        authorized; 2,421,562 and 2,394,780 
        shares issued and outstanding                 4,400          3,096 
     Deferred incentive compensation                   (956)           --
     Retained earnings                               50,736         46,272 
                                                    ----------------------- 
                                                     54,180         49,368 
                                                    ----------------------- 
                                                    $94,644        $77,115 
                                                    =======================
  
  The Notes to Consolidated Financial Statements are an integral part of
  these balance sheets.
  
                               Page 15<PAGE>
<PAGE>
                                   KENAN TRANSPORT COMPANY
                              CONSOLIDATED STATEMENTS OF INCOME
                           (In thousands except per share amounts)

<TABLE>
<CAPTION>

                                                        Years Ended December 31 
                                                   ---------------------------------
                                                     1998        1997        1996   
------------------------------------------------------------------------------------
<S>                                                <C>          <C>         <C>
Operating Revenue                                  $130,046     $73,308     $68,795 

Operating Expenses
   Wages and employee benefits                       65,845      36,804      34,580 
   Fuel and other operating expenses                 27,286      15,248      14,024 
   Depreciation and amortization                     10,402       6,962       6,598 
   Taxes and licenses                                 7,039       4,482       4,261 
   Insurance and claims                               5,075       2,692       2,502 
   Equipment rents                                    5,269         658         586 
                                                   ---------------------------------
                                                    120,916      66,846      62,551  
                                                   ---------------------------------
Operating Income                                      9,130       6,462       6,244  
   Interest expense                                    (762)        (40)        (20)
   Interest income and other expenses, net              301         174          30  
                                                   ---------------------------------
Income before Provision for Income Taxes              8,669       6,596       6,254  
   Provision for income taxes                         3,510       2,506       2,449  
                                                   ---------------------------------
Net Income                                         $  5,159     $ 4,090     $ 3,805  
                                                   =================================


Basic and Diluted Earnings per Share               $   2.14     $  1.71     $  1.59  
                                                   =================================

The Notes to Consolidated Financial Statements are an integral part of 
these statements.    

</TABLE>










        





                                          Page 16<PAGE>
<PAGE>
                                   KENAN TRANSPORT COMPANY
                       CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                                       (In thousands)


<TABLE>
<CAPTION>
                                Common Stock                                 Total
                              ----------------    Retained    Deferred    Shareholders'
                              Shares    Amount    Earnings  Compensation     Equity
                              --------------------------------------------------------
<S>                            <C>      <C>        <C>         <C>           <C>     
Balance, December 31, 1995     2,389    $2,996     $39,681     $  --         $42,677  

Dividends                                             (639)                     (639)
Net income                                           3,805                     3,805
                           --------------------------------------------------------
Balance, December 31, 1996     2,389     2,996      42,847        --          45,843

Dividends                                             (665)                     (665)
Stock bonus award                  6       100                                   100
Net income                                           4,090                     4,090
                           --------------------------------------------------------
Balance, December 31, 1997     2,395     3,096      46,272        --          49,368

Dividends                                             (695)                     (695)
Stock bonus award                  6       197                                   197
Issuance of restricted stock      21       696                  (696)            --      
Nonqualified stock option
   award                                   411                  (411)            --
Recognition of deferred
   compensation                                                  151             151
Net income                                           5,159                     5,159
                           --------------------------------------------------------
Balance, December 31, 1998     2,422    $4,400     $50,736     $(956)        $54,180
                              ========================================================

The Notes to Consolidated Financial Statements are an integral part of 
these statements.

</TABLE>

















                                          Page 17<PAGE>
<PAGE>
                                  KENAN TRANSPORT COMPANY
                           CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (Dollars in thousands)
<TABLE>
<CAPTION>
                                                              Years Ended December 31 
                                                        ---------------------------------
                                                           1998        1997        1996  
-----------------------------------------------------------------------------------------
<S>                                                      <C>         <C>         <C>     
Cash Flows from Operating Activities:
   Net income                                            $ 5,159     $ 4,090     $ 3,805 
   Adjustments to reconcile net income to net
    cash provided by operating activities:
      Depreciation and amortization                       10,402       6,962       6,598
      Deferred income taxes                                  390         171         551 
      Common stock issued under incentive plan               197         100         -- 
      Amortization of deferred compensation                  151         --          --
      Other, net                                            (401)       (393)       (246)
      Changes in operating assets and liabilities 
        net of effects from business acquisitions:
           Accounts receivable                              (478)     (3,032)        (43)
           Operating supplies and parts                      (51)       (108)         93 
           Prepayments                                      (259)       (152)        146 
           Accounts payable                                 (784)        796         288 
           Wages and employee benefits payable             1,225       1,380         988 
           Claims payable                                    389         144        (744) 
           Income taxes currently payable                    (83)         56        (256) 
                                                         --------------------------------
   Net cash provided by operating activities              15,857      10,014      11,180 

Cash Flows from Investing Activities:
   Purchases of operating property, net                   (8,267)     (8,037)     (9,466)
   Business acquisitions                                  (7,880)    (11,446)        --
   Sales of short-term investments, net                      --          --        6,886
                                                         --------------------------------
   Net cash used in investing activities                 (16,147)    (19,483)     (2,580)

Cash Flows from Financing Activities:
   Borrowings under line of credit agreement               7,500       2,500         --
   Payments on note obligations                             (375)        --          -- 
   Principal payments on capital lease obligations        (1,539)       (125)        --
   Dividends                                                (695)       (665)       (639)
                                                         --------------------------------
   Net cash provided by (used in) financing activities     4,891       1,710        (639)
                                                         --------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents       4,601      (7,759)      7,961
Cash and Cash Equivalents at Beginning of Year             3,422      11,181       3,220 
                                                         --------------------------------
Cash and Cash Equivalents at End of Year                 $ 8,023     $ 3,422     $11,181 
                                                         ================================

Noncash Investing and Financing Activities:
   Liabilities assumed in business acquisitions          $ 4,048     $ 3,619     $   --
   Equipment acquired through capital leases               1,633         --          --

Supplemental Cash Flow Disclosures:
   Interest paid                                         $   597     $    38     $    21
   Income taxes paid                                       3,228       2,279       2,154 

The Notes to Consolidated Financial Statements are an integral part of these statements.   

</TABLE>

                                          Page 18
<PAGE>
  <PAGE>
  
                           KENAN TRANSPORT COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  
  
 Note 1 - Significant Accounting Policies
 ---------------------------------------------------------------
 Preparation of Financial Statements - The consolidated financial
 statements are prepared in conformity with generally accepted accounting
 principles and include the accounts of Kenan Transport Company ("Kenan")
 and its wholly-owned subsidiary, Petro-Chemical Transport,
 Inc.("PCT")(together referred to as the "Company.") All significant
 intercompany accounts and transactions have been eliminated.
 
 The preparation of financial statements requires management to make
 estimates and assumptions that affect the reported amounts of assets and
 liabilities and disclosure of contingent assets and liabilities at the
 date of the financial statements and the reported amounts of revenues and
 expenses during the reporting periods. Actual results could differ from
 those estimates.
 
 Certain reclassifications have been made to the 1997 and 1996 previously
 reported consolidated financial statements.
 
 Cash Equivalents and Short-Term Investments - The Company classifies
 investments maturing within three months from the date of purchase as
 cash equivalents. All investments at December 31, 1998 and 1997 were cash
 equivalents. 
 
 Tires - The cost of replacement tires is included in operating supplies
 and parts in the accompanying consolidated balance sheets. When installed
 on revenue equipment, tire costs are included in prepayments and
 amortized over their useful life based on mileage.
 
 Operating Property - Operating property, including operating property
 under capital leases, is recorded at cost, net of tires and is
 depreciated or amortized over the estimated useful life of the related
 assets. Maintenance and repairs are charged to operating expenses as
 incurred; renewals and improvements are capitalized. Depreciation is
 computed on the straight-line method using lives of 3 to 15 years for
 revenue equipment, 15 to 40 years for buildings, remaining life of leases
 for leasehold improvements, and 2 to 10 years for other equipment.
 
 Claims Payable - Claims payable represents the estimated cost of open
 claims retained and paid by the Company under its insurance programs for
 workers' compensation, group medical, bodily injury and property damage.
 This estimate is based on historical information along with certain
 assumptions about future cash flows. Changes in assumptions for such
 things as medical costs, environmental hazards and legal actions, as well
 as changes in actual experience could cause this estimate to change. In
 the accompanying consolidated statements of income, workers' compensation
 costs are included in wages and employee benefits expenses, and other
 claims costs are included in claims and insurance expenses.
 
 
 
 
 
                                   Page 19<PAGE>
 <PAGE>
 
 Environmental Expenditures - The Company's operations require the storage
 of fuel for use in its tractors in both underground and aboveground
 tanks. The Company incurs costs to replace tanks, remediate soil
 contamination resulting from overfills, spills and leaks and monitor
 facilities on an ongoing basis. These costs are recorded when it is
 probable that a liability has been incurred and the related amount can be
 reasonably estimated. 
 
 Income Taxes - The provision for income taxes includes federal and state
 income taxes currently payable and those deferred because of temporary
 differences between the financial statement and tax bases of assets and
 liabilities.
 
 Recently Issued Accounting Standards - In June 1998, the Financial
 Accounting Standards Board issued Statement No. 133, "Accounting for
 Derivatives and for Hedging Activities." Statement No. 133 requires that
 upon adoption, all derivative instruments be recognized in the balance
 sheet at fair value, and that the changes in such fair values be
 recognized in earnings unless specific hedging criteria are met. The
 Company will adopt Statement No. 133 on January 1, 2000. The application
 of Statement No. 133 is not expected to have a significant impact on the
 Company's financial position or results of operations.
 
 
 
 Note 2 - Earnings Per Share 
 ---------------------------------------------------------------
     In 1997, the Company adopted Statement of Financial Accounting
 Standards (SFAS) No. 128 "Earnings per Share" that requires all prior
 years presented to be restated. A reconciliation of net income and the
 weighted average number of shares outstanding used in calculating basic
 and diluted earnings per share for the years ended December 31, 1998,
 1997 and 1996 is summarized in the table below (in thousands except per
 share amounts):
 
                                             1998        1997      1996 
                                          -------------------------------
 Net income                                 $5,159      $4,090    $3,805
                                          ===============================
 
 Beginning shares outstanding                2,395       2,389     2,389
 Shares issued under executive
    incentive plans                             19           6       --
                                          -------------------------------
    Basic shares outstanding                 2,414       2,395     2,389
 
 Shares earned under executive
    incentive plan                             --            1         1
 Dilutive effect of stock options                1         --        --
                                          -------------------------------
    Diluted shares outstanding               2,415       2,396     2,390
                                          ===============================
 
 Basic and diluted earnings per share       $ 2.14      $ 1.71    $ 1.59
                                          ===============================
 
 
                                   Page 20<PAGE>
 <PAGE>
                                   
 Note 3 - Business Acquisitions
 ---------------------------------------------------------------
     On December 1, 1997, Kenan purchased the majority of the
 transportation assets of Transport South, Inc. ("TSI") for $11,446,000 in
 cash and entered into a long-term contract to provide transportation
 services to its parent, RaceTrac Petroleum, Inc., in the southeastern
 United States and Texas. 
 
     On February 28, 1998, Kenan acquired 100% of the outstanding stock of
 Petro-Chemical Transport, Inc. ("PCT"), a wholly-owned subsidiary of
 CITGO Petroleum Corporation. PCT is a tank truck carrier serving the
 petroleum industry in the Southeast, Midwest and on the West Coast. The
 acquisition, net of cash acquired, required a cash investment totaling
 $7,880,000. The Company financed the acquisition through its line of
 credit facility. 
 
     The acquisitions have been accounted for using the purchase method of
 accounting. The accompanying consolidated statements of income include
 the results of operations of TSI from December 1, 1997  and the results
 of operations of PCT from February 28, 1998. The purchased assets and
 liabilities assumed have been recorded in the Company's financial
 statements at their estimated fair market values. The excess of the
 purchase cost over the fair value of net assets acquired in the
 acquisitions (goodwill) totaled $11,519,000 and is included in intangible
 assets in the accompanying consolidated balance sheets and is being
 amortized over an average of 20 years on a straight-line basis. 
 
     Goodwill at December 31, 1998 and 1997 was $11,519,000 and
 $7,591,000, respectively. Amortization expense was $543,000 in 1998 and
 $32,000 in 1997. Accumulated amortization at December 31, 1998 and 1997
 was $575,000 and $32,000, respectively. The carrying amount of goodwill
 is reviewed annually using estimated undiscounted cash flows for the
 businesses acquired over the remaining amortization periods.
 
     The following unaudited pro forma summary presents the consolidated
 results of operations of the Company as if the acquisitions had occurred
 as of January 1, 1998 and 1997. The pro forma information does not
 purport to be indicative of what would have occurred had the acquisitions
 been made as of those dates or of results that may occur in the future
 (in thousands except per share amounts).
 
     Pro-Forma Information (unaudited)
     -------------------------------------------------------------------
                                                 Years Ended December 31 
                                                 -----------------------   
                                                     1998        1997
                                                 -----------------------
     Revenue                                       $136,884    $137,719
     Net income                                       5,338       6,124
     Basic and diluted earnings per share              2.21        2.56
 
 
 
 
 
 
 
                                   Page 21<PAGE>
 <PAGE>
     
 Note 4 - Long-term Debt
 ---------------------------------------------------------------
     At December 31, 1997, the Company's borrowings under a Bank Credit 
 Agreement totaled $2,500,000 of which $500,000 was classified as
 currently payable based on management's intent to pay down such amount in
 1998.
  
     On February 13, 1998, the Company negotiated an unsecured $20,000,000
 Reducing Line of Credit Facility with a bank. The agreement replaced the
 Company's previous $7,000,000 line of credit. Funds available under the
 line reduce $500,000 per quarter beginning July 1, 1998 to a minimum line
 of $10,000,000. The agreement matures in March 2003. Interest under the
 agreement is at variable rates based on LIBOR plus an applicable margin.
 At December 31, 1998, the Company had $10,000,000 outstanding under the
 new credit facility. The credit agreement contains various financial
 covenants which the Company was in compliance with at December 31, 1998.
 
     On February 27, 1998, the Company entered into a simple interest rate
 swap agreement to manage interest costs and risks associated with
 changing interest rates. The agreement effectively changes a portion of
 the Company's interest rate exposure on the line of credit from a
 floating rate to a fixed rate. The agreement matures in March 2003. At
 December 31, 1998, the notional principal amount of this agreement
 totaled $7,000,000. The Company does not hold or issue derivative
 instruments for trading purposes.
 
     The Company agrees to exchange at specific intervals, the difference
 between fixed-rate and variable-rate interest amounts calculated by
 reference to the notional amount with any differential recorded as an
 adjustment to interest expense. The average variable-rate during 1998 was
 5.6% compared to a fixed-rate of 6.5%
 
 
 
 Note 5 - Fair Value of Financial Instruments
 ---------------------------------------------------------------
     The following methods and assumptions were used to estimate the fair
 value of each class of financial instruments:
 
     Cash and cash equivalents, trade receivables, short-term borrowings
     and current portion of capital lease obligations: The carrying
     amounts approximate fair value.
     
     Long-Term Debt: The fair values approximate carrying value based on
     quoted market prices for the same or similar issues or on the current
     rates offered to the Company for debt of the same remaining
     maturities.
     
     Interest rate swaps: The fair value of the Company's interest rate
     swap agreement was based on the contract value obtained from the
     financial institution, the counterparty to the agreement. The fair
     market value of the Company's interest rate swap agreement represents
     the estimated receipts or payments that would be made to terminate
     the agreement. At December 31, 1998, the Company would have paid
     approximately $260,000 to
     
     
                                   Page 22<PAGE>
 <PAGE>
 
     terminate the agreement. The Company uses an interest rate swap
     agreement to manage exposure to interest rate fluctuations. 
     
     Letters of credit: The Company utilizes third party letters of credit
     to guarantee certain casualty insurance activities. The letters
     reflect fair value as a condition of their underlying purpose and are
     subject to fees competitively determined in the marketplace. The
     contract/fair value of the letters of credit at December 31, 1998 and
     1997 were $3,554,000 and $2,666,000, respectively.
     
     
     
 Note 6 - Income Taxes
 ---------------------------------------------------------------
     Deferred income taxes reflect the net tax effect of temporary
 differences between the financial statement and tax bases of assets and
 liabilities. The tax effects of temporary differences that give rise to
 significant portions of the deferred tax liabilities and assets at
 December 31, 1998 and 1997 were as follows (in thousands):
 
                                             1998       1997
                                          --------------------
     Liabilities
        Depreciation                       $11,944    $10,012
        Prepaid tires                          703        558 
        Other                                  557        429 
                                          --------------------
           Deferred tax liabilities         13,204     10,999 
 
     Assets
        Claims payable                       1,497      1,349 
        Capital lease obligations            1,201      1,165
        Employee benefits                    1,101        701 
        Other                                  326        173 
                                          --------------------
           Deferred tax assets               4,125      3,388 
                                          --------------------
           Net deferred tax liability      $ 9,079    $ 7,611 
                                          ====================
 
     The provision for income taxes consist of the following (in
 thousands):
 
                                             1998       1997       1996 
                                          -------------------------------
     Currently payable
        Federal                             $2,650     $1,949     $1,568 
        State                                  470        386        330 
                                          -------------------------------
                                             3,120      2,335      1,898 
     Deferred                                  390        171        551 
                                          -------------------------------
                                            $3,510     $2,506     $2,449 
                                          ===============================
 
 
 
                                   Page 23<PAGE>
 <PAGE>
 
     The statutory federal income tax rates differ from the effective
 income tax rates as follows:
                                             1998       1997       1996    
                                          -------------------------------
 Statutory federal income tax rate           34.0%      34.0%      34.0%
 Increase (decrease) in tax rate
   resulting from:
     State income taxes, net of federal
       tax benefit                            4.2        4.1        4.0 
     Other items, net                         2.3        (.1)       1.2 
                                          -------------------------------
 Effective income tax rate                   40.5%      38.0%      39.2%
                                          ===============================
 
 
 Note 7 - Leases, Other Commitments and Contingencies
 ---------------------------------------------------------------
     Certain terminal facilities, office space and equipment, and revenue
 equipment are rented under operating leases expiring at various dates
 through 2006. Rent expense charged against income for years ended
 December 31, 1998, 1997 and 1996 was $5,269,000, $658,000 and $586,000,
 respectively. 
 
     Revenue equipment financed by capital leases is included in operating
 property as follows (in thousands):
 
                                               December 31
                                           -------------------
                                             1998       1997     
                                           -------------------
 Revenue equipment                          $3,396     $2,576        
 Less accumulated amortization                 458         67
                                           -------------------
 Net capital lease assets                   $2,938     $2,509
                                           ===================
 
     The following is a schedule by year of future minimum lease payments
 at December 31, 1998 (in thousands):
                                           Capital   Operating
                                            Leases     Leases
                                           -------------------
           1999                             $1,275     $1,776
           2000                                643        525
           2001                                600        393  
           2002                                402         53
           2003                                700         29
           Thereafter                          --          66
                                           -------------------
     Total minimum lease payments            3,620     $2,842
     Less amount representing                         ========   
       interest at 5% to 7% and taxes          456
                                           --------
     Present value of net minimum 
       lease payments                        3,164
     Less current portion                    1,108
                                           --------
     Long-term obligations                  $2,056
                                           ========
 
                                   Page 24<PAGE>
 <PAGE>
 
     On December 22, 1998, the Company entered into a lease commitment
 (the "Lease Commitment") to facilitate the financing of tractors having
 an expected acquisition cost of $3,921,000. The Lease Commitment expires
 March 31, 1999 and provides repayment periods of 36, 48 and 60 months.
 The interest rate is based on two-year Treasury Notes and the one-year
 LIBOR rate as published by the Wall Street Journal on the funding date.
 At December 31, 1998, the Company had $2,300,000 remaining under the
 commitment.
 
     The Company is involved in various claims and legal actions arising
 in the normal course of business. It is the opinion of management that
 these matters will have no significant impact on the financial statements
 of the Company.    
 
 
 
 Note 8 - Retirement Plans
 ---------------------------------------------------------------
     The Company has a Profit-Sharing Retirement Plan covering all
 employees. Contributions are determined annually by the Compensation
 Committe of the Board of Directors. The Plan is funded currently and
 contributions expensed were $2,004,000 (1998), $1,349,000 (1997) and
 $1,173,000 (1996).
 
     The Company has a Supplemental Executive Retirement Plan (SERP) to
 replace retirement benefits lost by certain officers under the Tax Reform
 Act of 1986. The SERP is an unfunded deferred compensation plan with
 benefits payable upon retirement, death or other termination of
 employment under provisions similar to those of the Profit-Sharing
 Retirement Plan. Net amounts expensed under the SERP were $179,000
 (1998), $143,000 (1997) and $127,000 (1996). 
 
 
 
 Note 9 - Incentive Plans
 ---------------------------------------------------------------
                        1994 Stock Bonus Plan
                        ---------------------
      In 1994, the Company implemented the 1994 Stock Bonus Plan (the
 "1994 Plan") that provided key employees with an opportunity to earn up
 to 56,600 shares of common stock over a ten-year period if targeted
 increases in net income were attained. On August 3, 1998, the 1994 Plan
 was terminated. Under the 1994 Plan, 5,283 shares of stock were earned in
 1996 and issued in March of 1997 increasing common stock by $100,000 in
 1997. There were 5,682 shares of stock earned in 1997 and issued in 1998
 increasing common stock by $197,000. A total of 22,123 shares was issued
 under the 1994 Plan. There would be no impact on reported net income from
 applying the disclosure requirements of SFAS 123 "Accounting for Stock-
 Based Compensation." Compensation expense related to the 1994 Plan was
 recognized in the year earned. 
 
 
 
 
 
 
 
                                   Page 25<PAGE>
 <PAGE>
 
                    1998 Long-Term Incentive Plan
                    -----------------------------
      On May 4, 1998, shareholders approved the Company's 1998 Long-Term
 Incentive Plan (the "1998 Plan"), which is intended to provide long-term
 incentives for key employees while encouraging optimum growth in Company
 profits. The 1998 Plan provides for grant awards in the form of stock
 options, stock appreciation rights, restricted stock and performance
 shares of up to 450,000 shares of common stock. 
  
 
      Stock Options
      -------------
      Under the 1998 Plan, options to purchase shares of common stock may
 be granted at not less than 100% of the fair market value at the date of
 grant, or 110% of fair market value in the case of any employee who holds
 more than 10% of the combined voting power of the Company's common stock
 as of the date of grant if the option is designated as an incentive
 option. Options have a ten-year term with vesting periods of one to five
 years from the date of the grant. The Company accounts for stock option
 grants in accordance with APB Opinion No. 25, "Accounting for Stock
 Issued to Employees." 
 
      During the first quarter of 1998, 328,900 nonqualified stock options
 were awarded to key employees. Between the date of the grant and approval
 of the 1998 Plan at the May 4, 1998, Annual Meeting of Shareholders, the 
 price of the Company's stock increased $1.25 per share. Under APB Opnion 
 No. 25, the Company recognizes compensation expense for any difference
 between fair market value and exercise price at the date of grant over
 the five-year vesting period. The unearned compensation is shown as a
 reduction of shareholders' equity in the accompanying consolidated
 balance sheets. Compensation expense relating to the stock options
 totaled $55,000 in 1998.
 
      A summary of the Company's stock option activity and related
 information for the year ended December 31, 1998 is as follows:
 
                                            1998
                                 ---------------------------
                                 Options    Weighted-Average
                                 (000's)     Exercise Price
                                 ---------------------------
 Outstanding, beginning of year       0             
 Granted                            329           $32
 Exercised                            0
 Forfeited                            0              
                                 ---------------------------
 Outstanding, end of year           329           $32
                                 ===========================
 
 
 
 
 
 
 
 
 
                                   Page 26<PAGE>
 <PAGE>
 
      The following is a summary of options outstanding as of December 31,
 1998:
 
                        Outstanding Options         Exercisable Options
                  --------------------------------  -------------------
                                Weighted-Average         
                           -----------------------            Weighted
                             Remaining                        Average
     Exercise      Number   Contractual   Exercise   Number   Exercise
   Price Range     (000's)      Life        Price    (000's)    Price
 ----------------------------------------------------------------------
 $31.75 - $32.00     329     10 years       $32         0        --
 
 
      Pro forma information regarding net income and earnings per share is
 required by FASB Statement No. 123 and has been determined as if the
 Company had accounted for its employee stock options under the fair value
 method of that Statement. The fair value for these options was estimated
 at the date of the grant using a Black-Scholes option pricing model with
 the following weighted-average assumptions: volatility factor of 23.9%;
 weighted-average expected life of options of 3.5 years; risk-free
 interest rate of 5.42% - 5.63%; dividend yield of 1%. Using these
 assumptions, the fair value of stock options granted in 1998 is
 $2,706,000, or $8.23 per share that would be amortized as compensation
 over the five-year vesting period. Had compensation cost relating to
 options awarded under the Plan been determined based upon the fair market
 value at the grant date consistent with the method described in SFAS 123,
 the Company's pro forma net income and earnings per share would have been
 as follows:
 
                                                        1998
 ---------------------------------------------------------------
 Pro forma net income (in thousands)                   $4,698
 Pro forma basic and diluted earnings per share        $ 1.95
 
 The option valuation models require the input of highly subjective
 assumptions. In management's opinion, the models do not necessarily
 provide a reliable single measure of the fair value of stock options.
 
 
      Restricted Stock
      ----------------
      During the first quarter of 1998, the Company awarded 21,100 shares
 of restricted stock to executive officers under the 1998 Plan. Plan
 participants are entitled to cash dividends and to vote their respective
 shares.  The sale or transfer of the shares is limited during the
 restricted period. The value of such stock was established by the market
 price on the date of grant. Restrictions on the shares expire ratably
 over a five-year vesting period.
 
 
 
 
 
 
 
 
                                   Page 27<PAGE>
 <PAGE>
 
      Unearned compensation was charged for the market value of the
 restricted shares as these shares were issued. The unearned compensation
 is shown as a reduction of shareholders' equity in the accompanying
 consolidated balance sheets and is being amortized ratably over the
 restricted period. During 1998, $96,000 was charged to expense relating
 to the restricted stock awards.              
 
 
 
 Note 10 - Nature of Business and Concentration of Credit Risk
 ---------------------------------------------------------------
      The Company transports commodities in bulk for the petroleum and
 chemical industries throughout the United States, and its customers
 include international corporations in these industries. A single customer
 accounted for 19% of the Company's revenue in 1998. In 1997 and 1996, a
 single customer accounted for 11% of the Company's revenue. Concentration
 of credit risks to the Company consists primarily of trade receivables
 from petroleum and chemical companies. The Company maintains an allowance
 for doubtful accounts, which totaled $425,000 and $313,000 at December
 31, 1998 and 1997, respectively, to cover estimated credit losses. 
      
      The Company operates in one industry segment: the transportation of
 petroleum, propane gas and chemicals in the tank truck industry.
 
 
 
 Note 11 - Summary of Quarterly Financial Information (Unaudited)
 ---------------------------------------------------------------
 
                                      (In thousands)            Basic and 
                             ---------------------------------   Diluted
                             Operating    Operating      Net     Earnings
     Quarter                  Revenue       Income      Income   Per Share
 -------------------------------------------------------------------------
   1998 
     First                     $28,481      $2,031      $1,175      $.49
     Second                     34,107       2,178       1,154       .48
     Third                      34,104       2,213       1,241       .51
     Fourth                     33,354       2,708       1,589       .66
 
   1997
     First                     $17,746      $1,541      $  976      $.41
     Second                     17,233       1,230         810       .34
     Third                      17,450       1,314         834       .35
     Fourth                     20,879       2,377       1,470       .61
 
 
 
 
 
 
 
 
 
 
 
 
                                   Page 28<PAGE>
  <PAGE>
 
 Item 9.  Changes in and Disagreements with Accountants on Accounting and
          Financial Disclosures
 -------------------------------------------------------------------------
         None
 
 
 
                               PART III
 
 
 Item 10.  Directors and Executive Officers of the Registrant
 -------------------------------------------------------------------------
     Information with respect to directors required by Item 401 of
 Regulation S-K, appearing under the heading "Election of Directors" in
 the Registrant's proxy statement dated March 30, 1999 for the Annual
 Meeting of Shareholders to be held May 3, 1999, is incorporated herein by
 reference. Information with respect to executive officers required by
 Item 401 of Regulation S-K is included as Item 4(a) in Part I.
 
     Information with respect to directors and executive officers required
 by Item 405 of Regulation S-K, appearing under the heading "Section 16(a)
 Beneficial Ownership Compliance" in the Registrant's proxy statement
 dated March 30, 1999 for the Annual Meeting of Shareholders to be held
 May 3, 1999, is incorporated herein by reference. 
 
 
 Item 11.  Executive Compensation
 -------------------------------------------------------------------------
     Information with respect to executive compensation required by Item
 402 of Regulation S-K, appearing under the heading "Compensation and
 Related Matters" in the Registrant's proxy statement dated March 30, 1999
 for the Annual Meeting of Shareholders to be held May 3, 1999, is
 incorporated herein by reference.
 
 
 Item 12.  Securities Ownership of Certain Beneficial Owners and
           Management
 -------------------------------------------------------------------------
     Information with respect to securities ownership of certain
 beneficial owners and management required by Item 403 of Regulation S-K,
 appearing under the headings "Principal Shareholders" and "Security
 Ownership of Management" in the Registrant's proxy statement dated March
 30, 1999 for the Annual Meeting of Shareholders to be held May 3, 1999,
 is incorporated herein by reference.
 
 
 Item 13.  Certain Relationships and Related Transactions
 -------------------------------------------------------------------------
     Information with respect to certain relationships and related
 transactions required by Item 404 of Regulation S-K, appearing under the
 heading "Compensation Committee Interlocks and Insider Participation" in
 the Registrant's proxy statement dated March 30, 1999 for the Annual
 Meeting of Shareholders to be held May 3, 1999, is incorporated herein by
 reference.
 
 
 
                                   Page 28<PAGE>
 <PAGE>
 
                              PART IV
 
 
 Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
          ---------------------------------------------------------------
 
 (a)(1)    Financial Statements
           --------------------
           The financial statements listed in the accompanying Index to
           Consolidated Financial Statements are filed as part of this
           Annual Report on Consolidated Form 10-K.
 
 
    (2)    Schedules
           ---------
           None
 
 
    (3)    Exhibits
           --------
           Exhibits to this report are listed in the accompanying Index
           to Exhibits.
 
 
 (b)       Reports on Form 8-K
           -------------------
           No reports on Form 8-K have been filed by the Registrant
           during the last quarter of the period covered by this report.
     
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                   Page 30<PAGE>
 <PAGE>
 
                              SIGNATURES
 
 
 Pursuant to the requirements of Section 13 or 15(d) of the Securities
 Exchange Act of 1934, the Registrant has duly caused this report to be
 signed on its behalf by the undersigned, thereunto duly authorized.
 
 
                              KENAN TRANSPORT COMPANY
                              -----------------------
                                   (Registrant)
 
 
 
       By:       /s/ Lee P. Shaffer
                 ------------------------------------------------------
                 Lee P. Shaffer, President and Chief Executive Officer
 
 
     Date:       March 22, 1999
 
 
 Pursuant to the requirements of the Securities Exchange Act of 1934, this
 report has been signed below by the following persons on behalf of the
 registrant and in the capacities and on the date indicated.
 
 
 
     Signature                          Title                     Date
 ------------------------    ---------------------------   --------------
 
 Principal Financial Officer:
 
 /s/ William L. Boone        Vice President-Finance;       March 22, 1999
 ------------------------    Secretary; Treasurer
 William L. Boone
 
 
 
 Controller or Principal
    Accounting Officer:
 
 /s/ J. Earl Cowan           Controller                    March 22, 1999
 ------------------------
 J. Earl Cowan
 
 
 
 
 
 
 
 
 
 
 
 
                                   Page 31<PAGE>
 <PAGE>
 
      Signature                         Title                    Date
 ------------------------    --------------------------    ---------------
 Directors:
 
 /S/ Thomas S. Kenan, III    Chairman of the Board         March 22, 1999
 ------------------------    of Directors
 Thomas S. Kenan, III
 
 
 /S/ Owen G. Kenan           Vice Chairman of the          March 22, 1999
 ------------------------    Board of Directors
 Owen G. Kenan
 
 
 /S/ William O. McCoy        Director                      March 22, 1999
 ------------------------
 William O. McCoy
 
 
 /S/ Paul J. Rizzo           Director                      March 22, 1999
 ------------------------
 Paul J. Rizzo
 
 
 /S/ William C. Friday       Director                      March 22, 1999
 ------------------------
 William C. Friday
 
 
 /S/ Braxton Schell          Director                      March 22, 1999
 ------------------------
 Braxton Schell
 
 
 /S/ Kenneth G. Younger      Director                      March 22, 1999
 ------------------------
 Kenneth G. Younger
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                   Page 32<PAGE>
 <PAGE>
 
               INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
                                                              Page No.
 Financial Statements                                       in Form 10-K
 ---------------------------------------------------------  ------------
 
 
 Report of Independent Public Accountants relating to the
    Consolidated Financial Statements and Notes thereto             14 
 
 Consolidated Balance Sheets - December 31, 1998 and 1997           15
 
 Consolidated Statements of Income - 
    For the Years Ended December 31, 1998, 1997 and 1996            16
 
 Consolidated Statements of Shareholders' Equity -
    For the Years Ended December 31, 1998, 1997 and 1996            17
 
 Consolidated Statements of Cash Flows - 
    For the Years Ended December 31, 1998, 1997 and 1996            18
 
 Notes to Consolidated Financial Statements                      19-28
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                   Page 33<PAGE>
 <PAGE>
 
                         INDEX TO EXHIBITS
 
 
 Exhibit No.                          Description 
 -----------     ------------------------------------------------------
    2(a)         Asset Purchase Agreement between Transport South, Inc.
                 And the Registrant, dated October 31, 1997, filed as 
                 Exhibit 2 to the Registrant's Form 10-Q Quarterly Report
                 for the quarter ended September 30, 1997, which is
                 incorporated herein by reference to such Form 10-Q.
 
    2(b)         Amendment to Asset Purchase Agreement between Transport
                 South, Inc. and the Registrant, dated December 1, 1997,
                 filed as Exhibit 2.A to the Registrant's Current Report
                 on Form 8-K, filed December 12, 1997, which is
                 incorporated herein by reference to such Form 8-K.
 
    2(c)         Stock Purchase and Sale Agreement between CITGO Petroleum
                 Corporation, Petro-Chemical Transport, Inc. and the
                 Registrant, dated February 18, 1998, filed as Exhibit 2
                 to the Registrant's Current Report on Form 8-K, filed
                 March 13, 1998, which is incorporated herein by reference
                 to such Form 8-K.
 
 
 
    3(a)         Charter Documents filed as Exhibit 3(a) to the
                 Registrant's Form 10 Registration of Securities, filed
                 April 27, 1984, which is incorporated herein by reference
                 to such Form 10.
 
    3(b)         Articles of Amendment dated May 1987, filed as Exhibit
                 4(b) to the Registrant's Form 10-Q Quarterly Report for
                 the quarter ended June 30, 1987, which is incorporated
                 herein by reference to such Form 10-Q.
 
    3(c)         Articles of Amendment dated May 1988, filed as Exhibit 
                 4(f) to the Registrant's Form 10-Q Quarterly Report for
                 the quarter ended June 30, 1988, which is incorporated
                 herein by reference to such Form 10-Q.
 
    3(d)         Bylaws filed as Exhibit 3(b) to the Registrant's Form 10
                 Registration of Securities, filed April 27, 1984, which
                 is incorporated herein by reference to such Form 10.
 
    3(e)         Amendments to the Bylaws of the Registrant adopted March
                 15, 1985, March 2, 1987 and March 1, 1990, filed as
                 Exhibit 4(e) to the Registrant's Form 10-K for the year
                 ended December 31, 1989, which is incorporated herein by
                 reference to such Form 10-K.
 
 
 
 
 
 
 
                                   Page 34<PAGE>
 <PAGE>
 
                         INDEX TO EXHIBITS - continued -
 
 
 Exhibit No.                       Description                       
 -----------     ---------------------------------------------------------
    3(f)         Amended and Restated Bylaws of the Registrant adopted
                 September 26, 1990, filed as Exhibit 4(d) to the
                 Registrant's Form 10-Q Quarterly Report for the quarter
                 ended June 30, 1991, which is incorporated herein by
                 reference to such Form 10-Q.
 
    3(g)         Amendment to the Bylaws of the Registrant adopted May 6,
                 1991, filed as Exhibit 4(e) to the Registrant's Form 10-Q
                 Quarterly Report for the quarter ended June 30, 1991,
                 which is incorporated herein by reference to such Form
                 10-Q.
 
    3(h)         Amendment to the Bylaws of the Registrant adopted October
                 7, 1991, filed as Exhibit 4(f) to the Registrant's Form
                 10-Q Quarterly Report for the quarter ended September 30,
                 1991, which is incorporated herein by reference to such
                 Form 10-Q.
 
    3(i)         Amendment to the Bylaws of the Registrant as adopted
                 October 21, 1996 by the Registrant's Board of Directors.
     
 
  
    4(a)         Specimen Stock Certificate filed as Exhibit 4(a) to the
                 Registrant's Form 10 Registration of Securities, filed
                 April 27, 1984, which is incorporated herein by reference
                 to such Form 10.
 
 
 
         Management Contracts or Compensatory Plans or Arrangements
                        Exhibits 10(a) - 10(h)
 
   10(a)         Supplemental Executive Retirement Plan, effective January
                 1, 1990, filed as Exhibit 10(e) to the Registrant's Form
                 10-K for the year ended December 31, 1990, which is
                 incorporated herein by reference to such Form 10-K.
 
   10(b)         1994 Stock Bonus Plan effective January 1, 1994, filed as
                 Exhibit 10(b) to the Registrant's Form 10-Q Quarterly
                 Report for the quarter ended June 30, 1994, which is
                 incorporated herein by reference to such Form 10-Q.
 
   10(c)         Senior Managers' Life Insurance Plan, effective April 1,
                 1996, filed as Exhibit 10.A to the Registrant's Form 10-Q
                 Quarterly Report for the quarter ended June 30, 1997,
                 which is incorporated herein by reference to such Form
                 10-Q.
 
 
 
 
                                   Page 35        <PAGE>
 <PAGE>
 
                         INDEX TO EXHIBITS - continued -
 
 
 Exhibit No.                       Description                       
 -----------     ---------------------------------------------------------
   10(d)         Senior Management Severance Plan, effective May 5, 1997,
                 filed as Exhibit 10.A to the Registrant's Form 10-Q
                 Quarterly Report for the quarter ended June 30, 1997,
                 which is incorporated herein by reference to such Form
                 10-Q.
 
   10(e)         1998 Long-Term Incentive Plan, effective January 29,
                 1998, filed as Exhibit 10 to the Registrant's Form 10-Q
                 Quarterly Report for the quarter ended June 30, 1998,
                 which is incorporated herein by reference to such Form
                 10-Q.
 
   10(f)         Amendment to the 1998 Long-Term Incentive Plan, effective
                 January 1, 1999.
 
   10(g)         Amendment to the Senior Managers' Life Insurance Plan,
                 effective January 1, 1999.
 
   10(h)         Executive Bonus Award Plan, effective January 1, 1999.
 
 
 
                 Material Contracts  Exhibits 10(i) - 10(k)
 
   10(i)         Credit Agreement between First Union National Bank and
                 the Registrant dated May 22, 1984, filed as Exhibit 4(b)
                 to the Registrant's Form 10-Q Quarterly Report for the
                 quarter ended June 30, 1984, which is incorporated herein
                 by reference to such Form 10-Q.
 
   10(j)         Loan Agreement between First Union National Bank and the
                 Registrant dated February 13, 1998, filed as Exhibit
                 10(h) to the Registrant's Form 10-K for the year ended
                 December 31, 1997, which is incorporated herein by
                 reference to such Form 10-K.
 
   10(k)         Promissory Note between First Union National Bank and the
                 Registrant dated February 13, 1998, filed as Exhibit
                 10(i) to the Registrant's Form 10-K for the year ended
                 December 31, 1997, which is incorporated herein by
                 reference to such Form 10-K.
 
 
   21            Subsidiaries of the Registrant
 
 
   23            Consent of Independent Public Accountants.
 
 
   27            Financial Data Schedule for the year ended December 31,
                 1998.
 
               
                                   Page 36