**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-K**

**x**                              ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**Forthe fiscal year ended June 30, 2007**

**OR**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**Commissionfile number 001-31920**

**K-SEATRANSPORTATION PARTNERS L.P.**

(Exact name of registrantas specified in its charter)

| **Delaware**                                                     |   | **20-0194477**                        |
|------------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction  of incorporation or organization) |   | (I.R.S. Employer  Identification No.) |

 

**One Tower CenterBoulevard, 17**th Floor

**East Brunswick, New Jersey08816**

(Address of principalexecutive offices and zip code)

**(732) 565-3818**

(Registrant’s telephonenumber, including area code)

**Securitiesregistered pursuant to Section 12(b) of the Act:**

| Title of each class | ** ** | **Name of each exchange on which registered** |
|---------------------|------------|-----------------------------------------------|
| Common Units        |       | New York Stock  Exchange                      |

 

**Securitiesregistered pursuant to section 12(g) of the Act: None**

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act. Yes o  No x

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Exchange Act. Yes o  No x

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports) and (2) has been subject to such filing requirementsfor the past 90 days. Yes x  No o

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K isnot contained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment tothis Form 10-K. o

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer o | Accelerated filer x | Non-accelerated filer o |
|---------------------------|---------------------|-------------------------|

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act). Yes o  Nox

The aggregate market valueof the registrant’s Common Units held by non-affiliates of the registrant wasapproximately $206.2 million as of December 29, 2006 based on $36.09 perCommon Unit, the closing price of the Common Units on the New York StockExchange on such date.

At September 11,2007, 7,069,050 Common Units and 3,123,750 Subordinated Units were outstanding.

Documents Incorporated by Reference: **None**

 

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**K-SEATRANSPORTATION PARTNERS L.P.2007 ANNUAL REPORT ON FORM 10-KTABLE OF CONTENTS**
|                | ** **                                                                                                             | **PAGE** |
|----------------|------------------------------------------------------------------------------------------------------------------------|----------|
| PART I    |                                                                                                                   |     |   |   |
| ITEMS 1 and 2. | BUSINESS  and PROPERTIES                                                                                               |     | 1 |   |
| ITEM 1A        | RISK FACTORS                                                                                                           |     | 21 |   |
| ITEM 1B        | UNRESOLVED STAFF COMMENTS                                                                                              |     | 37 |   |
| ITEM 3.        | LEGAL PROCEEDINGS                                                                                                      |     | 37 |   |
| ITEM 4.        | SUBMISSION  OF MATTERS TO A VOTE OF SECURITYHOLDERS                                                                    |     | 38 |   |
| PART II   |                                                                                                                   |     |   |   |
| ITEM 5.        | MARKET  FOR REGISTRANT’S COMMON EQUITY, RELATED SECURITYHOLDER MATTERS AND ISSUER  PURCHASES OF EQUITY SECURITIES |     | 39 |   |
| ITEM 6.        | SELECTED  FINANCIAL DATA                                                                                               |     | 42 |   |
| ITEM 7.        | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                            |     | 44 |   |
| ITEM 7A.       | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                            |     | 64 |   |
| ITEM 8.        | FINANCIAL  STATEMENTS AND SUPPLEMENTARY DATA                                                                           |     | 64 |   |
| ITEM 9.        | CHANGES  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE                                  |     | 64 |   |
| ITEM 9A.       | CONTROLS  AND PROCEDURES                                                                                               |     | 65 |   |
| ITEM 9B.       | OTHER  INFORMATION                                                                                                     |     | 65 |   |
| PART III  |                                                                                                                   |     |   |   |
| ITEM 10.       | DIRECTORS,  EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE                                                                |     | 66 |   |
| ITEM 11.       | EXECUTIVE  COMPENSATION                                                                                                |     | 70 |   |
| ITEM 12.       | SECURITY  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED  SECURITYHOLDER MATTERS                    |     | 82 |   |
| ITEM 13.       | CERTAIN  RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE                                             |     | 87 |   |
| ITEM 14.       | PRINCIPAL  ACCOUNTANT FEES AND SERVICES                                                                                |     | 89 |   |
| PART IV   |                                                                                                                   |     |   |   |
| ITEM 15.       | EXHIBITS  AND FINANCIAL STATEMENT SCHEDULES                                                                            |     | 91 |   |

 

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**FORWARD-LOOKINGSTATEMENTS**

Statements included in this report that are nothistorical facts (including statements concerning plans and objectives ofmanagement for future operations or economic performance, or assumptionsrelated thereto) are forward-looking statements. In addition, we may fromtime to time make other oral or written statements that are also forward-lookingstatements. Forward-looking statements may include words such as “anticipate,” “estimate,”“expect,” “project,” “intend,” “plan,” “believe,” “should” and other words andterms of similar meaning.

Forward-lookingstatements appear in a number of places in this report and include statementswith respect to, among other things:

·       ourability to pay distributions;

·       plannedcapital expenditures and availability of capital resources to fund capitalexpenditures;

·       ourexpected cost of complying with the Oil Pollution Act of 1990;

·       estimatedfuture expenditures for drydocking and maintenance of our tank vessels’operating capacity;

·       ourplans for the retirement or retrofitting of tank vessels and the expecteddelivery, and cost of, newbuild vessels;

·       theintegration of acquisitions of tank barges and tugboats, including the timing,effects and benefits thereof;

·       expecteddecreases in the supply of domestic tank vessels;

·       expecteddemand in the domestic tank vessel market in general and the demand for ourtank vessels in particular;

·       theadequacy and availability of our insurance and the amount of any capital calls;

·       expectationsregarding litigaton;

·       thelikelihood that pipelines will be built that compete with us;

·       theeffect of new or existing regulations or requirements on our financialposition;

·       ourfuture financial condition or results of operations and our future revenues andexpenses;

·       ourbusiness strategies and other plans and objectives for future operations;

·       ourfuture financial exposure to lawsuits currently pending against EWTransportation LLC and its predecessors; and

·       anyother statements that are not historical facts.

These forward-looking statements are made basedupon management’s current plans, expectations, estimates, assumptions andbeliefs concerning future events and, therefore, involve a number of risks anduncertainties. We caution that forward-looking statements are notguarantees and that actual results could differ materially from those expressedor implied in the forward-looking statements. Please read “Item 1A. RiskFactors” for a list of important factors that could cause our actual results ofoperations or financial condition to differ from our expectations.

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**PART I**

**ITEMS1 and 2.**                  BUSINESS andPROPERTIES.

**Our Partnership**

We are a leading provider of refined petroleumproducts marine transportation, distribution and logistics services in the U. S. domesticmarine transportation business. We currently operate a fleet of 71 tank barges,1 tanker and 58 tugboats that serves a wide range of customers, includingmajor oil companies, oil traders and refiners. With approximately4.2 million barrels of capacity, we believe we operate the largestcoastwise tank barge fleet in the United States. 

For the fiscal year ended June 30, 2007, ourfleet transported approximately 140 million barrels of refined petroleumproducts for our customers, including BP, Chevron, Conoco Philips, ExxonMobiland Rio Energy. Our five largest customers in fiscal 2007 have been doingbusiness with us for approximately 17 years on average. We do not assumeownership of any of the products we transport. During fiscal 2007, we derivedapproximately 79% of our revenue from longer-term contracts that are generallyfor periods of one year or more.

We believe we have a high-quality, well-maintainedfleet. Approximately 73% of our current barrel-carrying capacity isdouble-hulled. Furthermore, we will be permitted to continue to operateour single-hull tank vessels until January 1, 2015 in compliance with theOil Pollution Act of 1990, or OPA 90, which mandates the phase-out of allsingle-hull tank vessels transporting petroleum and petroleum products in U.S.waters. All of our tank vessels except two operate under the U.S. flag, and allbut four are qualified to transport cargo between U.S. ports under the JonesAct, the federal statutes that restrict foreign owners from operating in theU.S. maritime transportation industry.

Our strategy to expand our business and increase ourdistributable cash flow includes the expansion of our fleet through the buildingof new equipment and strategic acquisitions. On August 14, 2007, weacquired all of the equity interests in Smith Maritime, Ltd., or SmithMaritime, Go Big Chartering, LLC, or Go Big, and Sirius Maritime, LLC, orSirius Maritime. Smith Maritime, Go Big and Sirius Maritime are providers ofmarine transportation and logistics services to major oil companies, oiltraders and refiners in Hawaii and along the West Coast of the United States. Ona combined basis, the petroleum transportation operations of these companiesinclude 11 petroleum tank barges and 14 tugboats, aggregating 777,000 barrelsof capacity, of which 669,000 barrels, or 86%, are double-hulled. Theseacquired tank barges represent a 22% increase in the barrel-carrying capacityof our fleet to approximately 4.2 million barrels. The aggregate purchase pricefor Smith Maritime, Go Big and Sirius Maritime was approximately $203.0 million,comprising $169.2 million in cash, $23.6 million in assumed debt, andcommon units valued at approximately $10.2 million.

On October 18, 2005, we acquired all of themembership interests in Sea Coast Transportation LLC, or Sea Coast, from MarineResources Group, Inc., or MRG. Also on October 18, 2005, Sea Coastacquired four tugboats from MRG. Sea Coast is a provider of marinetransportation and logistics services to major oil companies, oil traders andrefiners along the West Coast of the United States and Alaska. The aggregatepurchase price for Sea Coast and the four tugboats comprised $77.0 million incash and 125,000 common units representing limited partner interests in us.

We also have grown our fleet through acquisitions ofindividual units and through a robust vessel newbuilding program. Since ourinitial public offering in January 2004, we have purchased or retrofittedfive existing double-hulled tank barges, with aggregate capacity of 576,000barrels. Also since our initial public offering, under our vessel newbuildingprogram, we have taken delivery of eight newly built double-hulled tank bargeswith aggregate capacity of 446,000 barrels, and we have entered into agreementswith shipyards to construct an additional ten new double-hulled tank bargeswith an aggregate capacity of 524,000 barrels. These ten vessels are expectedto cost, in the aggregate and after the addition of certain 

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special equipment,approximately $100.0 million. We expect to finance construction of these tennew tank barges from borrowings and cash from operations. To enhanceproductivity and reduce reliance on chartered-in towing, we also purchased fiveadditional tugboats during fiscal 2007 at a cost of approximately $14.6million.

Our primarybusiness objective is to increase distributable cash flow to unitholders byexecuting the following strategies:

·       *Expanding our fleet through newbuildings andaccretive and strategic acquisitions.  *We have grownsuccessfully in the past through newbuildings and strategic acquisitions. Weexpect to continue this strategy by consistently surveying the marketplace toidentify and pursue newbuilding opportunities and acquisitions that expand theservices and products we offer or that expand our geographic presence. Sinceour initial public offering in January 2004, we have grown our fleetbarrel-carrying capacity from 2.3 million barrels to 4.2 million barrelscurrently, and we have 524,000 barrels of additional capacity underconstruction.

·       *Maximizing fleet utilization and improving productivity.  *Theinterchangeability of our tank vessels and the critical mass of our fleet giveus the flexibility to allocate the right vessel for the right cargo assignmenton a timely basis. We intend to continue improving our operational efficiencythrough the use of new technology and comprehensive training programs for newand existing employees. We also intend to minimize down time by emphasizingefficient scheduling and timely completion of planned and preventativemaintenance.

·       *Maintaining safe, low-cost and efficient operations.  *Webelieve we are a cost-efficient and reliable tank vessel operator. We intend tocontinue to reduce operating costs through constant evaluation of each vessel’sperformance and concurrent adjustment of operating and chartering procedures tomaximize each vessel’s safety and profitability. We also intend to continue tominimize costs through an active preventative maintenance program both on-shoreand at sea, employing qualified officers and crew and continually training ourpersonnel to ensure safe and reliable vessel operations.

·       *Balancing our fleet deployment between longer-term contracts andshorter-term business in an effort to provide stable cash flows throughbusiness cycles, while preserving flexibility to respond to changing marketconditions*.   During fiscal 2007, we derived approximately 79%of our revenue from time charters, consecutive voyage charters, contracts ofaffreightment, and bareboat charters, all of which are generally for periods ofone year or more. We derived the remaining 21% of our revenue for fiscal 2007from single voyage charters, which are generally priced at prevailing marketrates. Vessels operating under voyage charters may generate increased profitmargins during periods of improved charter rates, while vessels operating ontime charters generally provide more predictable cash flow. We intend to pursuea strategy of emphasizing longer-term contracts, while preserving operationalflexibility to take advantage of changing market conditions.

·       *Attracting and maintaining customers by adhering tohigh standards of performance, reliability and safety.*   Customersplace particular emphasis on efficient operations and strong environmental andsafety records. We intend to continue building on our reputation formaintaining high standards of performance, reliability and safety, which webelieve will enable us to attract increasingly selective customers.

We are a publicly traded Delaware limited partnership.Our business activities are conducted through our subsidiary, K-Sea Operating PartnershipL.P., a Delaware limited partnership which we refer to as the “operatingpartnership,” and the subsidiaries of the operating partnership. Our generalpartner, K-Sea General Partner L.P., is a Delaware limited partnership whosegeneral partner is K-Sea General Partner 

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GP LLC, a Delaware limitedliability company. K-Sea General Partner GP LLC has ultimate responsibility formanaging our business.

Our principal executiveoffice is located at One Tower Center Boulevard, 17th Floor, East Brunswick, New Jersey 08816, andour telephone number at that address is (732) 585-3818.

**Our Industry**

***Introduction***

Tank vessels, which include tank barges and tankers,are a critical link in the refined petroleum product distribution chain. Tankvessels transport gasoline, diesel fuel, heating oil, asphalt and otherproducts from refineries and storage facilities to a variety of destinations,including other refineries, distribution terminals, power plants and ships.According to a June 2006 study by the Association of Oil Pipe Lines, 29.9%of all domestic refined petroleum product transportation was by water in 2004,making waterborne transportation the most used mode of transportation forrefined petroleum products after pipelines.

Among the laws governing the domestic tank vesselindustry is the one commonly referred to as the Jones Act, the federal statutethat restricts foreign competition in the U.S. marine transportation industry.Under the Jones Act, marine transportation of cargo between points in theUnited States, generally known as U.S. coastwise trade, is limited to U.S.-flagvessels that were built in the United States and are owned, manned and operatedby U.S. citizens. All of our tank vessels except two operate under the U.S.flag, and all but four are qualified to transport cargo between U.S. portsunder the Jones Act.

The Oil Pollution Act of 1990, or OPA 90, mandates,among other things, the phase-out of all single-hull tank vessels transportingpetroleum and petroleum products in U.S. waters at varying times by January 1,2015. The effect of this legislation has been, and is expected to continue tobe, the replacement of domestic single-hull tank vessel capacity withnewbuildings and retrofitting of existing single-hull tank vessels.

The demand for domestictank vessels is driven primarily by U.S. demand for refined petroleum products,which can be categorized as either clean oil products or black oil products.Clean oil products include motor gasoline, diesel fuel, heating oil, jet fueland kerosene. Black oil products, which are what remain after clean oilproducts have been separated from crude oil, include residual fuel oil in therefining process, asphalt, petrochemical feedstocks and bunker fuel. The demandfor clean oil products is impacted by vehicle usage, air travel and prevailingweather conditions, while demand for black oil products varies depending on thetype of product transported and other factors, such as oil refineryrequirements and turnarounds, asphalt use, the use of residual fuel oil byelectric utilities and bunker fuel consumption.

***Transportation of Refined Petroleum Products***

Refined petroleum productsare transported by pipelines, water carriers, motor carriers and railroads. Tankvessels are used frequently to continue the transportation of refined petroleumproducts along the distribution chain after these products have first beentransported by another method of transportation, such as a pipeline. Forexample, many areas have access to refined petroleum products only by using marinetransportation as the last link in their distribution chain. In addition, tankvessel transportation is generally a more cost-effective and energy-efficientmeans of transporting bulk commodities such as refined petroleum products thantransportation by rail car or truck. The carrying capacity of a 100,000-barreltank barge is the equivalent of approximately 162 average-size rail tank carsand approximately 439 average-size tractor trailer tank trucks.

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***Types of Tank Vessels***

The domestic tank vessel fleet consists of tankers,which have internal propulsion systems, and tank barges, which do not haveinternal propulsion systems and are instead pushed or towed by a tugboat. Tankbarges generally move at slower speeds than comparably sized tankers, but areless expensive to build and operate. Although tank barge configuration varies,the bow and stern of most tank barges are square or sloped, with the stern ofmany tank barges having a notch of varying depth to permit pushing by a tug. Whilea larger tank vessel may be able to carry more cargo, some voyages require atank vessel to go through a lock, bridge opening or narrow waterway, whichlimit the size of vessels that may be used. In addition, some loading anddischarge facilities have physical limitations that prevent larger tank vesselsfrom loading or discharging their cargo. Tank barges are often able to navigatethe shallower waters of the inland waterway system and the waters along thecoast. Tankers, however, are often confined to the deeper waters offshore dueto their size.

Tank vessels can becategorized by:

·       *Barrel-carrying Capacity*—the numberof barrels of refined product that it takes to fill a vessel;

·       *Gross Tonnage*—the total volume capacity ofthe interior space of a vessel, including non-cargo space, using a conventionof 100 cubic feet per gross ton;

·       *Net Tonnage*—the volume capacity of avessel determined by subtracting the engine room, crew quarters, stores andnavigation space from the gross tonnage using a convention of 100 cubic feetper net ton;

·       *Deadweight Tonnage*—the number of long-tons(2,240 pounds) of cargo that a vessel can transport. A deadweight ton isequivalent to approximately 6.5 to 7.5 barrels of capacity, depending on thespecific gravity of the cargo. In this report, we have assumed that adeadweight ton is equivalent to 7.0 barrels of capacity;

·       *Hull Type*—the body or framework of avessel. Vessels can have more than one hull, which means they have additionalcompartments between the cargo and the outside of the vessel. Typical vesselsare single- or double-hulled; and

·       *Cargo*—the type of commodity transported.

Tank vessels canalso be categorized into the following fleets based on the primary waterwaysystem typically navigated by the vessel:

·       *Coastwise Fleet.  *The term coastwisefleet generally refers to commercial vessels that transport goods in thefollowing areas:

·        alongthe Atlantic, Gulf and Pacific coasts;

·        betweenthe U.S. mainland and Puerto Rico, Alaska, Hawaii and other U.S. PacificIslands; and

·        betweenthe Atlantic or Gulf and Pacific coasts by way of the Panama Canal.

·       *Inland Waterways Fleet.  *The terminland waterways fleet generally refers to commercial vessels that transportgoods on the navigable internal waterways of the Atlantic, Gulf and PacificCoasts, and the Mississippi River System. The main arteries of the inlandwaterways network for the mid-continent are the Mississippi and the OhioRivers. The inland waterways fleet consists primarily of tugboats and tankbarges, which typically have a shallower depth, and are generally less costly,than many tank barges operating in the coastwise fleet. The vessels comprisingthe inland waterways fleet are generally not built to standards required foroperation in coastal waters.

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·       *Great Lakes Fleet.  *The term Great Lakes fleetgenerally refers to commercial vessels normally navigating the waters among theU.S. Great Lakes ports and connecting waterways.

***Tugboats***

Tugboats are equipped topush, pull or tow tank barges alongside. The amount of horsepower required tohandle a barge depends on a number of factors, including the size of the barge,the amount of product loaded, weather conditions and the waterways navigated. Atypical tug is manned by six people: a captain, a mate, an engineer, anassistant engineer and two deckhands. These individuals perform the duties andtasks required to operate the tug, such as standing navigational watches,maintaining and repairing machinery, rigging and line-handling, and paintingand other routine maintenance. A standard work schedule for a tugboat crew is14 days on, 14 days off. While on duty, the crew members generallywork two six-hour shifts each day.

***Integrated Tug-Barge Units***

Tugboats can also beintegrated into a barge utilizing a notching system that connects the twovessels. An integrated tug-barge unit, or ITB, has certain advantages overother tug-barge combinations, including higher speed and bettermaneuverability. In addition, an ITB can operate in certain sea and weatherconditions in which conventional tug-barge combinations cannot.

**Our Customers**

We provide marine transportation services primarily tomajor oil companies, oil traders and refiners in the East, West and Gulf Coastregions of the United States. We monitor the supply and distribution patternsof our actual and prospective customers and focus our efforts on providingservices that are responsive to the current and future needs of thesecustomers.

The following chart setsforth our major customers and the number of years each of them has been acustomer:

**K-SeaTransportation Partners L.P.Major Customers**

| **Major Customers** | ** ** | ** ** | ** ** | **Years as  Customer** | ** ** |
|--------------------------|------------|------------|------------|-----------------------------|------------|
| BP                       |       |       | 34         |                        |       |
| Chevron                  |       |       | 18         |                        |       |
| ConocoPhillips           |       |       | 11         |                        |       |
| ExxonMobil               |       |       | 11         |                        |       |
| Rio Energy               |       |       | 9          |                        |       |

 

Our two largest customers in fiscal 2007, based ongross revenue, were ExxonMobil and ConocoPhillips, each of which accounted formore than 10% of our fiscal 2007 consolidated revenue. Please read note 10to our audited consolidated financial statements included elsewhere in thisreport.

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**Our Vessels**

***Tank Vessel Fleet***

At August 15, 2007,our fleet consisted of the following tank vessels:

**K-SeaTransportation Partners L.P. Tank Vessel Fleet**

| **Vessel(1)**             | ** ** | ** ** | ** ** | **Year   Built** | ** ** | **Capacity   (barrels)** | ** ** | **Gross   Tons** | ** ** | **OPA 90   Phase-Out** | ** ** |
|---------------------------|------------|------------|------------|------------------|------------|--------------------------|------------|------------------|------------|-----------------------------|------------|
| ***Double-Hull  Barges*** |       |       |       |             |       |                     |       |             |       |                        |       |
| DBL 155(2)                |       | 2004       |       | 165,882          |       | 12,152                   |       |             | N.A.       |                        |       |
| DBL 151                   |       | 1981       |       | 150,000          |       | 8,710                    |       |             | N.A.       |                        |       |
| DBL 140                   |       | 2000       |       | 140,000          |       | 10,303                   |       |             | N.A.       |                        |       |
| DBL 134(3)                |       | 1994       |       | 134,000          |       | 9,514                    |       |             | N.A.       |                        |       |
| DBL 105(4)                |       | 2004       |       | 105,000          |       | 11,438                   |       |             | N.A.       |                        |       |
| DBL 101                   |       | 2002       |       | 102,000          |       | 6,774                    |       |             | N.A.       |                        |       |
| DBL 102                   |       | 2004       |       | 102,000          |       | 6,774                    |       |             | N.A.       |                        |       |
| DBL 103                   |       | 2006       |       | 102,000          |       | 6,774                    |       |             | N.A.       |                        |       |
| DBL 104                   |       | 2007       |       | 102,000          |       | 6,774                    |       |             | N.A.       |                        |       |
| Casablanca(5)             |       | 1987       |       | 89,293           |       | 5,736                    |       |             | N.A.       |                        |       |
| Lemon Creek(5)            |       | 1987       |       | 89,293           |       | 5,736                    |       |             | N.A.       |                        |       |
| Spring Creek(5)           |       | 1987       |       | 89,293           |       | 5,736                    |       |             | N.A.       |                        |       |
| Nale(*)                   |       | 2007       |       | 86,000           |       | 6,508                    |       |             | N.A.       |                        |       |
| McCleary’s Spirit(6) |       | 2001       |       | 85,000           |       | 6,554                    |       |             | N.A.       |                        |       |
| Antares(*)                |       | 2004       |       | 84,000           |       | 5,855                    |       |             | N.A.       |                        |       |
| Deneb(*)                  |       | 2006       |       | 84,000           |       | 5,855                    |       |             | N.A.       |                        |       |
| DBL 81                    |       | 2003       |       | 82,000           |       | 5,667                    |       |             | N.A.       |                        |       |
| DBL 82                    |       | 2003       |       | 82,000           |       | 5,667                    |       |             | N.A.       |                        |       |
| Capella(*)(7)             |       | 2002       |       | 81,751           |       | 5,159                    |       |             | N.A.       |                        |       |
| Leo(*)                    |       | 2003       |       | 81,540           |       | 5,954                    |       |             | N.A.       |                        |       |
| Pacific                   |       | 1993       |       | 81,000           |       | 5,669                    |       |             | N.A.       |                        |       |
| Rigel(*)                  |       | 1993       |       | 80,861           |       | 5,669                    |       |             | N.A.       |                        |       |
| Sasanoa                   |       | 2001       |       | 81,000           |       | 5,790                    |       |             | N.A.       |                        |       |
| DBL 78                    |       | 2000       |       | 80,000           |       | 5,559                    |       |             | N.A.       |                        |       |
| DBL 70                    |       | 1972       |       | 73,024           |       | 5,248                    |       |             | N.A.       |                        |       |
| Kays Point(7)             |       | 1999       |       | 67,000           |       | 4,720                    |       |             | N.A.       |                        |       |
| Noa(*)                    |       | 2002       |       | 67,000           |       | 4,826                    |       |             | N.A.       |                        |       |
| Cascades(7)               |       | 1993       |       | 67,000           |       | 4,721                    |       |             | N.A.       |                        |       |
| Na-Kao(*)                 |       | 2005       |       | 52,000           |       | 4,076                    |       |             | N.A.       |                        |       |
| Ne’ena(*)            |       | 2004       |       | 52,000           |       | 4,076                    |       |             | N.A.       |                        |       |
| DBL 53                    |       | 1965       |       | 53,000           |       | 4,543                    |       |             | N.A.       |                        |       |
| DBL 31                    |       | 1999       |       | 30,000           |       | 2,146                    |       |             | N.A.       |                        |       |
| DBL 32                    |       | 1999       |       | 30,000           |       | 2,146                    |       |             | N.A.       |                        |       |
| DBL 28                    |       | 2006       |       | 28,000           |       | 2,146                    |       |             | N.A.       |                        |       |
| DBL 29                    |       | 2006       |       | 28,000           |       | 2,146                    |       |             | N.A.       |                        |       |
| DBL 26                    |       | 2006       |       | 28,000           |       | 2,146                    |       |             | N.A.       |                        |       |
| DBL 27                    |       | 2007       |       | 28,000           |       | 2,146                    |       |             | N.A.       |                        |       |
| DBL 22                    |       | 2007       |       | 28,000           |       | 2,146                    |       |             | N.A.       |                        |       |
| Puget Sounder             |       | 1992       |       | 25,000           |       | 1,870                    |       |             | N.A.       |                        |       |
| DBL 2202                  |       | 1962       |       | 22,000           |       | 1,830                    |       |             | N.A.       |                        |       |
| DBL 16                    |       | 1954       |       | 20,000           |       | 1,420                    |       |             | N.A.       |                        |       |

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| DBL 19                   |   | 1998   |       | 18,000        |       | 1,499       |   |   | N.A.   |   |   |
|--------------------------|--------|--------|------------|---------------|------------|-------------|--------|--------|--------|--------|--------|
| DBL 18                   |   | 1998   |       | 18,000        |       | 1,499       |   |   | N.A.   |   |   |
| DBL 17                   |   | 1998   |       | 18,000        |       | 1,499       |   |   | N.A.   |   |   |
| **Subtotal**             |   |   | ** ** | **3,111,937** | ** ** | **223,176** |   |   |   |   |   |
| ***Single-Hull Tanker*** |   |   |       |          |       |        |   |   |   |   |   |
| Great Gull               |   | 1969   |       | 30,000        |       | 1,729       |   |   | 2015   |   |   |
| ***Single-Hull Barges*** |   |   |       |          |       |        |   |   |   |   |   |
| KTC 80                   |   | 1981   |       | 82,878        |       | 4,576       |   |   | 2015   |   |   |
| KTC 71                   |   | 1975   |       | 81,759        |       | 4,719       |   |   | 2015   |   |   |
| BB 110(7)                |   | 1976   |       | 78,000        |       | 4,754       |   |   | 2015   |   |   |
| SCT 340                  |   | 1983   |       | 75,000        |       | 4,395       |   |   | 2015   |   |   |
| 344(7)                   |   | 1984   |       | 75,000        |       | 5,214       |   |   | 2015   |   |   |
| Noho Hele(*)             |   | 1982   |       | 67,880        |       | 4,185       |   |   | 2015   |   |   |
| KTC 60                   |   | 1980   |       | 61,638        |       | 3,824       |   |   | 2015   |   |   |
| KTC 55                   |   | 1972   |       | 53,012        |       | 3,113       |   |   | 2015   |   |   |
| KTC 50                   |   | 1974   |       | 54,716        |       | 3,367       |   |   | 2015   |   |   |
| SCT 280                  |   | 1977   |       | 48,000        |       | 3,081       |   |   | 2015   |   |   |
| SCT 282                  |   | 1978   |       | 48,000        |       | 3,081       |   |   | 2015   |   |   |
| Hui Mana(*)(7)           |   | 1988   |       | 40,000        |       | 2,299       |   |   | 2015   |   |   |
| Essex                    |   | 1967   |       | 35,160        |       | 2,307       |   |   | 2015   |   |   |
| DBL 3201                 |   | 1968   |       | 31,000        |       | 2,033       |   |   | 2015   |   |   |
| KTC 30                   |   | 1960   |       | 30,000        |       | 1,807       |   |   | 2015   |   |   |
| Wallabout Bay            |   | 1986   |       | 28,330        |       | 1,687       |   |   | 2015   |   |   |
| Newark Bay               |   | 1969   |       | 27,390        |       | 1,595       |   |   | 2015   |   |   |
| PM 230(7)                |   | 1983   |       | 25,000        |       | 1,610       |   |   | 2015   |   |   |
| Trader II                |   | 1949   |       | 20,475        |       | 1,194       |   |   | 2015   |   |   |
| KTC 21                   |   | 1961   |       | 20,000        |       | 1,214       |   |   | 2015   |   |   |
| KTC 20                   |   | 1980   |       | 20,000        |       | 1,065       |   |   | 2015   |   |   |
| American 21              |   | 1968   |       | 19,500        |       | 1,262       |   |   | 2015   |   |   |
| Oyster Bay               |   | 1951   |       | 19,370        |       | 1,278       |   |   | 2015   |   |   |
| SCT 180                  |   | 1980   |       | 16,250        |       | 1,053       |   |   | 2015   |   |   |
| Josiah Bartlett          |   | 1955   |       | 14,000        |       | 1,287       |   |   | 2015   |   |   |
| SEA 76                   |   | 1969   |       | 13,313        |       | 830         |   |   | 2015   |   |   |
| KTC 14                   |   | 1941   |       | 13,000        |       | 820         |   |   | 2015   |   |   |
| **Subtotal**             |   |   | ** ** | **1,128,671** | ** ** | **69,379**  |   |   |   |   |   |
| **Total Fleet**          |   |   | ** ** | **4,240,608** | ** ** | **292,555** |   |   |   |   |   |

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(*)          Acquiredin the Smith Maritime, Go Big and Sirius Maritime acquisition, which wascompleted on August 14, 2007.

(1)          Excludesone potable water barge and one deck barge which we also operate.

(2)          Builtin 1974; double-hulling was completed and the vessel redelivered in September 2004.

(3)          Builtin 1986 and rebuilt in 1994.

(4)          Builtin 1982 and rebuilt for petroleum transportation in 2004.

(5)          Vesselnot qualified for Jones Act trade due to foreign construction.

(6)          Builtin 1969 and rebuilt in 2001.

(7)          Chartered-invessel.

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***Newbuildings***

Thefollowing sets forth the size and expected delivery date for vessels in ournewbuilding program:

| **Vessels**                      | ** ** | **Expected Delivery**                                           |
|----------------------------------|------------|-----------------------------------------------------------------|
| Three 28,000-barrel  tank barges |       | 1st Quarter fiscal  2008—3rd Quarter fiscal 2008 |
| Three 80,000-barrel  tank barges |       | 4th Quarter fiscal 2008—1st Quarter fiscal 2009  |
| Four 50,000-barrel  tank barges  |       | 2nd Quarter fiscal 2010—2nd Quarter fiscal 2011  |

 

The total cost of thebarges described above, in the aggregate and after the addition of certainspecial equipment, is approximately $100 million, of which approximately $13million has been spent as of June 30, 2007.

***Tugboat Fleet***

We use tugboats as the primary means of propelling ourtank barge fleet and generally do not charter them out to third parties. Therefore,we seek to maintain the proper balance between the number of tugboats and thenumber of tank barges in our fleet. This balance is influenced by a variety offactors, including the condition of the vessels in our fleet, the mix of ourcoastwise business and our local business and the level of longer-termcontracts versus shorter-term business. We are also able to maintain a properbalance between tugboats and tank barges by analyzing the historical tradingpatterns of our customers and the nature of their cargoes. While a tank bargeis unloading, we often dispatch its tugboat to perform other work.

At August 15, 2007,we operated the following tugboats:

**K-SeaTransportation Partners L.P. Tugboat Fleet**

| **Name(1)**        | ** ** | ** ** | ** ** | **Year Built** | ** ** | **Horsepower** | ** ** | **Dimensions** | ** ** |
|--------------------|------------|------------|------------|---------------------|------------|----------------|------------|----------------|------------|
| Lincoln Sea        |       |       | 2000       |                |       |           | 8000       |           |       | 119’ x 40’ x 22’ |   |
| Rebel              |       |       | 1975       |                |       |           | 7200       |           |       | 150’ x 46’ x 22’ |   |
| Yankee             |       |       | 1976       |                |       |           | 7200       |           |       | 150’ x 46’ x 22’ |   |
| Jimmy Smith(*)     |       |       | 1976       |                |       |           | 7200       |           |       | 150’ x 40’ x 22’ |   |
| Barents Sea        |       |       | 1976       |                |       |           | 6200       |           |       | 136’ x 40’ x 16’ |   |
| Irish Sea          |       |       | 1969       |                |       |           | 5750       |           |       | 135’ x 35’ x 18’ |   |
| Sirius(*)          |       |       | 1974       |                |       |           | 5750       |           |       | 135’ x 38’ x 19’ |   |
| Nakolo(*)          |       |       | 1974       |                |       |           | 5750       |           |       | 125’ x 38’ x 14’ |   |
| El Lobo Grande(*)  |       |       | 1978       |                |       |           | 5750       |           |       | 128’ x 36’ x 19’ |   |
| Nakoa(*)           |       |       | 1976       |                |       |           | 5500       |           |       | 118’ x 34’ x 17’ |   |
| Volunteer          |       |       | 1982       |                |       |           | 4860       |           |       | 120’ x 37’ x 18’ |   |
| Adriatic Sea(2)    |       |       | 2004       |                |       |           | 4800       |           |       | 126’ x 34’ x 15’ |   |
| Java Sea(3)        |       |       | 2005       |                |       |           | 4800       |           |       | 119” x 34’ x 15’ |   |
| Namahoe(*)         |       |       | 1997       |                |       |           | 4400       |           |       | 105’ x 34’ x 16’ |   |
| Pacific Freedom(4) |       |       | 1998       |                |       |           | 4500       |           |       | 120’ x 31’ x 15’ |   |
| Viking             |       |       | 1972       |                |       |           | 4300       |           |       | 133” x 34’ x 18’ |   |
| Beaufort Sea       |       |       | 1971       |                |       |           | 4300       |           |       | 113’ x 32” x 16’ |   |
| Pacific Wolf       |       |       | 1975       |                |       |           | 4100       |           |       | 111’ x 24’ x 13’ |   |
| William J. Moore   |       |       | 1970       |                |       |           | 4000       |           |       | 135’ x 35’ x 20’ |   |
| Niolo(*)           |       |       | 1982       |                |       |           | 4000       |           |       | 117’ x 34’ x 17’ |   |
| Nokea(*)           |       |       | 1975       |                |       |           | 4000       |           |       | 105’ x 30’ x 14’ |   |
| Nunui(*)           |       |       | 1978       |                |       |           | 4000       |           |       | 185’ x 40’ x 12’ |   |
| Tasman Sea         |       |       | 1976       |                |       |           | 3900       |           |       | 124 x 34’ x 16’ |   |

8

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| Norwegian Sea(5)   |   |   | 2006 |   |   |   | 3900 |   |   | 133’ x 34’ x 17’ |   |
|--------------------|--------|--------|------|--------|--------|--------|------|--------|--------|-----------------------------------------------------|--------|
| Sea Hawk(6)        |   |   | 2006 |   |   |   | 3900 |   |   | 112’ x 32’ x 15’ |   |
| John Brix(7)       |   |   | 1999 |   |   |   | 3900 |   |   | 141’ x 35’ x 8’  |   |
| Pacific Avenger    |   |   | 1977 |   |   |   | 3900 |   |   | 140’ x 34’ x 17’ |   |
| Altair(*)          |   |   | 1981 |   |   |   | 3800 |   |   | 106’ x 33’ x 17’ |   |
| Kara Sea           |   |   | 1974 |   |   |   | 3520 |   |   | 111’ x 32’ x 14’ |   |
| Coral Sea          |   |   | 1973 |   |   |   | 3280 |   |   | 111’ x 32’ x 14’ |   |
| Nathan E. Stewart  |   |   | 2001 |   |   |   | 3200 |   |   | 95’ x 32’ x 14”  |   |
| Maryland           |   |   | 1962 |   |   |   | 3010 |   |   | 110’ x 28’ x 14’ |   |
| Baltic Sea         |   |   | 1973 |   |   |   | 3000 |   |   | 101’ x 30’ x 13’ |   |
| Pacific Challenger |   |   | 1976 |   |   |   | 3000 |   |   | 118’ x 34’ x 16’ |   |
| Paragon            |   |   | 1978 |   |   |   | 3000 |   |   | 99’ x 32’ x 15’  |   |
| Pacific Raven      |   |   | 1970 |   |   |   | 3000 |   |   | 112’ x 31’ x 14’ |   |
| Na Hoku(*)         |   |   | 1981 |   |   |   | 3000 |   |   | 105’ x 34’ x 17’ |   |
| Nalani(*)          |   |   | 1981 |   |   |   | 3000 |   |   | 105’ x 34’ x 17’ |   |
| Nohea(*)           |   |   | 1983 |   |   |   | 3000 |   |   | 98’ x 30’ x 14’  |   |
| Pacific Pride(8)   |   |   | 1989 |   |   |   | 2500 |   |   | 84’ x 28’ x 13’  |   |
| Sargasso Sea       |   |   | 1972 |   |   |   | 2460 |   |   | 105’ x 30’ x 15” |   |
| Labrador Sea       |   |   | 2002 |   |   |   | 2400 |   |   | 82’ x 26’ x 12’  |   |
| Bering Sea         |   |   | 1975 |   |   |   | 2250 |   |   | 105’ x 29’ x 13’ |   |
| Caspian Sea        |   |   | 1981 |   |   |   | 2000 |   |   | 65’ x 24’ x 9’   |   |
| Inland Sea         |   |   | 2000 |   |   |   | 2000 |   |   | 76’ x 26’ x 10’  |   |
| Pacific Patriot    |   |   | 1981 |   |   |   | 2000 |   |   | 77’ x 27’ x 12’  |   |
| Davis Sea          |   |   | 1982 |   |   |   | 2000 |   |   | 77.4’ x 26’ x 9’ |   |
| Pacific Eagle(9)   |   |   | 2001 |   |   |   | 2000 |   |   | 98’ x 27’ x 13’  |   |
| Tiger              |   |   | 1966 |   |   |   | 2000 |   |   | 88’ x 27’ 12’         |   |
| Houma              |   |   | 1970 |   |   |   | 1950 |   |   | 90’ x 29’ x 11’  |   |
| Timor Sea          |   |   | 1960 |   |   |   | 1920 |   |   | 80’ x 24’ x 10’  |   |
| Odin               |   |   | 1982 |   |   |   | 1860 |   |   | 72’ x 28’ x 12’  |   |
| Taurus             |   |   | 1979 |   |   |   | 1860 |   |   | 79’ x 25’ x 12’  |   |
| Falcon             |   |   | 1978 |   |   |   | 1800 |   |   | 80’ x 25’ x 12’  |   |
| Naupaka(*)         |   |   | 1983 |   |   |   | 1800 |   |   | 75’ x 26’ x 10’  |   |
| Fidalgo            |   |   | 1973 |   |   |   | 1400 |   |   | 98’x 25’x 8’               |   |
| Banda Sea          |   |   | 1966 |   |   |   | 1350 |   |   | 75’ x 23’ x 8’   |   |
| Pacific Falcon     |   |   | 1985 |   |   |   | 1250 |   |   | 65’ x 22’ x 9’   |   |

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(*)          Acquiredin the Smith Maritime, Go Big and Sirius Maritime acquisition, which wascompleted on August 14, 2007.

(1)          Excludingcertain workboats and other small vessels most of which are less than 1,000 HP.

(2)          Builtin 1978 and rebuilt in 2004.

(3)          Builtin 1981 and rebuilt in 2005.

(4)          Builtin 1969 and rebuilt in 1998.

(5)          Builtin 1976 and rebuilt in 2006.

(6)          Builtin 1978 and rebuilt in 2006.

(7)          Builtin 1963 and rebuilt in 1999.

(8)          Builtin 1976 and rebuilt in 1989.

(9)          Builtin 1966 and rebuilt in 1985 and 2001.

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***Integrated Tug-Barge Units***

As of August 15,2007, we operated eighteen ITBs, which represented approximately 37% of thebarrel-carrying capacity of our tank barge fleet.

**Bunkering**

For over 30 years, we have specialized in theshipside delivery of fuel, known as bunkering, for the major and independentbunker suppliers in New York Harbor. We also provide bunkering services in theport of Norfolk. Demand for bunkering services is driven primarily by thenumber of ship arrivals. A ship’s time in port generally is limited, and thecost of delaying sailing due to bunkering or other activities can besignificant. Therefore, we continually strive to improve the level of serviceand on-time deliveries we provide to our customers.

The majority of our bunkerdelivery tank vessels are equipped with advanced, whole load sampling devicesto provide the supplier and receiver a representative sample. Our bunkerdelivery tank barges are also equipped with extended booms for hose handlingease alongside ships, remote pump engine shut-offs, spill rails, spillcontainment equipment and supplies, VHF and UHF radio communication andfendering.

**PreventativeMaintenance**

We have a computerized preventative maintenanceprogram that tracks U.S. Coast Guard and American Bureau of Shipping inspectionschedules and establishes a system for the reporting and handling of routinemaintenance and repair.

Vessel captains submit monthly inspection reports,which are used to note conditions that may require maintenance or repair.Vessel superintendents are responsible for reviewing these reports, inspectingidentified discrepancies, assigning a priority classification and generatingwork orders. Work orders establish job type, assign personnel responsible forthe task and record target start and completion dates. Vessel superintendentsinspect repairs completed by the crew, supervise outside contractors as neededand conduct quarterly inspections following the same criteria as the captains.Drills and training exercises are conducted in conjunction with theseinspections, which are typically more comprehensive in scope. In addition, anoperations duty officer is available on a 24-hour basis to handle anyoperational issues. The operations duty officer is prepared to respond on scenewhenever required and is trained in technical repair issues, spill control andemergency response.

The American Bureau ofShipping and the U.S. Coast Guard establish drydocking schedules. Typically, wedrydock our vessels twice every five years. Prior to sending a vessel to ashipyard, we develop comprehensive work lists to ensure all requiredmaintenance is completed. Repair facilities bid on these work lists, and jobsare awarded based on price and time to complete. Vessels then report to acleaning facility to prepare for shipyard. Once the vessel is gas-free, acertified marine chemist issues paperwork certifying that no dangerous vaporsare present. The vessel proceeds to the shipyard where the vesselsuperintendent and certain crewmembers assist in performing the maintenance andrepair work. The planned maintenance period is considered complete when allwork has been tested to the satisfaction of American Bureau of Shipping or U.S.Coast Guard inspectors or both.

**Safety**

***General***

We are committed to operating our vessels in a mannerthat protects the safety and health of our employees, the general public andthe environment. Our primary goal is to minimize the number of safety-and health-related accidents on our vessels and our property. Our primaryconcerns are to avoid personal injuries and to reduce occupational healthhazards. We want to prevent accidents that may cause damage 

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to our personnel,equipment or the environment, such as fire, collisions, petroleum spills andgroundings of our vessels. In addition, we are committed to reducing overallemissions and waste generation from each of our facilities and vessels and tothe safe management of associated cargo residues and cleaning wastes.

Our policy is to followall laws and regulations as required, and we are actively participating withgovernment, trade organizations and the public in creating responsible laws,regulations and standards to safeguard the workplace, the community and theenvironment. Our Operations Department is responsible for coordinating allfacets of our health and safety program and identifies areas that may requirespecial emphasis, including new initiatives that evolve within the industry.Our Human Resources Department is responsible for all training, whetherconducted in-house or at a training facility. Supervisors are responsible forcarrying out and monitoring compliance for all of the safety and healthpolicies on their vessels.

***Tank Barge Characteristics***

To protect the environment, today’s tank barge hullsare required not only to be leak-proof into the body of water in which theyfloat but also to be vapor-tight to prevent the release of any fumes orvapors into the atmosphere. Our tank barges that carry light products such asgasoline or naphtha have alarms that indicate when the tank is full (95% ofcapacity) and when it is overfull (98% of capacity). Each tank barge also has avapor recovery system that connects the cargo tanks to the shore terminal viapipe and hose to return to the plant the vapors generated while loading.

The majority of our bunkerdelivery tank barges are equipped with advanced, whole load sampling devices toprovide the supplier and receiver a representative sample. Our bunker deliverytank barges are also equipped with extended booms for hose handling easealongside ships, remote pump engine shut-offs, spill rails, spill containmentequipment and supplies, VHF and UHF radio, satellite and internetcommunication.

***Safety Management Systems***

We belong to and adhere to the recommendations of theAmerican Waterways Operators (“AWO”) Responsible Carrier Program. The programis designed as a framework for continuously improving the industry’s and membercompanies’ safety performance. The program complements and builds upon existinggovernment regulations, requiring company safety and training standards that inmany instances exceed those required by federal law or regulation.

Developed by theAWO, the Responsible Carrier Program incorporates best industry practices inthree primary areas:

·       managementand administration;

·       equipmentand inspection; and

·       humanfactors.

The Responsible Carriers Program has been recognizedby many groups, including the U.S. Coast Guard and shipper organizations. We areperiodically audited by an AWO-certified auditor to verify compliance. We werelast audited in early 2007, and our Responsible Carrier Program certificateremains in effect until March 2010.

We are also certified tothe standards of the International Safety Management, or ISM, system. The ISMstandards were promulgated by the International Maritime Organization, or IMO,and have been adopted through treaty by many IMO member countries, includingthe United States. Although ISM is not required for coastal tug and bargeoperations, we have determined that an integrated safety management 

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systemincluding the ISM and Responsible Carriers Program standards promotes saferoperations and provides us with necessary operational flexibility as wecontinue to grow.

**Ship Management,Crewing and Employees**

We maintain an experienced and highly qualified workforce of shore-based and seagoing personnel. As of August 15, 2007,we employed 925 persons, comprising 148 shore staff and 777 fleet personnel. Ourtug and tanker captains are non-union management supervisors. Effective July 1,2004, we entered into a new four-year collective bargaining agreement with ourmaritime union covering certain of our seagoing personnel comprising 44% of ourworkforce. The collective bargaining agreement provides for wage increasestotaling 15% over its term, and requires us to make contributions to certainpension and other welfare programs. No unfunded pension liability exists underany of these programs. Our vessel employees are paid on a daily or hourly basisand typically work 14 days on and 14 days off. Our shore-basedpersonnel are generally salaried and most are located at our headquarters inEast Brunswick, New Jersey, our facilities in Staten Island, New York, Seattle,Washington, and Norfolk, Virginia. We believe that our relations with ouremployees are satisfactory.

Our shore staff provides worldwide support for allaspects of our fleet and business operations, including sales and scheduling,crewing and human resources functions, engineering, compliance and technicalmanagement, financial and insurance services, and information technology. Astaff of dispatchers and schedulers maintain a 24-hour duty rotation tomonitor communications and to coordinate fleet operations with our customersand terminals. Communication with our vessels is accomplished by variousmethods, including wireless data links, cellular telephone, VHF, UHF and HFradio.

Our crews regularlyinspect each vessel, both at sea and in port, and perform most of the ordinarycourse maintenance. Our procedures call for a member of our shore-basedstaff to inspect each vessel at least once each fiscal quarter, making specificnotations and recommendations regarding the overall condition of the vessel,maintenance, safety and crew welfare. In addition, selected vessels areinspected each year by independent consultants. All of the vessels that are onbareboat charters to third parties are managed and operated by the customer.

**Classification,Inspection and Certification**

Most of our coastwise vessels have been certified asbeing “in class” by the American Bureau of Shipping and, in the case of onevessel, by Lloyds of London. Other vessels, primarily in our West Coastoperations, have the required “loadline” certification. The American Bureau ofShipping is one of several internationally recognized classification societiesthat inspect vessels at regularly scheduled intervals to ensure compliance withAmerican Bureau of Shipping classification rules and some applicablefederal safety regulations. Most insurance underwriters require at least a “loadline”certification by a classification society before they will extend coverage to acoastwise vessel. The classification society certifies that the pertinentvessel has been built and maintained in accordance with the rules of thesociety and complies with applicable rules and regulations of the vessel’scountry of registry and the international conventions of which that country isa member. Inspections are conducted on the pertinent vessel by a surveyor ofthe classification society in three surveys of varying frequency andthoroughness: annual surveys each year, an intermediate survey every two tothree years and a special survey every four to five years. As part of theintermediate survey, a vessel may be required to be drydocked every 24 to30 months for inspection of its underwater parts and for any necessaryrepair work related to such inspection.

Our vessels are also inspected at periodic intervalsby the U.S. Coast Guard to ensure compliance with Federal safety regulations. Allof our tank vessels carry Certificates of Inspection issued by the U.S. CoastGuard.

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Our vessels and shoresideoperations are also inspected and audited periodically by our customers, insome cases as a precondition to chartering our vessels. We maintain allnecessary approvals required for our vessels to operate in their normal trades.We believe that the high quality of our tonnage, our crews and our shoresidestaff are advantages when competing against other vessel operators forlong-term business.

**Insurance Program**

We maintain insurance coverage consistent withindustry practice that we believe is adequate to protect against the accident-relatedrisks involved in the conduct of our business and risks of liability forenvironmental damage and pollution. Nevertheless, we cannot provide assurancethat all risks are adequately insured against, that any particular claims willbe paid or that we will be able to procure adequate insurance coverage atcommercially reasonable rates in the future. K-Sea General Partner GP LLC,the general partner of our general partner, maintains a key man insurancepolicy on Mr. Timothy J. Casey, its President and Chief ExecutiveOfficer.

Our hull and machinery insurance covers risks ofactual or constructive loss from collision, towers liabilities, fire, groundingand engine breakdown up to an agreed value per vessel. Our war-risks insurancecovers risks of confiscation, seizure, capture, vandalism, sabotage and otherwar-related risks. While some tanker owners and operators obtain loss-of-hireinsurance covering the loss of revenue during extended tanker off-hire periods,we do not have this type of coverage. We believe that, given our diversifiedmarine transportation operations and high utilization rate, this type ofcoverage is not economical and is of limited value to us. However, we evaluatethe need for such coverage on an ongoing basis taking into account insurancemarket conditions and the employment of our vessels.

Our protection and indemnity insurance covers third-partyliabilities and other related expenses from, among other things, injury ordeath of crew, passengers and other third parties, claims arising fromcollisions, damage to cargo, damage to third-party property, asbestosexposure and pollution arising from oil or other substances. Our currentprotection and indemnity insurance coverage for pollution is $1 billionper incident and is provided by West of England Ship Owners InsuranceServices Ltd. (“West of England”), a mutual insurance association. West ofEngland is a member of the International Group of protection and indemnitymutual assurance associations. The protection and indemnity associations thatcomprise the International Group insure approximately 90% of the world’scommercial tonnage and have entered into a pooling agreement to reinsure eachassociation’s liabilities. Each protection and indemnity association has cappedits exposure to this pooling agreement at approximately $4.3 billion pernon-pollution incident. As a member of West of England, we are subject to callspayable to the association based on our claim records, as well as the claimrecords of all other members of the individual associations and members of Westof England.

We are not currently the subject of any claimsalleging exposure to asbestos or second-hand smoke, although such claims havebeen brought against our predecessors in the past and may be brought against usin the future. Our predecessor company, EW Transportation LLC, has contractuallyagreed to retain any such liabilities that occurred prior to our initial publicoffering in January 2004, will indemnify us for up to $10 million ofsuch liabilities until January 2014, and will make available to us thebenefit of certain indemnities it received in connection with the purchase ofcertain vessels. If, notwithstanding the foregoing, we are ultimately obligatedto pay any asbestos-related or similar claims for any reason, we believewe or EW Transportation LLC would have adequate insurance coverage for periodsafter March 1986 to pay such claims. However, EW Transportation LLC andits predecessors may not have insurance coverage prior to March 1986. Ifwe were subject to claims related to that period, including claims from currentor former employees, EW Transportation LLC may not have insurance to pay theliabilities, if any, that could be imposed on us. If we had to pay claimssolely out of our own funds, it could have a material adverse effect on ourfinancial condition. Furthermore, any claims covered by insurance 

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would be subject todeductibles, and because it is possible that a large number of claims could bebrought, the aggregate amount of these deductibles could be material. Pleaseread “Legal Proceedings” in Item 3 of this report.

We may not be able toobtain insurance coverage in the future to cover all risks inherent in ourbusiness, and insurance, if available, may be at rates that we do not considercommercially reasonable. In addition, as more single-hull vessels are retiredfrom active service, insurers may be less willing to insure, and customers lesswilling to hire, single-hull vessels.

**Competition**

The domestic tank vessel industry is highlycompetitive. The Jones Act restricts U.S. point-to-point maritime shipping tovessels built in the United States, owned and operated by U.S. citizens andmanned by U.S. crews. In our market areas, our primary direct competitors arethe operators of U.S.-flag ocean-going tank barges and U.S.-flag refinedpetroleum product tankers, including the captive fleets of major oil companies.

In the voyage and short-term charter market, ourvessels compete with all other vessels of a size and type required by acharterer that can be available at the date specified. In the voyage market,competition is based primarily on price and availability, although charterershave become more selective with respect to the quality of vessels they hire,with particular emphasis on factors such as age, double hulls and thereliability and quality of operations. Increasingly, major charterers aredemonstrating a preference for modern vessels based on concerns about theenvironmental risks associated with older vessels. Consequently, we believethat owners of large modern fleets have been able to gain a competitiveadvantage over owners of older fleets.

U.S.-flag tank vesselsalso compete with petroleum product pipelines and are affected by the level ofimports on foreign flag products carriers. The Colonial Pipeline system, whichoriginates in Texas and terminates at New York Harbor, the Plantation Pipe Linesystem, which originates in Louisiana and terminates in Washington D.C., andsmaller regional pipelines between Philadelphia and New York, carry refinedpetroleum products to the major storage and distribution facilities that wecurrently serve. We believe that high capital costs, tariff regulation andenvironmental considerations make it unlikely that a new refined productpipeline system will be built in our market areas in the near future. It ispossible, however, that new pipeline segments, including pipeline segments thatconnect with existing pipeline systems, could be built or that existingpipelines could be converted to carry refined petroleum products. Either ofthese occurrences could have an adverse effect on our ability to compete inparticular locations.

**Regulation**

Our operations are subjectto significant federal, state and local regulation, the principal provisions ofwhich are described below.

***Environmental***

*General.**  *Government regulation significantlyaffects the ownership and operation of our tank vessels. Our tank vessels aresubject to international conventions, federal, state and local laws andregulations relating to safety and health and environmental protection,including the generation, storage, handling, emission, transportation, anddischarge of hazardous and non-hazardous materials. Although we believe that weare in substantial compliance with applicable environmental laws andregulations, we cannot predict the ultimate cost of complying with theserequirements, or the impact of these requirements on the resale value or usefullives of our tank vessels. The recent trend in environmental legislation istoward stricter requirements, and this trend will likely continue. In addition,a future serious marine incident occurring in U.S. waters, or internationally,that results in significant oil pollution or causes 

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significant environmentalimpact could result in additional legislation or regulation that could affectour profitability.

Various governmental and quasi-governmentalagencies require us to obtain permits, licenses and certificates for theoperation of our tank vessels. While we believe that we are in substantialcompliance with applicable environmental laws and regulations and have allpermits, licenses and certificates necessary for the conduct of our operations,frequently changing and increasingly stricter requirements, futurenon-compliance or failure to maintain necessary permits or approvals could requireus to incur substantial costs or temporarily suspend operation of one or moreof our tank vessels.

We maintain operating standards for all our tankvessels that emphasize operational safety, quality maintenance, continuoustraining of our crews and officers, care for the environment and compliancewith U.S. regulations. Our tank vessels are subject to both scheduled andunscheduled inspections by a variety of governmental and private entities, eachof which may have unique requirements. These entities include the local portauthorities (U.S. Coast Guard, harbor master or equivalent), classificationsocieties, flag state administration and charterers, particularly terminaloperators and oil companies.

Finally, we manage our exposure to losses from potentialdischarges of pollutants through the use of well-maintained and well-managedfacilities, well maintained and well equipped vessels and safety andenvironmental programs, including a maritime compliance program and ourinsurance program. Moreover, we believe we will be able to accommodatereasonably foreseeable environmental regulatory changes. However, the risks ofsubstantial costs, liabilities, and penalties are inherent in marineoperations. As a result, there can be no assurance that any new regulations orrequirements or any discharge of pollutants by us will not have a materialadverse effect on us.

*TheOil Pollution Act of 1990.**  *The Oil Pollution Act of 1990, or OPA 90, affects allvessels trading in U.S. waters including the exclusive economic zone extending200 miles seaward. OPA 90 sets forth various technical and operatingrequirements for tank vessels operating in U.S. waters. Existing single-hull,double-sided and double-bottomed tank vessels are to be phased outof service at varying times based on their tonnage and age, with all suchvessels being phased out by January 2015. As of August 15, 2007, 28of our tank vessels, which are single-hulled, will be precluded fromtransporting petroleum products as of January 1, 2015.

Under OPA 90,owners or operators of tank vessels and certain non-tank vessels operating inU.S. waters must file vessel spill response plans with the U.S. CoastGuard and operate in compliance with the plans. These vessel response plansmust, among other things:

·       addressa “worst case” scenario and identify and ensure, through contract or otherapproved means, the availability of necessary private response resources;

·       describecrew training and drills; and

·       identifya qualified individual with specific authority and responsibility to implementremoval actions in the event of an oil spill.

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Our vessel response plans have been approved by theU.S. Coast Guard, and all of our tankermen have been trained to comply withthese guidelines. In addition, we conduct regular oil-spill response drills inaccordance with the guidelines set out in OPA 90. We believe that all of ourvessels are in substantial compliance with OPA 90.

*EnvironmentalSpill and Release Liability.**  *OPA 90 and various state laws substantially increasedover historic levels the statutory liability of owners and operators of vesselsfor the discharge or substantial threat of a discharge of oil and the resultingdamages, both regarding the limits of liability and the scope of damages. OPA90 imposes joint and several strict liability on responsible parties, includingowners, operators and bareboat charterers, for all oil spill and containmentand clean-up costs and other damages arising from spills attributable to theirvessels. A complete defense is available only when the responsible partyestablishes that it exercised due care and took precautions against foreseeableacts or omissions of third parties and when the spill is caused solely by anact of God, act of war (including civil war and insurrection) or a third partyother than an employee or agent or party in a contractual relationship with theresponsible party. These limited defenses may be lost if the responsible partyfails to report the incident or reasonably cooperate with the appropriateauthorities or refuses to comply with an order concerning clean-up activities.Even if the spill is caused solely by a third party, the owner or operator mustpay removal costs and damage claims and then seek reimbursement from the thirdparty or the trust fund established under OPA 90. Finally, in certaincircumstances involving oil spills, OPA 90 and other environmental laws mayimpose criminal liability on personnel and/or the corporate entity.

OPA 90 limits theliability of each responsible party for oil pollution from vessels, and theselimits were increased substantially in 2006. The limits for a tank vesselwithout a qualifying double hull are the greater of (1) $3,000 per grosston or (2) $22 million for a tank vessel of greater than 3,000 tonsor $6 million for a tank vessel of 3,000 gross tons or less. The limitsfor a tank vessel with a qualifying double hull are the greater of (1) $1,900per gross ton or (2) $16 million for a tank vessel of greater than 3,000gross tons or $4 million for a tank vessel of 3,000 gross tons or less. Thelimits for any vessel other than a tank vessel are the greater of $950 pergross ton or $0.8 million. The limits of liability are subject to periodicincrease to account for inflation. These limits do not apply where, among otherthings, the spill is caused by gross negligence or willful misconduct of, or aviolation of an applicable federal safety, construction or operating regulationby, a responsible party or its agent or employee or any person acting in acontractual relationship with a responsible party. In addition to removalcosts, OPA 90 provides for recovery of damages, including:

·       naturalresource damages and related assessment costs;

·       realand personal property damages;

·       netloss of taxes, royalties, rents, fees and other lost revenues;

·       netcosts of public services necessitated by a spill response, such as protectionfrom fire, safety or health hazards;

·       lossof profits or impairment of earning capacity due to the injury, destruction orloss of real property, personal property or natural resources; and

·       lossof subsistence use of natural resources.

OPA 90 requires owners and operators of vesselsoperating in U.S. waters to establish and maintain with the U.S. Coast Guardevidence of their financial responsibility sufficient to meet their potentialliabilities imposed by OPA 90. Under the regulations, we may provide evidenceof insurance, a surety bond, a guarantee, letter of credit, qualification as aself-insurer or other evidence of financial responsibility. We have qualifiedas a self-insurer under the regulations and have received Certificates ofFinancial Responsibility from the U.S. Coast Guard for all of our vesselssubject to this requirement.

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OPA 90 expressly provides that individual states areentitled to enforce their own oil pollution liability laws, even ifinconsistent with or imposing greater liability than OPA 90. There is nouniform liability scheme among the states. Some states have OPA 90-likeschemes for limiting liability to various amounts, some rely on common lawfault-based remedies and others impose strict and/or unlimited liabilityon an owner or operator. Virtually all coastal states have enacted their ownpollution prevention, liability and response laws, whether statutory or throughcourt decisions, with many providing for some form of unlimited liability. Webelieve that the liability provisions of OPA 90 and similar state laws havegreatly expanded potential liability in the event of an oil spill, even wherewe are not at fault. Some states have also established their own requirementsfor financial responsibility. However, at leasttwo states have repealed regulations concerning the operation, manning,construction or design of tank vessels as a result of the U. S. Supreme Court’s2000 ruling in United States v. Locke. In Locke, the Court held that theregulation of maritime commerce is generally a federal responsibility becauseof the need for national and international uniformity.

Parties affected by oil pollution that do not fullyrecover from a responsible party may pursue relief from the Oil Spill LiabilityTrust Fund. Responsible parties may seek reimbursement from the fund for costsincurred that exceed the liability limits of OPA 90. In order to obtainreimbursement of excess costs, the responsible party would need to establishthat it is entitled to a statutory limitation of liability as discussed above. Ifwe are deemed a responsible party for an oil pollution incident and areineligible for reimbursement of excess costs, the costs of responding to an oilpollution incident could have a material adverse effect on our results ofoperations, financial condition and cash flows. We presently maintain oilpollution liability insurance in an amount in excess of that required by OPA90. Through West of England, our current coverage for oil pollution is$1 billion per incident. It is possible, however, that our liability foran oil pollution incident may be in excess of the insurance coverage wemaintain.

We are also subject to potential liability arisingunder the U.S. Comprehensive Environmental Response, Compensation, andLiability Act, or CERCLA, which applies to the discharge of hazardoussubstances, whether on land or at sea. Specifically, CERCLA provides forliability of owners and operators of vessels for cleanup and removal ofhazardous substances. Liability under CERCLA for releases of hazardoussubstances from vessels is limited to the greater of $300 per gross ton or $5 millionper incident unless attributable to willful misconduct or neglect, a violationof applicable standards or rules, or upon failure to provide reasonablecooperation and assistance. CERCLA liability for releases from facilities otherthan vessels is generally unlimited.

We are required to show proof of insurance, suretybond, self insurance or other evidence of financial responsibility to paydamages under OPA 90 and CERCLA in the amount of $1,500 per gross ton forvessels, consisting of the sum of the OPA 90 liability limit of $1,200 pergross ton or $10 million per discharge and the CERCLA liability limit of$300 per gross ton or $5 million per discharge. We have satisfied theserequirements and obtained a U.S. Coast Guard Certificate of Financial Responsibilityfor each of our tank vessels. OPA 90 and CERCLA each preserve the right torecover damages under other existing laws, including maritime tort law.

*Water.**  *The federal Clean Water Act (CWA)imposes restrictions and strict controls on the discharge of pollutants intonavigable waters, and such discharges generally require permits. The CWAprovides for civil, criminal and administrative penalties for any unauthorizeddischarges and imposes substantial liability for the costs of removal,remediation and damages. State laws for the control of water pollution alsoprovide varying civil, criminal and administrative penalties and liabilities inthe case of a discharge of petroleum, its derivatives, hazardous substances,wastes and pollutants into state waters. In addition, the Coastal ZoneManagement Act authorizes state implementation and development of programs ofmanagement measures for non-point source pollution to restore and protectcoastal waters.

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A 2005 United States district court decision couldresult in certain of our vessels being required to obtain Clean Water Actpermits for the discharge of ballast water. Under current Clean Water Actregulations, our vessels are exempt from such permitting requirements, but inthe March 2005 Northwest Environmental Advocates v. EPA decision, thefederal district court in California ordered the EPA to repeal the exemption. Underthe court’s ruling owners and operators of vessels would be required to complywith the Clean Water Act permitting requirements or face penalties. The remedyphase of the proceeding is ongoing. However, if the permitting exemption isrepealed, we will incur certain costs to obtain Clean Water Act permits for ourvessels. Because we do not yet know how or when this matter ultimately will be resolved,we cannot estimate its potential financial impact at this time. However, webelieve that any financial impacts resulting from the repeal of the permittingexemption for ballast water discharge will not be material.

*SolidWaste.**  *Ouroperations occasionally generate and require the transportation, treatment anddisposal of both hazardous and non-hazardous solid wastes that are subject tothe requirements of the federal Resource Conservation and Recovery Act, orRCRA, and comparable state and local requirements. In addition, in the courseof our tank vessel operations, we engage contractors to remove and dispose ofwaste material, including tank residue. In the event that such waste is foundto be “hazardous” under either RCRA or the CWA, and is disposed of in violationof applicable law, we could be found jointly and severally liable for thecleanup costs and any resulting damages. Finally, the EPA does not currentlyclassify “used oil” as “hazardous waste,” provided certain recycling standardsare met. However, some states in which we operate have classified “used oil” as“hazardous” under state laws patterned after RCRA. The cost of managing wastesgenerated by tank vessel operations has increased in recent years understricter state and federal standards. Additionally, from time to time wearrange for the disposal of hazardous waste or hazardous substances at offsitedisposal facilities. If such materials are improperly disposed of by thirdparties, we could be liable for clean up costs under CERCLA or the equivalentstate laws. We use only certified haulers for this work.

EW Transportation Corp. (formerly K-Sea TransportationCorp., a predecessor company) was previously notified that it is potentiallyresponsible for the cleanup of hazardous substances at the “Palmer Barge Site”in Port Arthur, Texas, where cleaning was performed on two of our barges in1996 and 1997. We assumed this liability at the time of our initial publicoffering, subject to insurance and certain indemnification from our predecessors(see “Certain Relationships and Related Transactions—Omnibus Agreement—Indemnification”in Item 13 of this report). In August 2007, we agreed to settle our shareof liability for the EPA-mandated investigation and site cleanup for $25,000,which we anticipate will be indemnified by our predecessor. We believe thatfurther costs, if any, will be immaterial to our financial position, results ofoperations and cash flows.

*AirEmissions.**  *Thefederal Clean Air Act (CAA) requires the EPA to promulgate standards applicableto emissions of volatile organic compounds and other air contaminants. Ourvessels are subject to vapor control and recovery requirements for certaincargoes when loading, unloading, ballasting, cleaning and conducting otheroperations in regulated port areas. Our tank barges are equipped with vaporcontrol systems that satisfy these requirements. In addition, the EPA issuedfinal rules regarding emissions standards for various classes of marine dieselengines. While these rules are currently limited to new engines beginningwith the 2004 model year, the EPA has noted that it may revisit the applicationof emissions standards to rebuilt or remanufactured engines if the industrydoes not take steps to introduce new pollution control technologies. Adoptionof such standards could require modifications to some existing marine dieselengines and may require substantial expenditures.

The CAA also requiresstates to draft State Implementation Plans (SIPs) designed to attain nationalhealth-based air quality standards in primarily major metropolitan and/orindustrial areas. Where states fail to present approvable SIPs or SIP revisionsby certain statutory deadlines, the federal government is required to draft aFederal Implementation Plan. Several SIPs regulate emissions resulting frombarge 

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loadingand degassing operations by requiring the installation of vapor controlequipment. As stated above, our tank barges are already equipped with vaporcontrol systems that satisfy these requirements. Although a risk exists thatnew regulations could require significant capital expenditures and otherwiseincrease our costs, we believe, based upon the regulations that have beenproposed to date, that no material capital expenditures beyond those currentlycontemplated and no material increase in costs are likely to be required.

***Coastwise Laws***

A substantialportion of our operations are conducted in the U.S. domestic trade, which isgoverned by the coastwise laws of the United States. The U.S. coastwise lawsreserve marine transportation between points in the United States, includingharbor tug services, to vessels built in and documented under the laws of theUnited States (U.S.-flag) and owned and manned by U.S. citizens. Generally, anentity is deemed a U.S. citizen for these purposes so long as:

·       itis organized under the laws of the United States or a state;

·       eachof its chief executive officer (by whatever title) and the chairman of itsboard of directors is a U.S. citizen;

·       nomore than a minority of the number of its directors necessary to constitute aquorum for the transaction of business are non-U.S. citizens;

·       atleast 75% of the interest and voting power in the corporation is held by U.S.citizens free of any trust, fiduciary arrangement or other agreement,arrangement or understanding whereby voting power may be exercised directly orindirectly by non-U.S. citizens; and

·       inthe case of a limited partnership, the general partner meets U.S. citizenshiprequirements for U.S. coastwise trade.

Because we could lose the privilege of operating ourvessels in the U.S. coastwise trade if non-U.S. citizens were to own or controlin excess of 25% of our outstanding interests, our limited partnershipagreement restricts foreign ownership and control of our common andsubordinated units to not more than 15% of our outstanding interests.

There have been repeatedefforts aimed at repeal or significant change of the Jones Act. Although webelieve it is unlikely that the Jones Act will be substantially modified orrepealed, there can be no assurance that Congress will not substantially modifyor repeal such laws. Such changes could have a material adverse effect on ouroperations and financial condition.

***Other***

Our vessels are subject tothe jurisdiction of the U.S. Coast Guard, the National Transportation SafetyBoard, the U.S. Customs and Border Protection (CBP) and the U.S. MaritimeAdministration, as well as subject to rules of private industryorganizations such as the American Bureau of Shipping. These agencies and organizationsestablish safety standards and are authorized to investigate vessels andaccidents and to recommend improved maritime safety standards. Moreover, toensure compliance with applicable safety regulations, the U.S. Coast Guard isauthorized to inspect vessels at will.

***Occupational Health Regulations***

Our shoreside facilitiesare subject to occupational safety and health regulations issued by the U.S. OccupationalSafety and Health Administration, or OSHA, and comparable state programs. Theseregulations currently require us to maintain a workplace free of recognizedhazards, observe safety and health regulations, maintain records, and keepemployees informed of safety and health practices and 

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duties.Our vessel operations are also subject to occupational safety and healthregulations issued by the U.S. Coast Guard and, to an extent, OSHA. Theseregulations currently require us to perform monitoring, medical testing andrecordkeeping with respect to mariners engaged in the handling of the variouscargoes transported by our chemical and petroleum product carriers.

***Vessel Condition***

Our vessels are subject toperiodic inspection and survey by, and drydocking and maintenance requirementsof, the U.S. Coast Guard and/or the American Bureau of Shipping. We believe weare currently in compliance in all material respects with the environmental andother laws and regulations, including health and safety requirements, to whichour operations are subject. We are unaware of any pending or threatenedlitigation or other judicial, administrative or arbitration proceedings againstus occasioned by any alleged non-compliance with such laws or regulations. Therisks of substantial costs, liabilities and penalties are, however, inherent inmarine operations, and there can be no assurance that significant costs,liabilities or penalties will not be incurred by or imposed on us in thefuture.

**Seasonality**

We operate our tankvessels in markets that have historically exhibited seasonal variations indemand and, as a result, in charter rates. For example, movements of certainclean oil products, such as motor fuels, generally increase during the summerdriving season. In certain regions, movements of certain black oil products anddistillates, such as heating oil, generally increase during the winter months,while movements of asphalt products generally increase in the spring throughfall months. Unseasonably cold winters result in significantly higher demandfor heating oil in the northeastern United States. Meanwhile, our operationsalong the West Coast and in Alaska historically have been subject to seasonalvariations in demand that vary from those exhibited in the East Coast and GulfCoast regions. The summer driving season can increase demand for automobilefuel in all of our markets and, accordingly, the demand for our services. Adecline in demand for, and level of consumption of, refined petroleum productscould cause demand for tank vessel capacity and charter rates to decline, whichwould decrease our revenues and profitability. Our acquisitions on the WestCoast of the U.S. provide seasonal diversity primarily relating to the Alaskanmarkets, which experience the greatest demand for petroleum products in thesummer months, due to weather conditions. We do not see any significantseasonality impact in the Hawaiian market.

**Properties**

We lease pier facilities and approximately 7,000square feet of office space in Staten Island, New York. The lease expiresin April 2009; however, we have the option to renew it for two additionalten-year periods. We own and use a 2,100 square-foot modular facility foradditional office space on the premises.

We lease pier facilities, a water treatment facilityand approximately 10,500 square feet of office space in Norfolk, Virginia. Thislease expires in January 2010 and we have an option to purchase thefacility.

We lease approximately 9,500 square feet of officespace for our principal executive office in East Brunswick, New Jersey,for which the lease expires in December 2013.

We lease pier facilities and approximately 16,000square feet of office space in Seattle, Washington. This lease expires in October 2008with a renewal option for one additional five-year term. We also leaseapproximately 6,000 square feet of other office space in Seattle, Washington. Thislease expires in February 2008.

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We also lease pierfacilities and approximately 22,000 square feet of office and warehouse spacein Philadelphia, Pennsylvania, which terminates in December 2009, and wealso lease pier facilities and approximately 2,800 square feet of office andwarehouse space, on a month to month basis, in Honolulu, Hawaii.

**SEC Reporting**

We file annual, quarterly and current reports, alongwith any related amendments and supplements thereto, with the SEC. From time totime, we may also file registration statements pertaining to equity or debtofferings. You may read and copy any materials we file with the SEC at the SEC’sPublic Reference Room at 100 F Street, NE, Washington, DC 20549. You mayobtain information regarding the Public Reference Room by calling the SECat 1-800-SEC-0330. In addition, the SEC maintains a websiteat *www.sec.gov* that containsreports, proxy and information statements, and other information regardingissuers that file electronically with the SEC.

We also provide electronicaccess to our periodic and current reports on our website, *www.k-sea.com*, free of charge. Thesereports are available on our website as soon as reasonably practicable after weelectronically file such materials with, or furnish them to, the SEC. Informationon our website or any other website is not incorporated by reference into thisreport and does not constitute a part of this report.

**ITEM 1A.**        RISKFACTORS.

**Risks Inherent inOur Business**

***Marine transportation is an inherently risky business.***

Our vessels andtheir cargoes are at risk of being damaged or lost because of events such as:

·       marinedisasters;

·       badweather;

·       mechanicalfailures;

·       grounding,fire, explosions and collisions;

·       humanerror; and

·       warand terrorism.

All of these hazards can result in death or injury topersons, loss of property, environmental damages, delays or rerouting. If oneof our vessels were involved in an accident, with the potential risk ofenvironmental contamination, the resulting media coverage could have a materialadverse effect on our business, financial condition and results of operations.

On November 11, 2005, one of our double-hulledtank barges, the DBL 152, struck submerged debris in the U.S. Gulf of Mexico,causing significant damage. The submerged debris was determined to be a serviceplatform which collapsed during Hurricane Rita in September 2005. At thetime of the incident, the barge was carrying approximately 120,000 barrels of No. 6fuel oil, a heavy oil product. We believe much of the oil escaped into theocean. Our insurers responded to the pollution-related costs and environmentaldamages resulting from the incident, paying approximately $65 million less$60,000 in total deductibles.

Our affiliate, EWTransportation LLC, and its predecessors have been named, together with a largenumber of other companies, as co-defendants in 39 civil actions by variousparties alleging unspecified damages from past exposure to asbestos andsecond-hand smoke aboard some of the vessels that it contributed to us inconnection with the initial public offering of our common units. EWTransportation LLC and its predecessors have been dismissed from 38 of theselawsuits for an aggregate sum of 

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approximately$47,000 and are pursuing settlement of the other case. We may be subject tolitigation in the future involving these plaintiffs and others allegingexposure to asbestos due to alleged failure to properly encapsulate friableasbestos or remove friable asbestos on our vessels, as well as for exposure tosecond-hand smoke and other matters.

***A decline in demandfor, and level of consumption of, refined petroleum products could cause demandfor tank vessel capacity and charter rates to decline, which would decrease ourrevenues and profitability.***

The demand for tankvessel capacity is influenced by the demand for refined petroleum products andother factors including:

·       globaland regional economic and political conditions;

·       developmentsin international trade;

·       changesin seaborne and other transportation patterns, including changes in thedistances that cargoes are transported;

·       environmentalconcerns; and

·       competitionfrom alternative sources of energy, such as natural gas, and alternatetransportation methods.

Any of these factors could adversely affect the demandfor tank vessel capacity and charter rates. Any decrease in demand for tankvessel capacity or decrease in charter rates could adversely affect ourbusiness, financial condition and results of operations.

In addition, we operateour tank vessels in markets that have historically exhibited seasonalvariations in demand and, as a result, in charter rates. For example, movementsof certain clean oil products, such as motor fuels, generally increase duringthe summer driving season. In those same regions, movements of black oilproducts and certain clean oil products, such as heating oil, generallyincrease during the winter months, while movements of asphalt productsgenerally increase in the spring through fall months. Unseasonably mild winterscan result in significantly lower demand for heating oil in the northeasternUnited States. Meanwhile, our operations along the West Coast and in Alaskahistorically have been subject to seasonal variations in demand that vary fromthose exhibited in the East Coast and Gulf Coast regions. In addition,unpredictable weather patterns and variations in oil reserves disrupt vesselscheduling. Seasonality could materially affect our business, financialcondition and results of operations in the future.

***Our business wouldbe adversely affected if we failed to comply with the Jones Act provisions oncoastwise trade, or if those provisions were modified, repealed or waived.***

We are subject to the Jones Act and other federal lawsthat restrict maritime transportation between points in the United States tovessels built and registered in the United States and owned and manned by U.S.citizens. We are responsible for monitoring the ownership of our common unitsand other partnership interests. If we do not comply with these restrictions,we would be prohibited from operating our vessels in U.S. coastwise trade, andunder certain circumstances we would be deemed to have undertaken an unapprovedforeign transfer, resulting in severe penalties, including permanent loss ofU.S. coastwise trading rights for our vessels, fines or forfeiture of thevessels. For information about the Jones Act and other maritime laws, pleaseread “Regulation - Coastwise Laws” in Item 1 of this report.

In the past, interest groups have lobbied Congress torepeal the Jones Act to facilitate foreign flag competition for trades andcargoes currently reserved for U.S.-flag vessels under the Jones Act and cargopreference laws. We believe that interest groups may continue efforts to modifyor repeal the Jones Act and cargo preference laws currently benefitingU.S.-flag vessels. If these efforts are successful, it could result inincreased competition, which could reduce our revenues and cash available fordistribution.

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The Secretary of theDepartment of Homeland Security is vested with the authority and discretion towaive the coastwise laws to such extent and upon such terms as he may prescribewhenever he deems that such action is necessary in the interest of national defense.In response to the effects of Hurricanes Katrina and Rita, the Secretary of theDepartment of Homeland Security waived the coastwise laws generally for thetransportation of petroleum products from September 1 to September 19,2005 and from September 26, 2005 to October 24, 2005. In the past,the Secretary of the Department of Homeland Security has waived the coastwiselaws generally for the transportation of petroleum released from the StrategicPetroleum Reserve undertaken in response to circumstances arising from majornatural disasters. Any waiver of the coastwise laws, whether in response tonatural disasters or otherwise, could result in increased competition fromforeign tank vessel operators, which could reduce our revenues and cashavailable for distribution.

***We may not be ableto grow or effectively manage our growth.***

A principal focusof our strategy is to continue to grow by expanding our business in all coastalmarkets in the U.S. and also into other geographic markets. Our future growthwill depend upon a number of factors, some of which we can control and some ofwhich we cannot. These factors include our ability to:

·       identifybusinesses engaged in managing, operating or owning vessels for acquisitions orjoint ventures;

·       identifyvessels for acquisition;

·       consummateacquisitions or joint ventures;

·       integrateany acquired businesses or vessels successfully with our existing operations;

·       hire,train and retain qualified personnel to manage and operate our growing businessand fleet;

·       identifynew geographic markets;

·       improveour operating and financial systems and controls; and

·       obtainrequired financing for our existing and new operations.

A deficiency in any ofthese factors would adversely affect our ability to achieve anticipated levelsof cash flows or realize other anticipated benefits. In addition, competitionfrom other buyers could reduce our acquisition opportunities or cause us to paya higher price than we might otherwise pay.

***We may not be ableto successfully integrate the operations of Smith Maritime, Go Big and SiriusMaritime with our current operations.***

The integration ofboth Smith Maritime, Go Big and Sirius Maritime with our other operations willbe a complex, time consuming and costly process. Failure to timely andsuccessfully integrate both companies may have a material adverse effect on ourbusiness, financial condition and results of operations. The difficulties ofintegrating these companies will present challenges to our managementincluding:

·       operatinga significantly larger combined company with operations in geographic areas inwhich we have not previously operated;

·       managingrelationships with new customers for whom we have not previously providedservices;

·       integratingpersonnel with diverse backgrounds and organizational cultures;

·       experiencingoperational interruptions or the loss of key employees, customers or suppliers;

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·       assessingthe internal controls and procedures for the combined entity that we arerequired to maintain under the Sarbanes-Oxley Act of 2002; and

·       consolidatingother partnership and administrative functions.

We will also be exposed torisks that are commonly associated with transactions similar to thisacquisition, such as unanticipated liabilities and costs, some of which may bematerial, and diversion of management’s attention. As a result, the anticipatedbenefits of the acquisition may not be fully realized, if at all.

***Increasedcompetition in the domestic tank vessel industry could result in reducedprofitability and loss of market share for us.***

Contracts for ourvessels are generally awarded on a competitive basis, and competition in themarkets we serve is intense. The most important factors determining whether acontract will be awarded include:

·       availabilityand capability of the vessels;

·       abilityto meet the customer’s schedule;

·       price;

·       safetyrecord;

·       reputation;and

·       experience.

Some of our competitors may have greater financialresources and larger operating staffs than we do. As a result, they may be ableto make vessels available more quickly and efficiently, transition todouble-hull barges from single-hull barges more rapidly, and withstand theeffects of declines in charter rates for a longer period of time. They may alsobe better able to weather a downturn in the oil and gas industry. As a result,we could lose customers and market share to these competitors.

We also face competitionfrom refined petroleum product pipelines. Long-haul transportation of refinedpetroleum products is generally less costly by pipeline than by tank vessel.The construction of new pipeline segments to carry petroleum products into ourmarkets, including pipeline segments that connect with existing pipelinesystems, and the conversion of existing non-refined petroleum product pipelines,could adversely affect our ability to compete in particular locations.

***We rely on alimited number of customers for a significant portion of our revenues. The lossof any of these customers could adversely affect our business and operatingresults.***

Our customers consistprimarily of major oil companies, oil traders and refineries. The portion ofour revenues attributable to any single customer changes over time, dependingon the level of relevant activity by the customer, our ability to meet the customer’sneeds and other factors, many of which are beyond our control. Two customersaccounted for 19% and 17%, respectively, of our consolidated revenues forfiscal 2007. If we were to lose either of these customers or if either of thesecustomers significantly reduced its use of our services, our business andoperating results could be adversely affected.

***Voyage charters maynot be available at rates that will allow us to operate our vessels profitably.***

During fiscal 2007, wederived approximately 21% of our revenue from single voyage charters. Voyagecharter rates fluctuate significantly based on tank vessel availability, thedemand for refined petroleum products and other factors. Increased dependenceon the voyage charter market by us could result in a 

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lowerutilization of our vessels and decreased profitability. Future voyage chartersmay not be available at rates that will allow us to operate our vesselsprofitably.

***We may not be ableto renew time charters, consecutive voyage charters, contracts of affreightmentand bareboat charters when they expire.***

We received approximately79% of our revenue from time charters, consecutive voyage charters, contractsof affreightment and bareboat charters during fiscal 2007. These arrangements,which are generally for periods of one year or more, may not be renewed, or ifrenewed, may not be renewed at similar rates. If we are unable to obtain newcharters at rates equivalent to those received under the old charters, ourprofitability may be adversely affected.

***We must makesubstantial expenditures to maintain the operating capacity of our fleet, whichwill reduce our cash available for distribution.***

Tank vessels are subject to the requirements of theOil Pollution Act of 1990, or OPA 90. OPA 90 mandates that all single-hulltank vessels operating in U.S. waters be removed from petroleum and petroleumproduct transportation services at various times through January 1, 2015,and provides a schedule for the phase-out of the single-hull vessels based ontheir age and size. As of August 15, 2007, approximately 73% of thebarrel-carrying capacity of our tank vessel fleet was double-hulled incompliance with OPA 90. The remaining 27% will be in compliance with OPA 90until January 2015. The capacity of certain of our single-hull vessels hasalready been effectively replaced by double-hull vessels placed into service inthe past two years. We estimate that the current cost to replace our remainingsingle hull capacity with newbuildings or by retrofitting certain of ourexisting vessels ranges from $80.0 million to $82.0 million. This capacity canalso be replaced by acquiring existing double-hull tank vessels asopportunities arise. At the time we make these expenditures, the actual costcould be higher due to inflation and other factors.

Marine transportation of refined petroleum products isa capital intensive business, requiring significant investment to maintain anefficient fleet and to stay in regulatory compliance. We estimate that, overthe next five years, we will spend an average of approximately $21.5 millionper year to drydock and maintain our fleet. In addition, we will deduct anadditional $2.0 million per year from the cash that we would otherwisedistribute to our unitholders to contribute to the cost of replacing theoperating capacity of our single hull vessels when they phase-out underOPA 90 in January 2015. Periodically, we will also make expendituresto acquire or construct additional tank vessel capacity and to upgrade ouroverall fleet efficiency.

Please read “—RisksRelated to Our Common Units—In calculating our available cash from operatingsurplus each quarter, we are required to deduct estimated maintenance capitalexpenditures, which may result in less cash available for distribution tounitholders than if actual maintenance capital expenditures were deducted” forinformation about our requirement to deduct estimated maintenance capitalexpenditures in calculating our available cash from operating surplus.

***Capitalexpenditures and other costs necessary to operate and maintain a vessel varydepending on the age of the vessel and changes in governmental regulations,safety or other equipment standards.***

Capital expenditures and other costs necessary tooperate and maintain a vessel increase with the age of the vessel. In addition,changes in governmental regulations, safety or other equipment standards, aswell as compliance with standards imposed by maritime self-regulatoryorganizations and customer requirements or competition, may require us to makeadditional expenditures. For example, we may be required to make significantexpenditures for alterations or the addition of new equipment to satisfyrequirements of the U.S. Coast Guard and the American Bureau of Shipping. Inaddition, we may be 

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required to take ourvessels out of service for extended periods of time, with corresponding lossesof revenues, in order to make such alterations or to add such equipment. In thefuture, market conditions may not justify these expenditures or enable us tooperate our older vessels profitably during the remainder of their economiclives.

In order to fund thesecapital expenditures, we will either incur borrowings or raise capital throughthe sale of debt or equity securities. Our ability to access the capitalmarkets for future offerings may be limited by our financial condition at thetime as well as by adverse market conditions resulting from, among otherthings, general economic conditions and contingencies and uncertainties thatare beyond our control. Our failure to obtain the funds for necessary futurecapital expenditures would limit our ability to continue to operate some of ourvessels and could have a material adverse effect on our business and on ourability to make distributions to unitholders.

***Our purchase of existingvessels carries risks associated with the quality of those vessels.***

Our fleet renewal andexpansion strategy includes the acquisition of existing vessels as well as theordering of newbuildings. Unlike newbuildings, existing vessels typically do notcarry warranties with respect to their condition. While we generally inspectany existing vessel prior to purchase, such an inspection would normally notprovide us with as much knowledge of its condition as we would possess if thevessel had been built for us and operated by us during its life. Repairs andmaintenance costs for existing vessels are difficult to predict and may be moresubstantial than for vessels we have operated since they were built. Thesecosts could decrease our profits and reduce our liquidity.

***We are subject tocomplex laws and regulations, including environmental regulations, that canadversely affect the cost, manner or feasibility of doing business.***

Increasingly stringent federal, state and local lawsand regulations governing worker health and safety and the manning,construction and operation of vessels significantly affect our operations. Manyaspects of the marine industry are subject to extensive governmental regulationby the U.S. Coast Guard, the Department of Transportation, the Department ofHomeland Security, the National Transportation Safety Board and the U.S.Customs and Border Protection (CBP), and to regulation by private industryorganizations such as the American Bureau of Shipping. The U.S. Coast Guard andthe National Transportation Safety Board set safety standards and areauthorized to investigate vessel accidents and recommend improved safetystandards. The U.S. Coast Guard is authorized to inspect vessels at will.

Our operations are alsosubject to federal, state, local and international laws and regulations thatcontrol the discharge of pollutants into the environment or otherwise relate toenvironmental protection. Compliance with such laws, regulations and standardsmay require installation of costly equipment or operational changes. Failure tocomply with applicable laws and regulations may result in administrative andcivil penalties, criminal sanctions or the suspension or termination of ouroperations. Some environmental laws often impose strict liability forremediation of spills and releases of oil and hazardous substances, which couldsubject us to liability without regard to whether we were negligent or atfault. Under OPA 90, owners, operators and bareboat charterers are jointly andseverally strictly liable for the discharge of oil within the internal andterritorial waters of, and the 200-mile exclusive economic zone around,the United States. Additionally, an oil spill could result in significantliability, including fines, penalties, criminal liability and costs for naturalresource damages. The potential for these releases could increase as weincrease our fleet capacity. Most states bordering on a navigable waterway haveenacted legislation providing for potentially unlimited liability for thedischarge of pollutants within their waters.

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***Our insurance maynot be adequate to cover our losses.***

We may not be adequately insured to cover losses fromour operational risks, which could have a material adverse effect on ouroperations. For example, a catastrophic oil spill or other disaster couldexceed our insurance coverage. In addition, our affiliate, EW TransportationLLC, and its predecessors may not have insurance coverage prior to March 1986.If we were subject to claims related to that period, including claims fromcurrent or former employees, EW Transportation LLC may not have insurance topay the liabilities, if any, that could be imposed on us. If we had to payclaims solely out of our own funds, it could have a material adverse effect onour financial condition. Furthermore, any claims covered by insurance would besubject to deductibles, and since it is possible that a large number of claimscould be brought, the aggregate amount of these deductibles could be material.

We may not be able to procure adequate insurancecoverage at commercially reasonable rates in the future, and some claims maynot be paid. In the past, stricter environmental regulations have led to highercosts for insurance covering environmental damage or pollution, and newregulations could lead to similar increases or even make this type of insuranceunavailable. In addition, our insurance may be voidable by the insurers as aresult of certain actions of ours.

Because we obtain some ofour insurance through protection and indemnity associations, we also may besubject to calls, or premiums, in amounts based not only on our own claimrecords, but also the claim records of all other members of the protection andindemnity associations through which we receive insurance coverage for tortliability, including pollution-related liability. Our payment of these callscould result in significant expenses to us, which could reduce our profits orcause losses. Moreover, the protection and indemnity clubs and other insuranceproviders reserve the right to make changes in insurance coverage with littleor no advance notice.

***Terrorist attackshave resulted in increased costs and have disrupted our business. Continuedhostilities in the Middle East or other sustained military campaigns mayadversely impact our results of operations.***

After the terrorist attacks of September 11,2001, New York Harbor was shut down temporarily, resulting in the suspension ofour local operations in the New York City area for four days and the loss ofrevenue related to these operations. The long-term impact that terroristattacks and the threat of terrorist attacks may have on the petroleum industryin general, and on us in particular, is not known at this time. Uncertaintysurrounding continued hostilities in the Middle East or other sustainedmilitary campaigns may affect our operations in unpredictable ways, includingdisruptions of petroleum supplies and markets, and the possibility thatinfrastructure facilities could be direct targets of, or indirect casualtiesof, an act of terror.

Changes in the insurancemarkets attributable to terrorist attacks may make certain types of insurancemore difficult for us to obtain. Moreover, the insurance that may be availableto us may be significantly more expensive than our existing insurance coverage.Instability in the financial markets as a result of terrorism or war could alsoaffect our ability to raise capital.

***We depend uponunionized labor for the provision of our services in certain geographic areas.Any work stoppages or labor disturbances could disrupt our business inthose areas.***

Certain of our seagoingpersonnel, comprising 44% of our total workforce, are employed under a contractwith a division of the International Longshoreman’s Association that expires onJune 30, 2008. Any work stoppages or other labor disturbances couldhave a material adverse effect on our business, financial condition and resultsof operations.

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***Our employees arecovered by federal laws that may subject us to job-related claims in additionto those provided by state laws.***

Some of our employees arecovered by provisions of federal statutory and general maritime law. These lawstypically operate to make liability limits established by state workers’compensation laws inapplicable to these employees and to permit these employeesand their representatives to pursue actions against employers for job-relatedinjuries in federal courts. Because we are not generally protected by thelimits imposed by state workers’ compensation statutes, we may have greaterexposure for claims made by these employees.

***We depend on keypersonnel for the success of our business.***

We depend on the servicesof our senior management team and other key personnel. In particular, oursuccess depends on the continued efforts of Mr. Timothy J. Casey, thePresident and Chief Executive Officer of K-Sea General Partner GP LLC, andother key employees. The loss of the services of any key employee could have amaterial adverse effect on our business, financial condition and results ofoperations. We may not be able to locate or employ on acceptable termsqualified replacements for senior management or key employees if their serviceswere no longer available.

***Due to our lack ofasset diversification, adverse developments in our marine transportationbusiness would reduce our ability to make distributions to our unitholders.***

We rely exclusively on therevenues generated from our marine transportation business. Due to our lack ofasset diversification, an adverse development in this business would have asignificantly greater impact on our business, financial condition and resultsof operations than if we maintained more diverse assets.

***Changes ininternational trade agreements could affect our ability to provide marinetransportation services at competitive rates.***

Currently, vessel trade ormarine transportation between two points within the same country, generallyknown as cabotage or coastwise trade, is not included in the General Agreementon Trade in Services or the North American Free Trade Agreement. In addition,the Jones Act restricts maritime cargo transportation between U.S. ports toU.S.-flag vessels qualified to engage in U.S. coastwise trade. If maritimeservices were deemed to include cabotage and included in the General Agreementon Trade in Services, the North American Free Trade Agreement or othermulti-national trade agreements, transportation of maritime cargo between U.S.ports could be opened to foreign-flag vessels. Foreign vessels would have lowerconstruction costs and would generally operate at significantly lower coststhan we do in U.S. markets, which would likely have a material adverse effecton our ability to compete.

**Risks Related toOur Common Units**

***We may not havesufficient cash from operations to enable us to pay the minimum quarterlydistribution following establishment of cash reserves and payment of fees andexpenses, including payments to our general partner.***

We may not havesufficient available cash each quarter to pay the minimum quarterly distribution.The amount of cash we can distribute on our common units principally dependsupon the amount of cash we generate from our operations, which will fluctuatefrom quarter to quarter based on, among other things:

·       thelevel of consumption of refined petroleum products in the markets in which weoperate;

·       theprices we obtain for our services;

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·       thelevel of our operating costs, including payments to our general partner; and

·       prevailingeconomic conditions.

Additionally, theactual amount of cash we have available for distribution depends on otherfactors such as:

·       thelevel of capital expenditures we make, including for acquisitions, retrofittingof vessels and compliance with new regulations;

·       therestrictions contained in our debt instruments and our debt servicerequirements;

·       fluctuationsin our working capital needs;

·       ourability to make working capital borrowings; and

·       theamount, if any, of reserves, including reserves for future capital expendituresand other matters, established by our general partner in its discretion.

The amount of cash we haveavailable for distribution depends primarily on our cash flow, including cashflow from operations and working capital borrowings, and not solely onprofitability, which will be affected by non-cash items. As a result, we maymake cash distributions during periods when we record losses and may not makecash distributions during periods when we record net income.

***K-Sea GeneralPartner L.P. and its affiliates have conflicts of interest and limited fiduciaryduties, which may permit them to favor their own interests to the detriment ofour unitholders.***

Affiliates of ourgeneral partner indirectly own a 1.95% general partner interest and a 40.07%limited partner interest in us and own and control K-Sea General Partner GP LLC.Conflicts of interest may arise between K-Sea General Partner L.P. and itsaffiliates, on the one hand, and us and our unitholders, on the other hand. Asa result of these conflicts, our general partner may favor its own interestsand the interests of its affiliates over the interests of our unitholders.These conflicts include, among others, the following situations:

·       ourgeneral partner is allowed to take into account the interests of parties otherthan us, such as our affiliates, in resolving conflicts of interest, which hasthe effect of limiting its fiduciary duty to our unitholders;

·       ourgeneral partner may limit its liability and reduce its fiduciary duties, whilealso restricting the remedies available to our unitholders for actions that,without the limitations, might constitute breaches of fiduciary duty. As aresult of purchasing common units, our unitholders consent to some actions andconflicts of interest that might otherwise constitute a breach of fiduciary orother duties under applicable state law;

·       ourgeneral partner determines the amount and timing of asset purchases and sales,capital expenditures, borrowings, issuance of additional partnership securitiesand reserves, each of which can affect the amount of cash that is distributedto our unitholders;

·       insome instances, our general partner may cause us to borrow funds in order topermit the payment of cash distributions, even if the purpose or effect of theborrowing is to make a distribution on the subordinated units, to makeincentive distributions or to hasten the expiration of the subordinationperiod;

·       ourgeneral partner determines which costs incurred by it and its affiliates,including K-Sea General Partner GP LLC, are reimbursable by us;

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·       ourpartnership agreement does not restrict our general partner from causing us topay it or its affiliates for any services rendered on terms that are fair andreasonable to us or entering into additional contractual arrangements with anyof these entities on our behalf;

·       ourgeneral partner controls the enforcement of obligations owed to us by it andits affiliates; and

·       our general partner decideswhether to retain separate counsel, accountants or others to perform servicesfor us.

***Even if unitholdersare dissatisfied, they cannot remove our general partner without its consent.***

Unlike the holders of common stock in a corporation,unitholders have only limited voting rights on matters affecting our businessand, therefore, limited ability to influence management’s decisions regardingour business. Unitholders did not elect our general partner or the board ofdirectors of its general partner and will have no right to elect our generalpartner or the board of directors of its general partner on an annual or othercontinuing basis. The board of directors of the general partner of our generalpartner is chosen by its members.

Furthermore, if the unitholders are dissatisfied withthe performance of our general partner, they will have little ability to removeour general partner. Unitholders are currently unable to remove our generalpartner without its consent because our affiliates currently own sufficientunits to be able to prevent the general partner’s removal. The vote of theholders of at least 662¤3%of all outstanding common and subordinated units voting together as a singleclass is required to remove our general partner. Also, if our general partneris removed without cause during the subordination period and units held by ourgeneral partner and its affiliates are not voted in favor of that removal, allremaining subordinated units will automatically be converted into common unitsand any existing arrearages on the common units will be extinguished. A removalof our general partner under these circumstances would adversely affect thecommon units by prematurely eliminating their distribution and liquidationpreference over the subordinated units, which would otherwise have continueduntil we had met certain distribution and performance tests.

Cause is narrowly definedin our partnership agreement to mean that a court of competent jurisdiction hasentered a final, non-appealable judgment finding our general partner liable foractual fraud, gross negligence or willful or wanton misconduct in its capacityas our general partner. Cause does not include most cases of charges of poormanagement of the business, so the removal of our general partner during thesubordination period because of the unitholders’ dissatisfaction with ourgeneral partner’s performance in managing our partnership will most likelyresult in the termination of the subordination period.

***Our general partner’sdiscretion in establishing cash reserves may reduce the amount of cashavailable for distribution to unitholders.***

Our partnership agreementgives our general partner broad discretion in establishing financial reservesfor the proper conduct of our business. These reserves also will affect theamount of cash available for distribution. Our general partner may establishreserves for distributions on the subordinated units, but only if thosereserves will not prevent us from distributing the full minimum quarterlydistribution, plus any arrearages, on the common units for the following fourquarters. As described above under “—Risks Inherent in Our Business—We mustmake substantial expenditures to maintain the operating capacity of our fleet,which will reduce our cash available for distribution,” the partnershipagreement requires our general partner to deduct from operating surplus eachquarter estimated maintenance capital expenditures as opposed to actualexpenditures, which could reduce the amount of available cash for distribution.

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***In calculating ouravailable cash from operating surplus each quarter, we are required to deductestimated maintenance capital expenditures, which may result in less cashavailable for distribution to unitholders than if actual maintenance capitalexpenditures were deducted.***

Our partnership agreement requires us to deductestimated maintenance capital expenditures from operating surplus each quarter,as opposed to actual maintenance capital expenditures, in order to reducedisparities in operating surplus caused by the fluctuating level of maintenancecapital expenditures, such as drydocking. Because of the substantial capitalexpenditures we intend to make by January 1, 2015 to replace the operatingcapacity of our single-hull vessels, our annual estimated maintenance capitalexpenditures for purposes of calculating operating surplus also includes anadditional $2.0 million to contribute to the cost of replacing this operatingcapacity.

The amount of estimated maintenance capitalexpenditures we deduct from operating surplus is subject to review and changeby the board of directors of K-Sea General Partner GP LLC, with the concurrenceof the conflicts committee of such board. In years when estimated maintenancecapital expenditures are higher than actual maintenance capital expenditures,as we expect will be the case in some years until we actually make expendituresfor the OPA 90 replacements and retrofitting, the amount of cash available fordistribution to unitholders will be lower than if actual maintenance capitalexpenditures were deducted from operating surplus.

Please read “—RisksInherent in Our Business—We must make substantial expenditures to maintain theoperating capacity of our fleet, which will reduce our cash available fordistribution” for information regarding substantial expenditures that we mustmake to maintain the operating capacity of our fleet.

***We may issueadditional common units without the approval of unitholders, which would diluteunitholders’ ownership interests.***

During the subordinationperiod, without the approval of our unitholders, our general partner may causeus to issue up to 2,082,500 additional common units. Our general partner mayalso cause us to issue an unlimited number of additional common units or otherequity securities of equal rank with the common units, without unitholderapproval, in a number of circumstances such as:

·       theissuance of common units in connection with acquisitions or capitalimprovements that increase cash flow from operations per unit on a pro forma orestimated pro forma basis;

·       issuancesof common units to repay indebtedness, the cost of which to service is greaterthan the distribution obligations associated with the units issued inconnection with the repayment of the indebtedness;

·       theredemption of common units from the net proceeds of an issuance of commonunits;

·       theconversion of subordinated units into common units;

·       theconversion of units of equal rank with the common units into common units undersome circumstances; issuances of common units under our employee benefit plans;

·       theconversion of the general partner interest and the incentive distributionrights into common units as a result of the withdrawal or removal of ourgeneral partner; or

·       thecombination or subdivision of common units.

The issuance by usof additional common units or other equity securities of equal or senior rankwill have the following effects:

·       ourunitholders’ proportionate ownership interest in us will decrease;

·       theamount of cash available for distribution on each unit may decrease;

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·       becausea lower percentage of total outstanding units will be subordinated units, therisk that a shortfall in the payment of the minimum quarterly distribution willbe borne by our common unitholders will increase;

·       therelative voting strength of each previously outstanding unit may be diminished;and

·       themarket price of the common units may decline.

After the end of thesubordination period, we may issue an unlimited number of limited partnerinterests of any type without the approval of our unitholders. Our partnershipagreement does not give our unitholders the right to approve our issuance ofequity securities ranking junior to the common units at any time.

***Our partnership agreement currently limits theownership of our partnership interests by individuals or entities that are notU.S. citizens. This restriction could limit the liquidity of our common units.***

In order to ensurecompliance with Jones Act citizenship requirements, the board of directors of K-SeaGeneral Partner GP LLC has adopted a requirement that at least 85% of ourpartnership interests must be held by U.S. citizens. This requirement may havean adverse impact on the liquidity or market value of our common units, becauseunitholders will be unable to sell units to non-U.S. citizens. Any purportedtransfer of common units in violation of these provisions will be ineffectiveto transfer the common units or any voting, dividend or other rights in respectof the common units.

***Our general partner has a limited call right that mayrequire unitholders to sell their common units at an undesirable time or price.***

If at any time our generalpartner and its affiliates own more than 80% of the common units, our generalpartner will have the right, but not the obligation, which it may assign to anyof its affiliates or to us, to acquire all, but not less than all, of thecommon units held by unaffiliated persons at a price not less than theirthen-current market price. As a result, unitholders may be required to sell theircommon units at an undesirable time or price and may not receive any return ontheir investment. Unitholders may also incur a tax liability upon a sale oftheir units. Our general partner is not obligated to obtain a fairness opinionregarding the value of the common units to be repurchased by it upon exerciseof the limited call right. There is no restriction in our partnership agreementthat prevents our general partner from issuing additional common units andexercising its call right. If our general partner exercised its limited callright, the effect would be to take us private and, if the units weresubsequently deregistered, we would no longer be subject to the reportingrequirements of the Securities Exchange Act of 1934, as amended.

***Our partnership agreement restricts the voting rightsof unitholders owning 20% or more of our common units.***

Our partnership agreementrestricts unitholders’ voting rights by providing that any units held by aperson that owns 20% or more of any class of units then outstanding, other thanour general partner, its affiliates, their transferees and persons who acquiredsuch units with the prior approval of the board of directors of the generalpartner of our general partner, cannot vote on any matter. The partnership agreementalso contains provisions limiting the ability of unitholders to call meetingsor to acquire information about our operations, as well as other provisionslimiting the unitholders’ ability to influence the manner or direction ofmanagement.

***Cost reimbursements due our general partner and itsaffiliates will reduce cash available for distribution to unitholders.***

Prior to making anydistribution on the common units, we will reimburse our general partner and itsaffiliates for all expenses they incur on our behalf, which will be determinedby our general partner in its 

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solediscretion. These expenses will include all costs incurred by the generalpartner and its affiliates in managing and operating us, including costs forrendering corporate staff and support services to us. In addition, our generalpartner and its affiliates may provide us with other services for which thegeneral partner or its affiliates may charge us fees. The reimbursement ofexpenses and payment of fees, if any, to our general partner and its affiliatescould adversely affect our ability to pay cash distributions to unitholders.

***Unitholders may not have limited liability if a courtfinds that unitholder action constitutes control of our business.***

As a limited partner in apartnership organized under Delaware law, a unitholder could be held liable forour obligations to the same extent as a general partner if such unitholderparticipates in the “control” of our business. Our general partner generallyhas unlimited liability for the obligations of the partnership, such as itsdebts and environmental liabilities, except for those contractual obligationsof the partnership that are expressly made without recourse to our generalpartner. In addition, Section 17-607 of the Delaware Revised UniformLimited Partnership Act provides that, under some circumstances, a unitholdermay be liable to us for the amount of a distribution for a period of threeyears from the date of the distribution. The limitations on the liability ofholders of limited partner interests for the obligations of a limitedpartnership have not been clearly established in some of the other states inwhich we do business.

***Restrictions in our debt agreements may prevent usfrom engaging in some beneficial transactions or paying distributions.***

Our payment ofprincipal and interest on our debt will reduce cash available for distributionon our units. Our credit agreement prohibits the payment of distributions afterthe occurrence of the following events, among others, and receipt of noticefrom our lenders:

·       failureto pay any principal, interest, fees, expenses or other amounts when due;

·       defaultunder any vessel mortgage;

·       failureto notify the lenders of any oil spill or discharge of hazardous material, orof any action or claim related thereto;

·       breachor lapse of any insurance with respect to the vessels;

·       breachof certain financial covenants;

·       breachby our general partner or any of our subsidiaries of the guarantees issuedunder our new credit agreement;

·       failureto observe any other agreement, security instrument, obligation or covenantbeyond specified cure periods in certain cases;

·       defaultunder other material indebtedness of our operating partnership, our generalpartner or any of our subsidiaries;

·       bankruptcyor insolvency events involving us, our general partner or any of oursubsidiaries;

·       failureof any representation or warranty to be materially correct;

·       achange of control, as defined in the applicable agreement;

·       amaterial adverse effect, as defined in the applicable agreement, occursrelating to us or our business; and

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·       ajudgment against us, our general partner or any of our subsidiaries in excessof certain allowances and not covered by insurance.

Any subsequent refinancingof our current debt or any new debt could have similar restrictions.

***The control of our general partner may be transferredto a third party without unitholder consent.***

Our general partner maytransfer its general partner interest to a third party in a merger or in a saleof all or substantially all of its assets without the consent of theunitholders so long as the third party satisfies the citizenship requirementsof the Jones Act. Furthermore, there is no restriction in the partnershipagreement on the ability of the partners of our general partner fromtransferring their respective partnership interests in our general partner to athird party that satisfies the citizenship requirements of the Jones Act. Thenew partners of our general partner would then be in a position to replace theboard of directors and officers of the general partner of our general partnerwith their own choices and to control the decisions taken by the board ofdirectors and officers.

***Our affiliates may engage in activities that competedirectly with us.***

Pursuant to the omnibusagreement entered into in connection with the initial public offering of ourcommon units, certain of our affiliates have agreed not to engage, eitherdirectly or indirectly, in the business of providing refined petroleum productmarine transportation, distribution and logistics services in the United Statesto the extent such business generates qualifying income for federal income taxpurposes. The omnibus agreement does not prohibit the equity owners of ouraffiliates from owning assets or engaging in businesses that compete directlyor indirectly with us.

**Tax Risks**

***Our tax treatment depends on our status as apartnership for federal income tax purposes, as well as our not being subjectto a material amount of entity-level taxation by individual states. If the IRSwere to treat us as a corporation or if we were to become subject to a materialamount of entity-level taxation for state tax purposes, then our cash availablefor distribution to unitholders would be substantially reduced.***

The anticipated after-tax economic benefit of aninvestment in us depends largely on our being treated as a partnership forfederal income tax purposes. If less than 90% of our gross income for anytaxable year is “qualifying income” from transportation or processing of crudeoil, natural gas or products thereof, interest, dividends or similar sources,we will be taxable as a corporation under Section 7704 of the Internal RevenueCode for federal income tax purposes for that taxable year and all subsequentyears. The IRS has not provided any ruling on this matter.

If we were treated as a corporation for federal incometax purposes, we would pay federal income tax on our income at the corporatetax rate, which is currently a maximum of 35%, and would likely pay stateincome tax at varying rates. Distributions would generally be taxed again tounitholders as corporate distributions and no income, gains, losses, ordeductions would flow through to unitholders. Because a tax would be imposedupon us as an entity, cash available for distribution to unitholders would besubstantially reduced. Treatment of us as a corporation would result in amaterial reduction in the anticipated cash flow and after-tax return tounitholders and thus would likely result in a substantial reduction in thevalue of the common units.

Current law may change soas to cause us to be treated as a corporation for federal income tax purposesor otherwise subject us to entity-level taxation. For example, because ofwidespread state budget deficits and other reasons, several states areevaluating ways to subject partnerships to entity-level taxation through theimposition of state income, franchise and other forms of taxation. Thepartnership agreement provides that, if a law is enacted or an existing law ismodified or interpreted in a manner that subjects us 

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totaxation as a corporation or otherwise subjects us to entity-level taxation forfederal, state, or local income tax purposes, the minimum quarterlydistribution amount and the target distribution amounts will be adjusted toreflect the impact of that law on us.

***If the IRS contests any of the federal income taxpositions we take, the market for our common units may be adversely affected,and the costs of any contest will reduce our cash available for distribution tounitholders.***

The IRS has not providedany ruling with respect to our treatment as a partnership for federal incometax purposes or any other matter affecting us. The IRS may adopt positions thatdiffer from the positions we take. It may be necessary to resort to administrativeor court proceedings to sustain some or all of our counsel’s conclusions or thepositions we take. A court may not agree with some or all of our counsel’sconclusions or the positions we take. Any contest with the IRS may materiallyand adversely impact the market for our common units and the price at whichthey trade. In addition, the costs of any contest with the IRS will be borneindirectly by our unitholders and our general partner because the costs willreduce our cash available for distribution.

***Unitholders may be required to pay taxes on theirshare or our income even if they do not receive any cash distributions from us.***

Because our unitholderswill be treated as partners to whom we will allocate taxable income, whichcould be different in amount than the cash we distribute, our unitholders willbe required to pay federal income taxes and, in some cases, state, local, andforeign income taxes on their share of our taxable income, even if they receiveno cash distributions from us. Unitholders may not receive cash distributionsequal to their share of our taxable income or even the tax liability thatresults from that income.

***Tax gain or loss on the disposition of our commonunits could be different than expected.***

If a unitholder sells his commonunits, that unitholder will recognize gain or loss equal to the differencebetween the amount realized and the unitholder’s tax basis in those commonunits. Prior distributions in excess of the total net taxable income theunitholder was allocated for a common unit, which decreased the unitholder’stax basis in that common unit, will, in effect, become taxable income to theunitholder if the common unit is sold at a price greater than the unitholder’stax basis in that common unit, even if the price the unitholder receives isless than the unitholder’s original cost. A substantial portion of the amountrealized, whether or not representing gain, may be ordinary income tounitholders. Should the IRS successfully contest some positions we take,unitholders could recognize more gain on the sale of common units than would bethe case under those positions, without the benefit of decreased income inprior years. In addition, if unitholders sell their common units, they mayincur a tax liability in excess of the amount of cash they receive from thesale.

***Tax-exempt entities and foreign persons face uniquetax issues from owning common units that may result in adverse tax consequencesto them.***

Investment in common unitsby tax-exempt entities, such as individual retirement accounts (known as IRAs)and other retirement accounts, and non-U.S. persons, raises issues unique tothem. For example, virtually all of our income allocated to organizationsexempt from federal income tax, including IRAs and other retirement plans, willbe unrelated business income and will be taxable to them. Distributions tonon-U.S. persons will be reduced by withholding taxes at the highest applicableeffective tax rate, and non-U.S. persons will be required to file United Statesfederal income tax returns and pay tax on their share of our taxable income. Ifyou are a tax-exempt entity or a foreign person, you should consult your taxadvisor before investing in our common units.

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***We registered as a tax shelter under prior law. Thismay increase the risk of an IRS audit of us or a unitholder.***

Prior to the enactment of the American Jobs CreationAct of 2004, certain types of entities were required to register with the IRSas “tax shelters,” based on a perception that those entities might claim taxbenefits that were unwarranted. We registered as a tax shelter under such priorlaw. The American Jobs Creation Act of 2004 repealed the tax shelterregistration requirement and replaced it with a regime that requires reporting,and will likely require registration, of certain “reportable transactions.”  We do not expect to engage in any reportabletransactions. Nevertheless, our registration as a tax shelter under prior law,or our future participation in a reportable transaction, might increase the likelihoodthat we will be audited, and any such audit might lead to tax adjustments.

Should our tax returns beaudited, any adjustments to our tax returns may lead to adjustments to ourunitholders’ tax returns and may lead to audits of unitholders’ tax returns.Our unitholders’ would be responsible for the consequences of any audits totheir tax returns.

***We treat each purchaser of common units as having thesame tax benefits without regard to the units purchased. The IRS may challengethis treatment, which could adversely affect the value of the common units.***

Because we cannot matchtransferors and transferees of common units and because of other reasons, wewill take depreciation and amortization positions that may not conform to allaspects of the Treasury Regulations. A successful IRS challenge to thosepositions could adversely affect the amount of tax benefits available tounitholders. It also could affect the timing of these tax benefits or theamount of gain from the sale of common units and could have a negative impacton the value of our common units or result in audit adjustments to unitholders’tax returns.

***Unitholders may be subject to state, local and foreigntaxes and return filing requirements as a result of investing in our commonunits.***

In addition to federalincome taxes, unitholders will likely be subject to other taxes, such as stateand local income taxes, unincorporated business taxes and estate, inheritance,or intangible taxes that are imposed by the various jurisdictions in which we dobusiness or own property. Unitholders will likely be required to file state andlocal income tax returns and pay state and local income taxes in some or all ofthe various jurisdictions in which we do business or own property and may besubject to penalties for failure to comply with those requirements. We ownproperty or conduct business in Alaska, New York, New Jersey, Pennsylvania,Hawaii, Washington and Virginia, all of which impose a state income tax. Wecurrently conduct certain operations in Puerto Rico, Canada and Venezuela in amanner that we believe does not subject unitholders to direct liability to paytax or file returns in those countries, but there can be no assurance that wewill conduct our foreign operations in this manner in the future. Taxes we paywith respect to our foreign operations reduce the cash flow available fordistribution to our unitholders. We may do business or own property in otherstates or foreign countries in the future. It is the responsibility ofunitholders to file all federal, state, local, and foreign tax returns. Ourcounsel has not rendered an opinion on the state, local or foreign taxconsequences of an investment in our common units.

***We have subsidiaries that are treated as corporationsfor federal income tax purposes and subject to corporate-level income taxes.***

We conduct a portion ofour operations through subsidiaries that are, or are treated as, corporationsfor federal income tax purposes. Currently, those operations consist primarilyof our bunkering activities and our operation of a Canadian flagged vessel. Wemay elect to conduct additional operations in corporate form in the future.These corporate subsidiaries will be subject to corporate-level tax, which willreduce the cash available for distribution to us and, in turn, to ourunitholders. If the IRS were to successfully assert that these corporatesubsidiaries have more tax liability than we anticipate or legislation 

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wasenacted that increased the corporate tax rate, our cash available fordistribution to our unitholders would be further reduced.

***The sale or exchange of 50% or more of our capital andprofits interests during any twelve-month period will result in the terminationof our partnership for federal income tax purposes.***

We will be considered tohave terminated for federal income tax purposes if there is a sale or exchangeof 50% or more of the total interests in our capital and profits within atwelve-month period. Our termination would, among other things, result in theclosing of our taxable year for all unitholders and could result in a deferralof depreciation deductions allowable in computing our taxable income.

***We have adopted certain methodologies that may resultin a shift of income, gain, loss and deduction between the general partner andthe unitholders. The IRS may challenge this treatment, which could adverselyaffect the value of the common units.***

When we issue additional units or engage in certainother transactions, we determine the fair market value of our assets andallocate any unrealized gain or loss attributable to our assets to the capitalaccounts of our unitholders and our general partner. Our methodology may beviewed as understating the value of our assets. In that case, there may be ashift of income, gain, loss and deduction between certain unitholders and thegeneral partner, which may be unfavorable to such unitholders. Moreover,subsequent purchasers of common units may have a greater portion of theirInternal Revenue Code Section 743(b) adjustment allocated to our tangibleassets and a lesser portion allocated to our intangible assets. The IRS maychallenge our valuation methods, or our allocation of the Section 743(b) adjustmentattributable to our tangible and intangible assets, and allocations of income,gain, loss and deduction between the general partner and certain of ourunitholders.

A successful IRS challengeto these methods or allocations could adversely affect the amount of taxableincome or loss being allocated to our unitholders. It also could affect the amountof gain from our unitholders’ sale of common units and could have a negativeimpact on the value of the common units or result in audit adjustments to ourunitholders’ tax returns without the benefit of additional deductions.

**ITEM 1B.**       UNRESOLVEDSTAFF COMMENTS.

**None.**

**ITEM 3.**                LEGALPROCEEDINGS.

We are a party to various suits in the ordinary courseof business for monetary relief arising principally from personal injuries,collision or other casualty and to claims arising under vessel charters. All ofthese personal injury, collision and casualty claims against us are fullycovered by insurance, subject to deductibles ranging from $10,000 to $100,000in amount. We reserve on a current basis for amounts we expect to pay. Althoughthe outcome of any individual claim or action cannot be predicted withcertainty, we believe that any adverse outcome, individually or in theaggregate, would be substantially mitigated by applicable insurance orindemnification from previous owners of our assets, and would not have amaterial adverse effect on our financial position, results of operations orcash flows.

EW Transportation LLC and its predecessors have beennamed, together with a large number of other companies, as co-defendants in 39civil actions by various parties, including former employees, allegingunspecified damages from past exposure to asbestos and second-hand smoke aboardsome of the vessels that it contributed to us in connection with our initialpublic offering. EW Transportation LLC and its predecessors have been dismissedfrom 38 of these lawsuits for an aggregate sum of approximately $47,000, andare seeking to settle the other case. We may be subject to litigation in thefuture from these plaintiffs and others alleging exposure to asbestos due toalleged failure to properly encapsulate or remove 

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friable asbestos on ourvessels, as well as for exposure to second-hand smoke and other matters. For arelated discussion of insurance coverage, please read “Business and Properties—InsuranceProgram” in Items 1 and 2 of this report.

In November 2005, one of our tank barges strucksubmerged debris in the U.S. Gulf of Mexico, causing significant damage whichresulted in the barge eventually capsizing. At the time of the incident, thebarge was carrying approximately 120,000 barrels of No. 6 fuel oil, aheavy oil product. In January 2006, submerged oil recovery operations weresuspended and a monitoring program, which sought to determine if anyrecoverable oil could be found on the ocean floor, was begun. In February 2007,the Coast Guard agreed to end the cleanup and response phase, including ourobligation to conduct any further monitoring of the area around the spill site.Our insurers responded to the pollution-related costs and environmental damagesresulting from the incident, paying approximately $65 million less $60,000 intotal deductibles, and are pursuing their own financial recovery efforts. Ourincident response effort is complete. We are not aware of any further recovery,cleanup or other costs. However, if any such costs are incurred, they areexpected to be paid by the insurers.

Our predecessors haveagreed to indemnify us for certain liabilities. For more information, pleaseread “Certain Relationships and Related Transactions—Omnibus Agreement—Indemnification”in Item 13 of this report.

**ITEM 4.**                SUBMISSIONOF MATTERS TO A VOTE OF SECURITYHOLDERS.

No matters were submittedto a vote of security holders during the quarter ended June 30, 2007.

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**PART II**

**ITEM 5.**                MARKETFOR REGISTRANT’S COMMON EQUITY, RELATED SECURITYHOLDER MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIES.

**Market Price ofCommon Units, Distributions and Related Unitholder Matters**

Ourcommon units are listed on the New York Stock Exchange under the symbol “KSP.”  As of September 7, 2007, there were7,069,050 outstanding common units, representing an aggregate 68.0% limitedpartner interest in us, which were held by 44 holders of record, representingapproximately 5,000 beneficial owners. The following table sets forth, for theperiods indicated, the high and low sales prices per common unit, as reportedon the New York Stock Exchange, and the amount of cash distributions declaredper common unit:

| ** **                                   | ** ** | **Price Range** | ** ** | **Cash**     | ** ** |
|----------------------------------------------|------------|----------------------|------------|--------------|------------|
| ** **                                   | ** ** | **High**             | ** ** | **Low**      | ** ** | **Distribution** (1) | ** ** |
| ***2007  Fiscal Year***                      |       |                 |       |         |       |   |   |   |   |
| Fourth Quarter  Ended June 30, 2007     |       | $ 48.00         |       | $ 40.01 |       |   | $ 0.70 |   |   |
| Third Quarter  Ended March 31, 2007     |       | $ 40.97         |       | $ 35.15 |       |   | $ 0.68 |   |   |
| Second Quarter  Ended December 31, 2006 |       | $ 36.40         |       | $ 33.56 |       |   | $ 0.66 |   |   |
| First Quarter  Ended September 30, 2006 |       | $ 34.35         |       | $ 30.70 |       |   | $ 0.64 |   |   |
| ***2006  Fiscal Year***                      |       |                 |       |         |       |   |   |   |   |
| Fourth Quarter  Ended June 30, 2006     |       | $ 33.67         |       | $ 31.10 |       |   | $ 0.62 |   |   |
| Third Quarter  Ended March 31, 2006     |       | $ 35.56         |       | $ 33.50 |       |   | $ 0.60 |   |   |
| Second Quarter  Ended December 31, 2005 |       | $ 37.25         |       | $ 34.05 |       |   | $ 0.59 |   |   |
| First Quarter Ended  September 30, 2005 |       | $ 40.19         |       | $ 34.31 |       |   | $ 0.57 |   |   |
|                                              |            |                      |            |              |            |  |  |  |  |  |

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(1)          Distributions are shownfor the quarter with respect to which they were declared. For each of theindicated quarters for which distributions have been made, an identical perunit cash distribution was paid on the subordinated units.

The aggregate amount ofdistributions declared in respect of the 2007 and 2006 fiscal years on commonunits, subordinated units and general partner units totaled $28.2 million and$24.4 million, respectively.

**Cash DistributionPolicy**

Within 45 daysafter the end of each quarter, we distribute all of our available cash fromoperating surplus to unitholders of record on the applicable record date. Ouravailable cash from operating surplus consists generally of all cash on hand atthe end of the fiscal quarter, plus all cash on hand resulting from workingcapital borrowings made after the end of the quarter up to the date ofdetermination of available cash, less the amount of cash that our generalpartner determines is necessary or appropriate to, among others:

·       providefor the proper conduct of our business, including reserves for future capitaland maintenance expenditures;

·       complywith applicable law, any of our debt instruments, or other agreements; or

·       providefunds for distributions to our unitholders and to our general partner for anyone or more of the next four quarters.

Our ability to distributeavailable cash is contractually restricted by the terms of our credit facilities,which require us to maintain certain financial ratios and generally prohibitdistributions to unitholders if the distribution would cause an event ofdefault, or an event of default is existing, under our credit 

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facilities.Please read “Management’s Discussion and Analysis of Financial Condition andResults of Operations—Liquidity and Capital Resources—Credit Agreement” in Item7 of this report.

**SubordinationPeriod**

During the subordination period, the common units havethe right to receive distributions of available cash from operating surplus inan amount equal to the minimum quarterly distribution of $0.50 per quarter,plus any arrearages in the payment of the minimum quarterly distribution on thecommon units from prior quarters, before any distributions of available cashfrom operating surplus may be made on the subordinated units. Upon expirationof the subordination period, each outstanding subordinated unit will convertinto one common unit and will participate pro rata with the other common unitsin distributions of available cash.

*Definition ofSubordination Period.**  *Thesubordination period will extend until the first day of any quarter, beginningafter December 31, 2008, that each of the following tests are met:

·       distributionsof available cash from operating surplus on each of the outstanding commonunits and subordinated units equaled or exceeded the minimum quarterlydistribution for each of the three consecutive, non-overlapping four-quarterperiods immediately preceding that date;

·       the“adjusted operating surplus,” as defined in our partnership agreement, generatedduring each of the three consecutive, non-overlapping four-quarter periodsimmediately preceding that date equaled or exceeded the sum of the minimumquarterly distributions on all of the outstanding common units and subordinatedunits during those periods on a fully diluted basis and the relateddistribution on the general partner interest during those periods; and

·       thereare no arrearages in payment of the minimum quarterly distribution on thecommon units.

Adjusted operating surplus is intended to reflect thecash generated from operations during a particular period and thereforeexcludes net increases in working capital borrowings and net drawdowns ofreserves of cash generated in prior periods.

*Early Conversion ofSubordinated Units.**  *Beforethe end of the subordination period, 50% of the subordinated units, or up to2,082,500 subordinated units, may convert into common units on a one-for-onebasis immediately after the distribution of available cash to the partners inrespect of any quarter ending on or after:

·       December 31,2006 with respect to 25% of the subordinated units; and

·       December 31,2007 with respect to 25% of the subordinated units.

The earlyconversions will occur if at the end of the applicable quarter each of thefollowing occurs:

·       distributionsof available cash from operating surplus on each of the outstanding commonunits and subordinated units equaled or exceeded the minimum quarterlydistribution for each of the three consecutive, non-overlapping four-quarterperiods immediately preceding that date;

·       theadjusted operating surplus generated during each of the three consecutive,non-overlapping four-quarter periods immediately preceding that date equaled orexceeded the sum of the minimum quarterly distributions on all of theoutstanding common units and subordinated units during those periods on a fullydiluted basis and the related distribution on the general partner interestduring those periods; and

·       thereare no arrearages in payment of the minimum quarterly distribution on thecommon units.

The second earlyconversion of the subordinated units may not occur until at least one yearfollowing the first early conversion of the subordinated units. We met therequired tests for early conversion of the 

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first25% of subordinated units and, as a result, 1,041,250 of these subordinatedunits converted to common units on February 14, 2007.

**IncentiveDistribution Rights**

Incentive distribution rights represent the right toreceive an increasing percentage of quarterly distributions of available cashfrom operating surplus after the minimum quarterly distribution and certaintarget distribution levels have been achieved. Our general partner currentlyholds the incentive distribution rights, but may transfer these rights separatelyfrom its general partner interest, subject to restrictions in the partnershipagreement.

If for any quarter,we have distributed available cash from operating surplus a) to the commonand subordinated unitholders an amount equal to the minimum quarterlydistribution, and b) on the common units an amount necessary to eliminateany cumulative arrearages in payment of the minimum quarterly distribution,then we will distribute any additional available cash from operating surplusfor that quarter among the unitholders and our general partner in the followingmanner:

·       first,98% to all unitholders, pro rata, and 2% to our general partner, until eachunitholder receives a total of $0.55 per unit for that quarter;

·       second,85% to all unitholders, pro rata, and 15% to our general partner, until eachunitholder receives a total of $0.625 per unit for that quarter;

·       third,75% to all unitholders, pro rata, and 25% to our general partner, until eachunitholder receives a total of $0.75 per unit for that quarter; and

·       thereafter,50% to all unitholders, pro rata, and 50% to our general partner.

The percentage interestsset forth above for our general partner include its 1.95% general partnerinterest and assume the general partner has not transferred the incentivedistribution rights.

**Issuer Purchases ofEquity Securities**

We did not repurchase anyof our common units during the fourth quarter of fiscal 2007.

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**ITEM 6.**                SELECTEDFINANCIAL DATA.

Thefollowing table sets forth selected historical financial and operating data ofK-Sea Transportation Partners L.P. and its predecessors. On January 14,2004, EW Transportation LLC contributed assets and liabilities constituting itsbusiness to us in connection with our initial public offering of common units. Therefore,the historical financial and operating data presented below for all periodsprior to January 14, 2004 are for EW Transportation LLC. The followingtable should be read in conjunction with the consolidated financial statements,including the notes thereto, included elsewhere in this report, and “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” inItem 7 of this report.

| ** **                                                       | ** ** | **Years Ended June 30,** | ** ** |
|------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                       | ** ** | **2007**                                | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Income  Statement Data:**                                      |       |                                    |       |   |   |   |   |   |   |   |   |
| Voyage revenue                                                   |       | $ 216,924                          |       | $ 176,650 |   | $ 118,811 |   | $ 93,899 |   | $ 83,942 |   |
| Bareboat charter  and other revenue                              |       | 9,650                                   |       | 6,118 |   | 2,583 |   | 1,900 |   | 3,753 |   |
| Total revenues                                                   |       | 226,574                                 |       | 182,768 |   | 121,394 |   | 95,799 |   | 87,695 |   |
| Voyage expenses                                                  |       | 45,875                                  |       | 37,973 |   | 24,220 |   | 16,339 |   | 14,151 |   |
| Vessel operating  expenses                                       |       | 96,005                                  |       | 77,325 |   | 49,296 |   | 38,809 |   | 36,326 |   |
| General and  administrative expenses                             |       | 20,472                                  |       | 17,309 |   | 11,163 |   | 8,149 |   | 7,047 |   |
| Depreciation and  amortization                                   |       | 33,415                                  |       | 26,810 |   | 21,399 |   | 18,643 |   | 16,293 |   |
| Net (gain) loss on  sale of vessels                              |       | 102                                     |       | (313 | ) | (264 | ) | 255 |   | (275 | ) |
| Total operating  expenses                                        |       | 195,869                                 |       | 159,104 |   | 105,814 |   | 82,195 |   | 73,542 |   |
| Operating income                                                 |       | 30,705                                  |       | 23,664 |   | 15,580 |   | 13,604 |   | 14,153 |   |
| Interest expense  (income), net                                  |       | 14,097                                  |       | 10,118 |   | 5,949 |   | 6,370 |   | 8,808 |   |
| Net loss on  reduction of debt(1)                                |       | —                                  |       | 7,224 |   | 1,359 |   | 3,158 |   | 4 |   |
| Other (income)  expense, net                                     |       | (63                                     | )          | (64 | ) | (27 | ) | (253 | ) | 29 |   |
| Income before  provision (benefit) for  income taxes             |       | 16,671                                  |       | 6,386 |   | 8,299 |   | 4,329 |   | 5,312 |   |
| Provision  (benefit) for income taxes(2)                         |       | 851                                     |       | 484 |   | 163 |   | (16,845 | ) | 340 |   |
| Net income                                                       |       | $ 15,820                           |       | $     5,902 |   | $   8,136 |   | $ 21,174 |   | $   4,972 |   |
| Net income per  unit—basic                                  |       | $     1.56     |       | $       0.60 |   | $     0.95 |   | $     2.26 |   | $     1.03 |   |
| —diluted                                                    |       | $     1.55     |       | $       0.60 |   | $     0.95 |   | $     2.25 |   | $     1.03 |   |
| **Balance Sheet Data (at year end):**                            |       |                                    |       |   |   |   |   |   |   |   |   |
| Vessels and  equipment, net                                      |       | $ 358,580                          |       | $ 316,237 |   | $ 235,490 |   | $ 193,646 |   | $ 145,520 |   |
| Total assets                                                     |       | 429,814                                 |       | 383,028 |   | 273,262 |   | 228,144 |   | 178,328 |   |
| Total debt                                                       |       | 244,287                                 |       | 193,380 |   | 114,005 |   | 78,817 |   | 114,003 |   |
| Partners’  capital/members’ equity                     |       | 152,653                                 |       | 163,943 |   | 141,940 |   | 135,698 |   | 41,290 |   |
| **Cash Flow Data:**                                              |       |                                    |       |   |   |   |   |   |   |   |   |
| Net cash provided  by (used in):                                 |       |                                    |       |   |   |   |   |   |   |   |   |
| Operating activities                                             |       | $ 41,643                           |       | $   20,774 |   | $ 24,163 |   | $ 10,904 |   | $ 13,235 |   |
| Investing activities                                             |       | (63,704                                 | )          | (105,398 | ) | (55,901 | ) | (59,167 | ) | (240 | ) |
| Financing activities                                             |       | 22,147                                  |       | 85,362 |   | 31,447 |   | 48,616 |   | (12,984 | ) |
| **Other Financial Data:**                                        |       |                                    |       |   |   |   |   |   |   |   |   |
| Capital  expenditures(3):                                        |       |                                    |       |   |   |   |   |   |   |   |   |
| Maintenance                                                      |       | $ 20,337                           |       | $   13,753 |   | $   8,024 |   | $   7,957 |   | $   8,389 |   |
| Expansion (including vessel and company acquisitions)            |       | 25,960                                  |       | 98,073 |   | 39,337 |   | 52,747 |   | 7,814 |   |
| Total                                                            |       | $ 46,297                           |       | $ 111,826 |   | $ 47,361 |   | $ 60,704 |   | $ 16,203 |   |
| Construction of  tank vessels                                    |       | $ 33,315                           |       | $   20,702 |   | $ 16,816 |   | $ 16,512 |   | $ 18,703 |   |
| Distributions declared  per common unit in respect of the period |       | $   2.680                |       | $     2.380 |   | $   2.180 |   | $   0.955 |   |   |   |

 

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| ** **                                                   | ** ** | **Years Ended June 30,** | ** ** |
|--------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                   | ** ** | **2007**                                | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Operating  Data:**                                         |       |                                    |       |   |   |   |   |   |   |   |   |
| Number of tank  barges (at period end)                       |       | 60                                      |       | 61 |   | 44 |   | 34 |   | 35 |   |
| Number of tankers  (at period end)                           |       | 1                                       |       | 2 |   | 2 |   | 2 |   | 3 |   |
| Number of tugboats  (at period end)                          |       | 44                                      |       | 41 |   | 25 |   | 19 |   | 18 |   |
| Total barrel-carrying  capacity (in thousands at period end) |       | 3,464                                   |       | 3,357 |   | 2,561 |   | 2,410 |   | 2,309 |   |
| Net utilization(4)                                           |       | 85                                      | %          | 83 | % | 85 | % | 86 | % | 87 | % |
| Average daily rate(5)                                        |       | $ 10,097                           |       | $ 9,245 |   | $ 8,734 |   | $ 8,095 |   | $ 7,468 |   |

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(1)           Fiscal 2006 and fiscal 2005 include losses of $7.2million and $1.4 million, respectively, in connection with the restructuring ofour revolving credit facility and repayment of certain term loans, includingour Title XI debt in fiscal 2006. Fiscal 2004 includes a $3.2 million losson prepayment of certain EW Transportation LLC debt using proceeds of ourinitial public offering.

(2)           Fiscal 2004 includes a non cash tax benefit of$17.6 million solely attributable to a reduction in deferred taxesresulting from the change in income tax status of the assets and liabilitiesconstituting the business of EW Transportation LLC that were transferred to usat the date of the initial public offering.

(3)           We define maintenance capital expenditures as capitalexpenditures required to maintain, over the long term, the operating capacityof our fleet, and expansion capital expenditures as those capital expendituresthat increase, over the long term, the operating capacity of our fleet. Examplesof maintenance capital expenditures include costs related to drydocking avessel, retrofitting an existing vessel or acquiring a new vessel to the extentsuch expenditures maintain the operating capacity of our fleet. Expendituresmade in connection with our tank vessel newbuilding program were considered maintenancecapital expenditures as they were made to replace capacity scheduled to phaseout under OPA 90; however, because they were non-routine in nature they areincluded separately in the above table under “Construction of tank vessels.”  Generally, expenditures for construction oftank vessels in progress are not included as capital expenditures until suchvessels are completed. Capital expenditures associated with retrofitting anexisting vessel, or acquiring a new vessel, which increase the operating capacityof our fleet over the long term whether through increasing our aggregate barrel-carryingcapacity, improving the operational performance of a vessel or otherwise, areclassified as expansion capital expenditures. Drydocking expenditures are moreextensive in nature than normal routine maintenance and, therefore, arecapitalized and amortized over three years. For more information regarding ouraccounting treatment of drydocking expenditures, please read “Management’sDiscussion and Analysis of Financial Condition and Results of Operations—CriticalAccounting Policies—Amortization of Drydocking Expenditures” in Item 7 of thisreport.

(4)           “Net utilization” is a percentage equal to the totalnumber of days actually worked by a tank vessel or group of tank vessels duringa defined period, divided by the number of calendar days in the periodmultiplied by the total number of tank vessels operating or in drydock duringthat period.

(5)           “Average daily rate” equals the net voyage revenueearned by a tank vessel or group of tank vessels during a defined period,divided by the total number of days actually worked by that tank vessel orgroup of tank vessels during that period.

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**ITEM 7.**                MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following is adiscussion of the historical consolidated financial condition and results ofoperations of K-Sea Transportation Partners L.P. and should be read inconjunction with our historical consolidated financial statements and notesthereto included elsewhere in this report.

**GENERAL**

We are a leading provider of refined petroleum productmarine transportation, distribution and logistics services in the United Statesdomestic marine transportation business. We currently operate a fleet of 71tank barges, 1 tanker and 58 tugboats that serves a wide range of customers,including major oil companies, oil traders and refiners. With approximately4.2 million barrels of capacity, we believe we currently operate thelargest coastwise tank barge fleet in the United States.

Demand for ourservices is driven primarily by demand for refined petroleum products in theareas in which we operate. We generate revenue by charging customers for thetransportation and distribution of their products utilizing our tank vesselsand tugboats. These services are generally provided under the following fourbasic types of contractual relationships:

·       timecharters, which are contracts to charter a vessel for a fixed period of time,generally one year or more, at a set daily rate;

·       contractsof affreightment, which are contracts to provide transportation services forproducts over a specific trade route, generally for one or more years, at anegotiated per barrel rate;

·       voyagecharters, which are charters for shorter intervals, usually a singleround-trip, that are made on either a current market rate or advancecontractual basis; and

·       bareboatcharters, which are longer-term agreements that allow a customer to operate oneof our vessels and utilize its own operating staff without taking ownership ofthe vessel.

In addition, a variation of a voyage charter is knownas a “consecutive voyage charter.” Under this arrangement, consecutive voyagesare performed for a specified period of time.

Thetable below illustrates the primary distinctions among these types ofcontracts:

| ** **                    | ** ** | **Time Charter**                                          | ** ** | **Contract of  Affreightment** | ** ** | **Voyage  Charter(1)** | ** ** | **Bareboat  Charter** | ** ** |
|-------------------------------|------------|----------------------------------------------------------------|------------|-------------------------------------|------------|------------------------|------------|-----------------------|------------|
| Typical contract  length      |       | One  year or more                                              |       | One  year or more                   |       | Single  voyage         |       | Two  years or more    |       |
| Rate basis                    |       | Daily                                                          |       | Per  barrel                         |       | Varies                 |       | Daily                 |       |
| Voyage  expenses(2)           |       | Customer  pays                                                 |       | We  pay                             |       | We  pay                |       | Customer  pays        |       |
| Vessel operating  expenses(2) |       | We  pay                                                        |       | We  pay                             |       | We  pay                |       | We  pay               |       |
| Idle time                     |       | Customer pays as  long as vessel is  available for  operations |       | Customer does  not pay              |       | Customer does  not pay |       | Customer pays         |       |

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(1)          Under a consecutivevoyage charter, the customer pays for idle time.

(2)          See “Definitions” below.

For contracts of affreightment and voyage charters,revenue is recognized based upon the relative transit time in each period, withexpenses recognized as incurred. Although contracts of affreightment andcertain contracts for voyage charters may be effective for a period in excessof one year, revenue is 

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recognized over thetransit time of individual voyages, which are generally less than ten days induration. For time charters and bareboat charters, revenue is recognizedratably over the contract period, with expenses recognized as incurred.

One of the principaldistinctions among these types of contracts is whether the vessel operator orthe customer pays for voyage expenses, which include fuel, port charges, pilotfees, tank cleaning costs and canal tolls. Some voyage expenses are fixed, andthe remainder can be estimated. If we, as the vessel operator, pay the voyageexpenses, we typically pass these expenses on to our customers by charginghigher rates under the contract or re-billing such expenses to them. As aresult, although voyage revenue from different types of contracts may vary, thenet revenue that remains after subtracting voyage expenses, which we call netvoyage revenue, is comparable across the different types of contracts.Therefore, we principally use net voyage revenue, rather than voyage revenue,when comparing performance between different periods. Since net voyage revenueis a non-GAAP measurement, it is reconciled to the nearest GAAP measurement,voyage revenue, under “Results of Operations” below.

**RECENT DEVELOPMENTS**

On August 14, 2007, we completed the acquisitionof all of the equity interests in Smith Maritime, Go Big and Sirius Maritime. SmithMaritime, Go Big and Sirius Maritime are providers of marine transportation andlogistics services to major oil companies, oil traders and refiners in Hawaiiand along the West Coast of the United States. On a combined basis, theoperations of these companies included 11 petroleum tank barges and 14tugboats, aggregating 777,000 barrels of capacity, of which 669,000 barrels, or86%, are double-hulled. The tank barges added by this acquisition represent a22% increase in the barrel-carrying capacity of our fleet to approximately 4.2million barrels. The aggregate purchase price for Smith Maritime, Go Big andSirius Maritime was approximately $203.0 million, comprising $169.2 million incash, $23.6 million of assumed debt, and common units valued at approximately$10.2 million. Prior to the acquisition, Gordon L.K. Smith was the owner of80.3% of the capital stock of Smith Maritime and 100% of the equity interestsin Go Big. Mr. Smith is also the sole member of Smith Maritime LLC, whichowned 33 1/3% of the membership interests in Sirius Maritime. Six of the 12vessels operated by Sirius Maritime were owned by subsidiaries of SmithMaritime or by Go Big and chartered in by Sirius Maritime. Because theacquisition of Smith Maritime and Sirius Maritime were completed after June 30,2007, the operations of Smith Maritime and Sirius Maritime are not included inthe fourth quarter or fiscal 2007 results.

Also on August 14, 2007, we amended and restatedour revolving credit agreement with KeyBank National Association, asadministrative agent and lead arranger, to provide for (1) an increase inavailability to $175 million under our senior secured revolving creditfacility, which we refer to as the revolving facility, with an extension of theterm to seven years, (2) a $45 million 364-day senior securedrevolving credit facility, which we refer to as the 364-day facility, (3) amendmentsto certain financial covenants and (4) a reduction in interest ratemargins. Under certain conditions, we have the right to increase the revolvingfacility by up to $75 million, to a maximum total facility amount of $250million. The revolving facility and the 364-day facility arecollateralized by a first perfected security interest in vessels having a totalfair market value of approximately $275 million and certain equipment andmachinery related to such vessels. The revolving facility and the 364-dayfacility bear interest at the London Interbank Offered Rate, or LIBOR, plus amargin ranging from 0.7% to 1.5% depending on our ratio of total funded debt toEBITDA (as defined in the agreement). On August 14, 2007, we borrowed$67.0 million under the revolving facility and $45.0 million under the 364-dayfacility to fund a portion of the purchase price of Smith Maritime, Go Big andSirius Maritime. As of August 14, 2007, we had approximately $166.4million outstanding under the revolving facility and $45.0 million outstandingunder the 364-day facility.

Also on August 14,2007, we entered into a bridge loan facility for up to $60 million with anaffiliate of KeyBank National Association. The bridge loan facility bearsinterest at an annual rate of LIBOR plus 

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1.5%. Thebridge loan facility matures on November 12, 2007. The bridge loanfacility is not collateralized until October 13, 2007 and, thereafter,will be collateralized by a second perfected security interest in the vesselscollateralizing the revolving facility and the 364-day facility. Duringan event of default, the bridge loan facility will bear interest at an annualrate of LIBOR plus 7.5%. On August 14, 2007, we borrowed $60.0 millionunder the bridge loan facility in connection with the Smith Maritime, Go Bigand Sirius Maritime acquisition.

**DEFINITIONS**

In order tounderstand our discussion of our results of operations, it is important tounderstand the meaning of the following terms used in our analysis and thefactors that influence our results of operations:

·       *Voyage revenue.  *Voyage revenueincludes revenue from time charters, contracts of affreightment and voyagecharters, where we, as vessel operator, pay the vessel operating expenses.Voyage revenue is impacted by changes in charter and utilization rates and bythe mix of business among the types of contracts described in the precedingsentence.

·       *Voyage expenses.  *Voyage expensesinclude items such as fuel, port charges, pilot fees, tank cleaning costs andcanal tolls, which are unique to a particular voyage. Depending on the form ofcontract and customer preference, voyage expenses may be paid directly bycustomers or by us. If we pay voyage expenses, they are included in our resultsof operations when they are incurred. Typically when we pay voyage expenses, weadd them to our freight rates at an approximate cost.

·       *Net voyage revenue.  *Net voyagerevenue is equal to voyage revenue less voyage expenses. As explained above,the amount of voyage expenses we incur for a particular contract depends uponthe form of the contract. Therefore, in comparing revenues between reportingperiods, we use net voyage revenue to improve the comparability of reportedrevenues that are generated by the different forms of contracts. Since netvoyage revenue is a non-GAAP measurement, it is reconciled to the nearest GAAPmeasurement, voyage revenue, under “Results of Operations” below.

·       *Bareboat charter and other revenue.  *Bareboatcharter and other revenue includes revenue from bareboat charters and fromtowing and other miscellaneous services.

·       *Vessel operating expenses.  *The mostsignificant direct vessel operating expenses are wages paid to vessel crews,routine maintenance and repairs and marine insurance. We may also incur outsidetowing expenses during periods of peak demand and in order to maintain ouroperating capacity while our tugs are drydocked or otherwise out of service forscheduled and unscheduled maintenance.

·       *Depreciation and amortization.  *Weincur fixed charges related to the depreciation of the historical cost of ourfleet and the amortization of expenditures for drydockings. The aggregatenumber of drydockings undertaken in a given period, the size of the vessels andthe nature of the work performed determine the level of drydockingexpenditures. We capitalize expenditures incurred for drydocking and amortizethese expenditures over 36 months. We also amortize, over periods rangingfrom four to ten years, intangible assets in connection with vesselacquisitions.

·       *General and administrative expenses.  *Generaland administrative expenses consist of employment costs of shoreside staff andthe cost of facilities, as well as legal, audit, insurance and otheradministrative costs.

·       *Total tank vessel days.  *Total tankvessel days is equal to the number of calendar days in the period multiplied bythe total number of tank vessels operating or in drydock during that period.

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·       *Scheduled drydocking days.  *Scheduleddrydocking days are days designated for the inspection and survey of tankvessels, and identification and completion of required refurbishment work, asrequired by the U.S. Coast Guard and the American Bureau of Shipping tomaintain the vessels’ qualification to work in the U.S. coastwise trade.Generally, drydockings are required twice every five years and last between 30and 60 days, based upon the size of the vessel and the type and extent ofwork required.

·       *Net utilization.  *Net utilization isa primary measure of operating performance in our business. Net utilization isa percentage equal to the total number of days worked by a tank vessel or groupof tank vessels during a defined period, divided by total tank vessel days forthat tank vessel or group of tank vessels. Net utilization is adverselyimpacted by scheduled drydocking, scheduled and unscheduled maintenance andidle time not paid for by the customer.

·       *Average daily rate.  *Average dailyrate, another key measure of our operating performance, is equal to the netvoyage revenue earned by a tank vessel or group of tank vessels during adefined period, divided by the total number of days actually worked by thattank vessel or group of tank vessels during that period. Fluctuations inaverage daily rates result not only from changes in charter rates charged toour customers, but also from changes in vessel utilization and efficiency,which could result from internal factors, such as newer and more efficient tankvessels, and from external factors such as weather or other delays.

·       *Coastwise and local trades.  *Ourbusiness is segregated into coastwise trade and local trade. Our coastwisetrade generally comprises voyages of between 200 and 1,000 miles by vesselswith greater than 40,000 barrels of barrel-carrying capacity. Thesevoyages originate from the mid-Atlantic states to points as far north as Canadaand as far south as Cape Hatteras, from points within the Gulf Coast region toother points within that region or to the Northeast, and to and from points onthe West Coast of the United States and Alaska. We also own two non-Jones Acttank barges that transport petroleum products internationally. Our local tradegenerally comprises voyages by smaller vessels of less than 200 miles. The termU.S. coastwise trade is an industry term used generally for Jones Act purposes,and would include both our coastwise and local trades.

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**RESULTS OFOPERATIONS**

Thefollowing table summarizes our results of operations for the periods presented(dollars in thousands, except average daily rates):

| ** **                                    | ** ** | **For the Years Ended June 30,** | ** **  |
|-----------------------------------------------|------------|-----------------------------------------------------------|-------------|
| ** **                                    | ** ** | **2007**                                                  | ** **  | **2006** | ** ** | **2005** | ** ** |
| Voyage revenue                                |       | $                                                         | 216,924     |   | $ | 176,650 |   | $ | 118,811 |   |
| Bareboat charter and  other revenue           |       | 9,650                                                     |        | 6,118 |   | 2,583 |   |
| **Total  revenues**                           | ** ** | **226,574**                                               | ** **  | **182,768** | ** ** | **121,394** | ** ** |
| Voyage expenses                               |       | 45,875                                                    |        | 37,973 |   | 24,220 |   |
| Vessel operating  expenses                    |       | 96,005                                                    |        | 77,325 |   | 49,296 |   |
| *% of  total revenues*                        | * *   | *42.4*                                                    | *%*         | *42.3* | *%* | *40.6* | *%* |
| General and  administrative expenses          |       | 20,472                                                    |        | 17,309 |   | 11,163 |   |
| *% of  total revenues*                        | * *   | *9.0*                                                     | *%*         | *9.5* | *%* | *9.2* | *%* |
| Depreciation and  amortization                |       | 33,415                                                    |        | 26,810 |   | 21,399 |   |
| Net (gain) loss on sale  of vessels           |       | 102                                                       |        | (313 | ) | (264 | ) |
| **Operating  income**                         | ** ** | **30,705**                                                | ** **  | **23,664** | ** ** | **15,580** | ** ** |
| *% of  total revenues*                        | * *   | *13.6*                                                    | *%*         | *12.9* | *%* | *12.8* | *%* |
| Interest expense, net                         |       | 14,097                                                    |        | 10,118 |   | 5,949 |   |
| Net loss on reduction of  debt                |       | —                                                    |        | 7,224 |   | 1,359 |   |
| Other (income) expense,  net                  |       | (63                                                       | )           | (64 | ) | (27 | ) |
| **Income  before provision for income taxes** | ** ** | **16,671**                                                | ** **  | **6,386** | ** ** | **8,299** | ** ** |
| Provision for income  taxes                   |       | 851                                                       |        | 484 |   | 163 |   |
| **Net  income**                               | ** ** | **$**                                                     | **15,820**  | ** ** | **$** | **5,902** | ** ** | **$** | **8,136** | ** ** |
| **Net voyage revenue by trade**               |       |                                                      |        |   |   |   |   |
| **Coastwise**                                 |       |                                                      |        |   |   |   |   |
| Total tank vessel days                        |       | 11,032                                                    |        | 9,430 |   | 6,691 |   |
| Days worked                                   |       | 9,954                                                     |        | 8,467 |   | 6,035 |   |
| Scheduled drydocking  days                    |       | 511                                                       |        | 403 |   | 142 |   |
| Net utilization                               |       | 90                                                        | %           | 90 | % | 90 | % |
| Average daily rate                            |       | $                                                         | 12,375      |   | $ | 11,967 |   | $ | 11,369 |   |
| **Total  coastwise net voyage revenue(a)**    | ** ** | **$**                                                     | **123,182** | ** ** | **$** | **101,324** | ** ** | **$** | **68,610** | ** ** |
| **Local**                                     |       |                                                      |        |   |   |   |   |
| Total tank vessel days                        |       | 8,864                                                     |        | 8,537 |   | 6,084 |   |
| Days worked                                   |       | 6,987                                                     |        | 6,534 |   | 4,795 |   |
| Scheduled drydocking  days                    |       | 232                                                       |        | 317 |   | 263 |   |
| Net utilization                               |       | 79                                                        | %           | 77 | % | 79 | % |
| Average daily rate                            |       | $                                                         | 6,851       |   | $ | 5,717 |   | $ | 5,418 |   |
| **Total  local net voyage revenue(a)**        | ** ** | **$**                                                     | **47,867**  | ** ** | **$** | **37,353** | ** ** | **$** | **25,981** | ** ** |
| **Tank vessel fleet**                         |       |                                                      |        |   |   |   |   |
| Total tank vessel days                        |       | 19,896                                                    |        | 17,967 |   | 12,775 |   |
| Days worked                                   |       | 16,941                                                    |        | 15,001 |   | 10,830 |   |
| Scheduled drydocking  days                    |       | 743                                                       |        | 720 |   | 405 |   |
| Net utilization                               |       | 85                                                        | %           | 83 | % | 85 | % |
| Average daily rate                            |       | $                                                         | 10,097      |   | $ | 9,245 |   | $ | 8,734 |   |
| **Total fleet net voyage revenue(a)**         | ** ** | **$**                                                     | **171,049** | ** ** | **$** | **138,677** | ** ** | **$** | **94,591** | ** ** |

 

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(a)           Netvoyage revenue is a non**-**GAAP measurewhich is defined above under “Definitions” and reconciled to Voyage revenue,the nearest GAAP measure, under “Voyage Revenue and Voyage Expenses” in theperiod-to-period comparisons below.

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**Fiscal Year Ended June 30,2007 Compared to the Fiscal Year Ended June 30, 2006**

***Voyage Revenue and Voyage Expenses***

Voyage revenue was $216.9million for the fiscal year ended June 30, 2007, an increase of$40.2 million, or 23%, as compared to voyage revenue of $176.7 millionfor the fiscal year ended June 30, 2006. Voyage expenses were$45.9 million for the fiscal year ended June 30, 2007, an increase of$7.9 million, or 21%, as compared to voyage expenses of $38.0 millionfor the fiscal year ended June 30, 2006.

***Net Voyage Revenue***

Net voyage revenue was $171.0 million for thefiscal year ended June 30, 2007, an increase of $32.3 million, or23%, as compared to net voyage revenue of $138.7 million for the fiscalyear ended June 30, 2006. In our coastwise trade, net voyage revenue was$123.2 million for the fiscal year ended June 30, 2007, an increase of$21.9 million, or 22%, as compared to $101.3 million for the fiscal year ended June 30,2006. Net utilization in our coastwise trade remained constant at 90% for boththe fiscal year ended June 30, 2007 and 2006. The acquisition of Sea CoastTransportation LLC, or Sea Coast, in October 2005 resulted in increasedcoastwise net voyage revenue of $14.3 million for the fiscal year ended June 30,2007, as compared to the fiscal year ended June 30, 2006. Increasestotaling $7.6 million in coastwise net voyage revenue resulted from an increasein days worked by the following vessels: (1) the DBL 103, which was placedin service in January 2006, (2) the DBL 104, which was placed inservice in April 2007, (3) the McCleary’s Spirit, which was purchasedin October 2005, and (4) the DBL 53, which commenced operations in June 2006after being rebuilt. These increases were partially offset by a $1.0 milliondecrease in coastwise net voyage revenue resulting from the loss of the DBL 152in the previously reported November 2005 barge incident. Average dailyrates in coastwise net voyage revenue increased 3% to $12,375 for the fiscalyear ended June 30, 2007 from $11,967 for the fiscal year ended June 30,2006, which accounted for approximately $3.5 million of increased net voyagerevenue.

Net voyage revenue in ourlocal trade for the fiscal year ended June 30, 2007 increased by $10.5million, or 28%, to $47.9 million from $37.4 million for the year ended June 30,2006. The acquisition of Sea Coast in October 2005 resulted in increasedlocal net voyage revenue of $1.8 million for the fiscal year ended June 30,2007, as compared to the fiscal year ended June 30, 2006. Additionally,local net voyage revenue increased by $8.6 million for the fiscal year ended June 30,2007 due to the increased number of work days for the newbuild barges DBL 28,DBL 29 and DBL 26, and BDL 27 delivered in March 2006, May 2006, August 2006,and January 2007, respectively. This was partially offset by theretirement of three small tank vessels which decreased net voyage revenue by$3.4 million. Net utilization in our local trade was 79% for the fiscal yearended June 30, 2007, compared to 77% for the fiscal year ended June 30,2006. Average daily rates in our local trade increased 20% to $6,851 for thefiscal year ended June 30, 2007 from $5,717 for the comparative prioryear, positively impacted by higher charter rates resulting from strong marketconditions, particularly for short term charters. Increased charter ratesaccounted for approximately $5.1 million of increased net voyage revenue forthe fiscal year ended June 30, 2007.

***Bareboat Charter and Other Revenue***

Bareboat charter and otherrevenue was $9.7 million for the fiscal year ended June 30, 2007, comparedto $6.1 million for the fiscal year ended June 30, 2006. Of this $3.6million increase, $1.5 million was generated by increased outside chartering oftank barges and $1.9 million was generated by a small lube oil operationpurchased in the fall of 2006.

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***Vessel Operating Expenses***

Vessel operating expenseswere $96.0 million for the fiscal year ended June 30, 2007, an increase of$18.7 million, or 24%, as compared to $77.3 million for the fiscal year ended June 30,2006. Vessel operating expenses as a percentage of total revenues increased to42.4% for the fiscal year ended June 30, 2007 from 42.3% for the fiscalyear ended June 30, 2006, resulting mainly from a higher such percentagefor the Sea Coast vessels acquired in October 2005 and increased outsidetowing during tugboat shipyard periods. Four of the Sea Coast barges arechartered in, and we pay a charter fee that is included in vessel operatingexpenses. The charter fee increases the percentage of vessel operating expensesto net voyage revenue; however, there is no associated depreciation or interestexpense. Vessel labor and related costs increased $11.4 million as a result ofcontractual labor rate increases and a higher average number of employees due tothe operation of the additional barges described under “—Net voyage revenue”above, and additional tugboats purchased in October 2005, November 2006,and April 2007. Insurance costs and vessel repairs and supplies increased$4.0 million as a result of the operation of the larger number of vessels. Additionally,outside towing increased $1.3 million due to higher shipyard days of ourtugboats.

***Depreciation and Amortization***

Depreciation andamortization was $33.4 million for fiscal 2007, an increase of $6.6 million, or25%, as compared to $26.8 million for the fiscal year ended June 30, 2006.The increase resulted from additional depreciation and drydocking amortizationon our newbuild and purchased vessels described above, plus $0.4 million inincreased amortization of certain intangible assets acquired in our acquisitionof Sea Coast.

***General and Administrative Expenses***

General and administrativeexpenses were $20.5 million for the fiscal year ended June 30, 2007, anincrease of $3.2 million, or 18%, as compared to general and administrativeexpenses of $17.3 million for the fiscal year ended June 30, 2006. As apercentage of total revenues, general and administrative expenses decreased to9.0% for the fiscal year ended June 30, 2007 from 9.5% for the fiscal yearended June 30, 2006. The $3.2 million increase included $1.1 million ofincreased personnel and facilities costs resulting from the Sea Coastacquisition, and also a $2.2 million increase relating to increased headcountand facilities costs of our new corporate office and a small satellite officein Philadelphia to support our growth.

***Interest Expense, Net***

Net interest expense was$14.1 million for the fiscal year ended June 30, 2007, or $4.0 millionhigher than the $10.1 million incurred in fiscal year ended June 30, 2006.The increase resulted from higher average debt balances resulting fromincreased credit line and term loan borrowings in connection with ouracquisition and vessel newbuilding program, and higher average interest rates.

***Loss on Reduction of Debt***

In November 2005, inconnection with our redemption of the Title XI bonds (see “—Liquidity andCapital Resources- Title XI Borrowings” below), we made a make-whole payment of$4.0 million. After writing off $2.7 million in unamortized deferred financingcosts relating to the Title XI bonds, and after costs and expenses relating tothe transaction, we recorded a loss on reduction of debt of $6.9 million. Werecorded an additional $0.3 million of loss on reduction of debt in April 2006resulting from the write-off of deferred financing costs relating to adownsizing of our revolving credit facility.

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***Provision For Income Taxes***

For fiscal 2007, oureffective tax rate decreased to 5.1%, compared to 7.6% in fiscal 2006. Oureffective tax rate comprises the New York City Unincorporated Business Tax andforeign taxes on our operating partnership, plus federal, state, local andforeign corporate income taxes on the taxable income of our operatingpartnership’s corporate subsidiaries. Our effective tax rate for the fiscalyear ended June 30, 2007 was lower than the comparable prior year periodprimarily because a smaller percentage of our pre-tax book income related toour corporate subsidiaries.

***Net Income***

Net income was $15.8million for the fiscal year ended June 30, 2007, an increase of $9.9million compared to net income of $5.9 million for the fiscal year ended June 30,2006. This increase resulted primarily from a $7.2 million decrease in net losson reduction of debt and a $7.0 million increase in operating income partiallyoffset by a $4.0 million increase in interest expense and a $0.4 millionincrease in the provision for income taxes.

**Fiscal Year Ended June 30,2006 Compared to the Fiscal Year Ended June 30, 2005**

***Voyage Revenue and Voyage Expenses***

Voyage revenue was $176.7million for the fiscal year ended June 30, 2006, an increase of$57.9 million, or 49%, as compared to voyage revenue of$118.8 million for the fiscal year ended June 30, 2005. Voyageexpenses were $38.0 million for the fiscal year ended June 30, 2006,an increase of $13.8 million, or 57%, as compared to voyage expenses of$24.2 million for the fiscal year ended June 30, 2005.

***Net Voyage Revenue***

Net voyage revenue was $138.7 million for thefiscal year ended June 30, 2006, an increase of $44.1 million, or47%, as compared to net voyage revenue of $94.6 million for the fiscalyear ended June 30, 2005. In our coastwise trade, net voyage revenue was$101.3 million for the fiscal year ended June 30, 2006, an increase of$32.7 million, or 48%, as compared to $68.6 million for the fiscal year ended June 30,2005. Net utilization in our coastwise trade remained constant at 90% for eachfiscal year. The acquisition of Sea Coast in October 2005 resulted inincreased coastwise net voyage revenue of $23.0 million in fiscal 2006,compared to fiscal 2005. Other increases for the year ended June 30, 2006included $14.0 million in coastwise net voyage revenue resulting from anincrease in days worked by the following vessels: (1) the DBL 78, which wasplaced in service in June 2005, (2) the KTC 50, which was placed inservice in January 2005, (3) the Spring Creek, which was in shipyardfor most of the fiscal 2005 second quarter in preparation for a new timecharter which commenced in January 2005, (4) the DBL 103, which wasplaced in service in January 2006, (5) the McCleary’s Spirit, aCanadian-flag vessel which was purchased in October 2005, and (6) theDBL 155, which returned to service in September 2004 after itsdouble-hulling. These increases were partially offset by a $7.2 milliondecrease in coastwise net voyage revenue during fiscal 2006 resulting from thephase-out of the KTC 90 and KTC 96 in December 2004, and the loss of theDBL 152. Coastwise net voyage revenue also benefited from a 5% increase inaverage daily rates to $11,967 for the year ended June 30, 2006 from$11,369 for the year ended June 30, 2005, which accounted forapproximately $3.6 million of increased net voyage revenue. Coastwise averagedaily rates were positively impacted by the continuing strong demand forpetroleum products and increasing oil prices.

Net voyage revenue in ourlocal trade for the year ended June 30, 2006 increased by $11.4 million,or 44%, to $37.4 million from $26.0 million for the year ended June 30,2005. The acquisition of Sea Coast in October 2005 resulted in increasedlocal net voyage revenue of $5.8 million for fiscal 2006. Additionally, 

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localnet voyage revenue increased by $3.0 million during the year ended June 30,2006 due to the increased number of work days for vessels acquired in ourNorfolk acquisition in December 2004. The newbuild barges DBL 28 and DBL29, delivered during the third and fourth quarters of fiscal 2006, contributed$0.8 million of net voyage revenue. Net utilization in our local trade was 77%for the year ended June 30, 2006, compared to 79% for the year ended June 30,2005. Average daily rates in our local trade increased 6% to $5,717 for theyear ended June 30, 2006 from $5,418 for the comparative prior year,positively impacted by higher charter rates resulting from strong marketconditions, which accounted for approximately $1.4 million of increased netvoyage revenue.

***Bareboat Charter and Other Revenue***

Bareboat charter and otherrevenue was $6.1 million for the fiscal year ended June 30, 2006, comparedto $2.6 million for the fiscal year ended June 30, 2005. Of this $3.5million increase, $1.5 million resulted from increased revenue from our watertreatment plant in Norfolk, and an additional $1.8 million was generated by outsidechartering of tank barges by Sea Coast.

***Vessel Operating Expenses***

Vessel operating expenseswere $77.3 million for the fiscal year ended June 30, 2006, an increase of$28.0 million, or 57%, as compared to $49.3 million for the fiscal year ended June 30,2005. Vessel operating expenses as a percentage of total revenues increased to42.3% for the fiscal year ended June 30, 2006 from 40.6% for the fiscalyear ended June 30, 2005, resulting mainly from a higher such percentagefor the Sea Coast vessels acquired in October 2005. Four of the Sea Coastbarges are chartered in, and we pay a charter fee that is included in vesseloperating expenses. The charter fee increases the percentage of vesseloperating expenses to net voyage revenue; however, there is no associateddepreciation or interest expense. Vessel labor and related costs increased as aresult of contractual labor rate increases and a higher average number ofemployees due to the operation of the additional barges described under “—NetVoyage Revenue” above, an additional tugboat purchased in October 2005,and integration of the additional vessels purchased in December 2004. Insurancecosts and vessel repairs and supplies also increased as a result of theoperation of the larger number of vessels. Outside towing expense increased by$1.8 million due to the need for additional tugboats to satisfy increaseddemand for our tank vessels, and to replace certain of our tugboats duringcoupling and re-powering projects.

***Depreciation and Amortization***

Depreciation andamortization was $26.8 million for fiscal 2006, an increase of $5.4 million, or25%, as compared to $21.4 million for the fiscal year ended June 30, 2005.The increase resulted from additional depreciation and drydocking amortizationon our newbuild and purchased vessels described above, plus $0.7 million inamortization of certain intangible assets acquired in our acquisition of SeaCoast.

***General and Administrative Expenses***

General and administrativeexpenses were $17.3 million for the fiscal year ended June 30, 2006, anincrease of $6.1 million, or 54%, as compared to general and administrativeexpenses of $11.2 million for the fiscal year ended June 30, 2005. As apercentage of total revenues, general and administrative expenses increased to9.5% for the fiscal year ended June 30, 2006 from 9.2% for the fiscal yearended June 30, 2005. The $6.1 million increase reflected $4.7 million ofincreased personnel and facilities costs in support of our growth, includingthe Norfolk and Sea Coast acquisitions, and $0.3 million in costs related to acancelled bond offering.

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***Interest Expense, Net***

Net interest expense was$10.1 million for the year ended June 30, 2006, or $4.2 million higherthan the year ended June 30, 2005. The increase resulted from higheraverage debt balances resulting from increased credit line and term loanborrowings in connection with the Norfolk vessel acquisitions in fiscal 2005,the Sea Coast acquisition in October 2005, and higher average interestrates.

***Loss on Reduction of Debt***

In connection with our redemption of the Title XIbonds, we made a make-whole payment of $4.0 million. After writing off $2.7million in unamortized deferred financing costs relating to these bonds, andafter costs and expenses relating to the transaction, we recorded a loss onreduction of debt of $6.9 million. We recorded an additional $0.3 million ofloss on reduction of debt in April 2006 resulting from the write-off ofdeferred financing costs relating to a downsizing of our revolving creditfacility.

In connection with therefinancing of our revolving credit facility and repayment of certain termloans in March 2005, we incurred a $1.4 million loss on reduction of debt.Included in this amount was $1.1 million in deferred financing costs related tothe repaid debt that were written off, and $0.3 million of prepayment costs.

***Provision For Income Taxes***

For fiscal 2006, oureffective tax rate increased to 7.6%, compared to 2.0% in fiscal 2005, owing toan increased amount of non U.S. taxes incurred relative to our operations inPuerto Rico, Venezuela and Canada. Our effective tax rate comprises the NewYork City Unincorporated Business Tax and foreign taxes on our operatingpartnership, plus federal, state, local and foreign corporate income taxes onthe taxable income of the operating partnership’s corporate subsidiaries.

***Net Income***

Net income was $5.9million for the fiscal year ended June 30, 2006, a decrease of $2.2million compared to net income of $8.1 million for the fiscal year ended June 30,2005. This decrease resulted primarily from the $7.2 million loss on reductionof debt, the $4.2 million increase in interest expense, net, and the $0.3million increase in the provision for income taxes, which were partially offsetby the $8.1 million increase in operating income. The year ended June 30,2005 included a $1.4 million loss on reduction of debt.

**LIQUIDITY ANDCAPITAL RESOURCES**

*OperatingCash Flows.**  *Netcash provided by operating activities was $41.6 million in fiscal 2007, $20.8million in fiscal 2006 and $24.2 million in fiscal 2005. The increase of $20.8million in fiscal 2007, compared to fiscal 2006, resulted primarily from $14.7million of improved operating results, after adjusting for non-cash expensessuch as depreciation and amortization and net loss on reduction of debt, and a$9.0 million positive impact from changes in operating working capital,partially offset by increased drydocking payments of $2.9 million. The decreaseof $3.4 million in fiscal 2006, compared to fiscal 2005, resulted primarilyfrom a $4.9 million increase in drydocking expenditures and a $3.8 millionnegative impact from changes in operating working capital, partially offset bythe improved operating income of $5.3 million, after adjusting for theaforementioned non-cash expenses. During the year ended June 30, 2007, ourworking capital decreased mainly due to increases in accrued expenses and othercurrent liabilities resulting from increased payroll, self-insured medical andclaim accruals, and decreased prepaid and other current assets resulting mainlyfrom the collection of insurance claim receivables. During the year ended June 30,2006, working capital increased primarily as a result of increased accountsreceivable 

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due to increased revenues,and increased prepaid and other current assets primarily as a result ofincreases in insurance claims receivable.

*InvestingCash Flows.**  *Netcash used in investing activities totaled $63.7 million in fiscal 2007,$105.4 million in fiscal 2006 and $55.9 million in fiscal 2005. Theprimary elements of these activities were acquisitions of vessels andcompanies, and construction of new vessels. Vessel acquisitions, which totaled$16.2 million for the year ended June 30, 2007, included the purchase offive tugboats and the purchase of certain small tank vessels. In fiscal 2006,we spent $76.5 million in cash, net, to acquire Sea Coast in October 2005.Also during fiscal 2006, we acquired an 85,000-barrel integrated tug-barge unitfor approximately $13.1 million. During fiscal 2005, we acquired ten tankbarges and seven tugboats from Bay Gulf Trading Company, Ltd. of Norfolk,Virginia and its affiliates. The purchase price of $21.2 million included awater treatment facility in Norfolk. The fiscal 2005 acquisitions included theNorfolk vessels and also the DBL 78, which was acquired in June 2005. Constructionexpenditures for our tank vessel newbuilding program and rebuilding projects totaled$33.3 million in fiscal 2007, $20.7 million in fiscal 2006 and$16.8 million in fiscal 2005. Other capital expenditures of$14.8 million in fiscal 2007, $9.1 million in fiscal 2006 and$9.0 million in fiscal 2005 related primarily to re-powering of, andinstallation of coupling systems on, certain tugboats used with our newbuildtank barges, and expenditures related to upgrading the vessels acquired in December 2004.Additionally, in fiscal 2007 we completed rebuilding of one of our larger tankvessels. Capital expenditures made in the normal course of business aregenerally financed by cash from operations and, where necessary, borrowingsunder our credit agreement.

*FinancingCash Flows.**  *Netcash provided by financing activities was $22.1 million in fiscal 2007,$85.4 million in fiscal 2006, and $31.4 million in fiscal 2005. Duringthe year ended June 30, 2007, we increased our credit line borrowings by$43.1 million, increased borrowings on term loans by $14.9 million to financethe construction of new tank barges, repaid term loans by $7.7 million, andpaid $27.1 million in distributions to partners.

In fiscal 2006, our primary financing activities werethe issuance of $109.4 million in new term loans and $34.0 million in grossproceeds from the sale of 950,000 common units in October 2005. Theseproceeds were used in financing the Sea Coast acquisition and the otherinvesting activities described above. Additionally, we paid $36.8 million toredeem the principal balance of the Title XI bonds, and made $23.0 million ofdistributions to partners. We also amended our revolving credit agreement (see “—CreditAgreement” below) and increased our credit line borrowings by $6.9 million.

As a result of a restructuring of our financialagreement for the Title XI bonds in January 2004, we were required to makemonthly reserve fund deposits which were used to make semi-annual debt servicepayments. The principal portion of such deposits, which are reflected asprincipal payments to Title XI reserve funds, were $0.7 million and $1.6million for fiscal 2006, and 2005, respectively. When we redeemed the Title XIbonds in November 2005, the balance of the Title XI reserve funds,totaling $2.9 million which are reflected as proceeds from Title XI reservefunds under “Investing Cash Flows” above, was returned to us. For moreinformation, please read “—Title XI Borrowings” below.

During fiscal 2005, we increased our credit lineborrowings and term loans by a net of $36.8 million, primarily to financevessel acquisitions. We also paid $18.2 million in distributions to ourunitholders in fiscal 2005. In March 2005, we signed a new five-year $80.0million credit agreement with a syndicate of banks, which replaced ourthen-existing $47.0 million credit agreement, which was repaid and terminated. OnJune 1, 2005, we issued and sold 500,000 common units in a privateplacement for gross proceeds of $16.0 million.

*OilPollution Act of 1990.**  *Tankvessels are subject to the requirements of OPA 90. OPA 90 mandates that all single-hulltank vessels operating in U.S. waters be removed from petroleum and petroleumproduct transportation services at various times through January 1, 2015,and provides a schedule for the phase-out of the single-hull vessels based ontheir age and size. At June 30, 2007, approximately 71% of the 

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barrel-carrying capacityof our tank vessel fleet was double-hulled in compliance with OPA 90, and theremainder will be in compliance with OPA 90 until January 2015.

*Ongoing CapitalExpenditures.**  *Marinetransportation of refined petroleum products is a capital intensive business,requiring significant investment to maintain an efficient fleet and to stay inregulatory compliance. We estimate that, over the next five years, we willspend an average of approximately $20.5 million per year to drydock andmaintain our fleet. We expect drydocking and maintenance expenditures toapproximate $21.5 million in fiscal 2008. In addition, we anticipate thatwe will spend $1.0 million annually for other general capital expenditures.Periodically, we also make expenditures to acquire or construct additional tankvessel capacity and/or to upgrade our overall fleet efficiency. For a furtherdiscussion of maintenance and expansion capital expenditures, please read footnote3 to the table in “Selected Financial Data” in Item 6 of this report. Thefollowing table summarizes total maintenance capital expenditures, includingdrydocking expenditures, and expansion capital expenditures for the periodspresented (in thousands):

| ** **                                                                       | ** ** | **Years Ended June 30,** | ** ** |
|----------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                       | ** ** | **2007**                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| Maintenance  capital expenditures                                                |       | $                                       | 20,337     |   | $ | 13,753 |   | $ | 8,024 |   |
| Expansion capital  expenditures (including vessel and company acquisitions) |       | 25,960                                  |       | 98,073 |   | 39,337 |   |
| **Total capital expenditures**                                                   | ** ** | **$**                                   | **46,297** | ** ** | **$** | **111,826** | ** ** | **$** | **47,361** | ** ** |
| Construction of tank  vessels                                                    | ** ** | **$**                                   | **33,315** | ** ** | **$** | **20,702** | ** ** | **$** | **16,816** | ** ** |

 

Duringfiscal 2007, we took delivery of the following newbuild vessels: in June 2007,a 28,000-barrel tank barge, the DBL 22; in March 2007, a 100,000-barreltank barge, the DBL 104; in January 2007, a 28,000-barrel tank barge, theDBL 27; and in August 2006, a 28,000-barrel tank barge, the DBL 26. Additionally,we acquired five tugboats during the year. These tank barges and tugboats cost$40,124 in the aggregate. We have also entered into agreements with shipyardsfor the construction of additional new tank barges, as follows:

| **Vessels**                      | ** ** | **Expected Delivery**                                          |
|----------------------------------|------------|----------------------------------------------------------------|
| Three 28,000-barrel tank  barges |       | 1st Quarter fiscal 2008—3rd Quarter fiscal 2008 |
| Three 80,000-barrel tank  barges |       | 4th Quarter fiscal 2008—1st Quarter fiscal 2009 |
| Four 50,000-barrel tank barges   |       | 2nd Quarter fiscal 2010—2nd Quarter fiscal 2011 |

 

The barges listed above are expected to cost, in theaggregate and after the addition of certain special equipment, approximately$100.0 million, of which $13.3 million has been spent as of June 30, 2007.

Additionally, we intend to retire, retrofit or replace28 (including four chartered-in) single-hull tank vessels by December 2014,which at August 15, 2007 represented approximately 27% of ourbarrel-carrying capacity. The capacity of certain of these single-hulledvessels has already been effectively replaced by double-hulled vessels placedinto service in the past two years. We estimate that the current cost to replacethe remaining capacity with newbuildings and by retrofitting certain of ourexisting vessels will range from $80.0 million to $82.0 million. This capacitycan also be replaced by acquiring existing double-hulled tank vessels asopportunities arise. We evaluate the most cost-effective means to replace thiscapacity on an ongoing basis. In addition, we will deduct an additional $2.0million per year from the cash that we would otherwise distribute to ourunitholders to contribute to the replacement of the operating capacity of oursingle hull vessels when they phase-out under OPA 90 in January 2015.

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*LiquidityNeeds.**  *Ourprimary short-term liquidity needs are to fund general working capitalrequirements, distributions to unitholders, and drydocking expenditures whileour long term liquidity needs are primarily associated with expansion and othermaintenance capital expenditures. Expansion capital expenditures are primarilyfor the purchase of vessels, while maintenance capital expenditures includedrydocking expenditures and the cost of replacing tank vessel operatingcapacity. Our primary sources of funds for our short term liquidity needs arecash flows from operations and borrowings under our credit agreement, while ourlong term sources of funds are cash from operations, long term bank borrowingsand other debt or equity financings.

We believe that cash flows from operations andborrowings under our credit agreement, described under “—Credit Agreement”below, will be sufficient to meet our liquidity needs for the next 12 months.

*CreditAgreement.*   In March 2005, we entered into anew five-year $80.0 million revolving credit agreement with a syndicate ofbanks led by KeyBank National Association. The credit agreement replaced ourthen-existing $47.0 million revolving credit agreement, which was repaid andterminated. On October 18, 2005, to partially finance the acquisition ofSea Coast, we amended our credit agreement to increase the available borrowingsto $120.0 million, of which $77.0 million was drawn down to pay the cashportion of the purchase price. On November 29, 2005, to fund theredemption of its Title XI bonds (see “Title XI Borrowings” below), we furtheramended the credit agreement to increase the maximum borrowings to $155.0million. On April 3, 2006, we used the net proceeds from the issuance of$80.0 million in new term loans to repay outstanding borrowings under thecredit agreement, and further amended it to reduce the available borrowings, torelease certain vessels from the collateral pool, and to reduce certaincovenant requirements. During fiscal 2007, we further amended the creditagreement to add additional bank participants, increase the availableborrowings, amend certain financial covenants and reduce interest rates.

On August 14, 2007, we amended and restated thecredit agreement to provide for (1) an increase in availability to $175.0million under a senior secured revolving credit facility, which we refer to asthe revolving facility, with an extension of the term to seven years, to August 2014,(2) a $45.0 million 364-day senior secured revolving credit facility,which we refer to as the 364-day facility, (3) amendments to certainfinancial covenants and (4) a reduction in interest rate margins. Undercertain conditions, we have the right to increase the revolving facility by upto $75.0 million, to a maximum total facility amount of $250.0 million. Therevolving facility and the 364-day facility are collateralized by a firstperfected security interest in vessels having a total fair market value ofapproximately $275.0 million and certain equipment and machinery related tosuch vessels. On August 14, 2007, we borrowed $67.0 million under therevolving facility and $45.0 million under the 364-day facility to fund aportion of the purchase price of Smith Maritime, Go Big and Sirius Maritime. Asof August 14, 2007, we had approximately $166.4 million outstanding underthe revolving facility and $45.0 million outstanding under the 364-dayfacility.

Thefollowing table summarizes the rates of interest and commitment fees for therevolving facility and 364-day facility under our credit agreement:

| **Ratio of Total Funded Debt to EBITDA** | ** ** | ** ** | ** ** | **LIBOR  Margin** | ** ** | **Base Rate  Margin** | ** ** | **Commitment  Fee** | ** ** |
|------------------------------------------------------------------------|------------|------------|------------|-------------------|------------|----------------------------|------------|---------------------|------------|
| Less than 2.00 :  1.00                                                 |       |       | 0.70       | %                 |       |                       | 0.00       | %                   |       |   | 0.150 | % |   |
| Greater than or equal to 2.00 : 1.00 and less than  2.50 : 1.00        |       |       | 0.85       | %                 |       |                       | 0.00       | %                   |       |   | 0.150 | % |   |
| Greater than or equal to 2.50 : 1.00 and less than  3.00 : 1.00        |       |       | 1.10       | %                 |       |                       | 0.00       | %                   |       |   | 0.200 | % |   |
| Greater than or equal to 3.00 : 1.00 and less than  3.50 : 1.00        |       |       | 1.25       | %                 |       |                       | 0.00       | %                   |       |   | 0.200 | % |   |
| Greater than or  equal to 3.50 : 1.00                                  |       |       | 1.50       | %                 |       |                       | 0.25       | %                   |       |   | 0.300 | % |   |

 

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Interest on a base rate loan is payable monthly overthe five-year term of the agreement, outstanding principal amounts under the 364-dayfacility are due on August 12, 2008. Interest on a LIBOR-based loan isdue, at our election, one, two or three months after such loan is made. Outstandingprincipal amounts are due upon termination of the credit agreement.

Loan proceeds under the credit agreement may be usedfor any purpose in the ordinary course of business, including vesselacquisitions, ongoing working capital needs and distributions. Amounts borrowedand repaid may be re-borrowed. Borrowings made for working capital purposesmust be reduced to zero for a period of at least 15 consecutive days once eachyear.

The creditagreement contains covenants that include, among others:

·       themaintenance of the following financial ratios (all as defined in theagreement):

·        EBITDAto fixed charges of at least 1.85 to 1.00,

·        maximumfirst lien funded debt to EBITDA of no greater than 4.25 to 1.00 until the “AdjustmentDate,” defined as the earlier of (i) December 31, 2007 or (ii) paymentof the 364-Day Facility and the Bridge Facility using other thansecond-priority lien or subordinated debt. After the Adjustment Date, the ratiosteps down to 4.00 to 1.00; and

·        totalfunded debt to EBITDA of no greater than 4.75 to 1.00 until the AdjustmentDate, and  thereafter stepping down to4.00 to 1.00;

·       restrictionson creating liens on or disposing of the vessels collateralizing the creditagreement, subject to permitted exceptions;

·       restrictionson merging and selling assets outside the ordinary course of business;

·       prohibitionson making distributions to limited or general partners of ours during thecontinuance of an event of default; and

·       restrictionson transactions with affiliates and materially changing our business.

The credit agreementcontains customary events of default. If a default occurs and is continuing, wemust repay all amounts outstanding under the agreement.

*Other Term Loans*

On August 14, 2007, we entered into a bridge loanfacility for up to $60.0 million with an affiliate of KeyBank NationalAssociation. The bridge loan facility bears interest at a rate per annum equalto, at our option, (a) the greater of the prime rate and the federal fundsrate plus 0.25% or (b) the 30-day LIBOR plus a margin of 1.50%. Interestis due on a monthly basis. The bridge loan facility matures on November 12,2007. The bridge loan facility is not collateralized until October 13,2007, and thereafter will be collateralized by a second perfected securityinterest in the vessels collateralizing the revolving facility and the 364-dayfacility. During an event of default, the bridge loan facility will bearinterest at an annual rate of LIBOR plus 7.5%. On August 14, 2007, we borrowed$60.0 million under the bridge loan facility in connection with the SmithMaritime, Go Big and Sirius Maritime acquisition. The bridge loan facilitycontains the same covenants as are contained in the credit agreement as well ascustomary events of default. If a default occurs and is continuing, includingfailure by us to make payment in full by November 12, 2007, the lendersunder the bridge loan facility may require us to repay all amounts outstandingunder the bridge loan facility.

Also on August 14, 2007 in connection with theSmith Maritime, Go Big and Sirius Maritime acquisition, we assumed two termloans totaling $23.6 million. The first, in the amount of $19.5 million, bearsinterest at the same LIBOR-based variable rate as the credit agreement (seetable under “Credit 

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Agreement” above) and isrepayable in equal monthly installments of $147, plus interest, until August 2018.The second, in the amount of $4.0 million, bears interest at LIBOR plus 1.0%and is repayable in monthly installments ranging from $59 to $81, plusinterest, until May 2012. The loans are collateralized by three tankbarges. We also agreed with the related lending institution to assume the twoexisting interest rate swaps relating to these two loans. The LIBOR-based, variable interest payments onthese loans have been swapped for fixed payments at an average rate of 5.44%,over the same terms as the loans.

On April 3, 2006, weentered into an agreement with a lending institution to borrow $80.0 million,for which we pledged six tugboats and six tank barges as collateral. We used theproceeds of these loans to repay indebtedness under our credit agreement. Borrowings are represented by six notes whichhave been assigned to other lending institutions. These loans bear interest ata rate equal to LIBOR on one-month Eurodollar deposits plus 1.40%, and arerepayable in 84 monthly installments with the remaining principal payable atmaturity. The agreement contains certain prepayment premiums. Borrowingsoutstanding on these loans totaled $75.9 million as of June 30, 2007. Alsoon April 3, 2006, we entered into an agreement with the lendinginstitution to swap the one-month, LIBOR based, variable interest payments onthe $80.0 million of loans for a fixed payment at a rate of 5.2275%, over thesame terms as the loans. This swap will result in a fixed interest rate on theNotes of 6.6275% for their seven-year term. This swap contract has beendesignated as a cash flow hedge. Therefore, the unrealized gains and lossesduring fiscal 2007 and 2006 resulting from the change in fair value of the swapcontract have been reflected in other comprehensive income. The fair value ofthe swap contract of $446 and $1,136 as of June 30, 2007 and 2006,respectively, is included in other assets in the consolidated balance sheet.

On December 19, 2005, one of our subsidiariesentered into a seven year Canadian dollar term loan to refinance purchase of anintegrated tug-barge unit. The proceeds of $13.0 million were used to repayborrowings under the amended revolving credit agreement which had been used tofinance purchase of the unit. The loan bears interest at a fixed rate of 6.59%,is repayable in 84 monthly installments of CDN 136,328 with the remainingprincipal amount payable at maturity, and is collateralized by the relatedtug-barge unit and one other tank barge. Borrowings outstanding on this loantotal $13.4 million as of June 30, 2007.

In May 2006, we entered into an agreement toborrow up to $23.0 million to partially finance construction of two 28,000-barreland one 100,000-barrel tank barges. The third and final vessel wasdelivered, and the note termed-out, during the fourth quarter of fiscal 2007. Theloan bears interest at 30-day LIBOR plus 1.40%, and is repayable, plusaccrued interest, over seven years, with the remaining principal amount payableat maturity. The loan is collateralized by the related tank barges and twoother tank vessels. Borrowings outstanding on this loan total $20,321 at June 30,2007.

In March 2005, we entered into an agreement toborrow up to $11.0 million to partially finance construction of a 100,000-barreltank barge. The loan bears interest at 30-day LIBOR plus 1.05%, and isrepayable in monthly principal installments of $65,500 with the remainingprincipal amount payable at maturity. The loan is collateralized by the relatedtank barge. Borrowings outstanding on this loan totaled $9.9 million at June 30,2007.

In March 2005 we entered into a three-year termloan in the amount of $11,700. The loan bears interest at a fixed rate of 6.25%annually, and is repayable in monthly principal installments of $70 with theremaining principal amount payable at maturity. The loan is collateralized bythree vessels and the proceeds were used to refinance an existing term loan. Borrowingsoutstanding on this loan total $9,821 at June 30, 2007, but it isclassified as a long-term liability because we intend to refinance it with ourcredit agreement.

In June 2005, we entered into an agreement toborrow up to $18.0 million to finance the purchase of an 80,000-barreldouble-hull tank barge and construction of two 28,000-barrel double-hulltank barges. The 

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loan bears interest at 30-dayLIBOR plus 1.71%, and is repayable in monthly principal installments of$107,143 with the remaining principal amount payable at maturity. The loan iscollateralized by the related tank barges. Borrowings outstanding on this loanwere $16.6 million at June 30, 2007.

*TitleXI Borrowings.**  *OnJune 7, 2002, to provide financing for four newbuild tank vessels, weprivately placed $40.4 million of bonds (“Title XI bonds”), which wereguaranteed by the Maritime Administration of the U.S. Department ofTransportation, or MARAD, pursuant to Title XI of the Merchant Marine Act of1936. The proceeds of $39.1 million, net of certain closing fees, weredeposited in a reserve account with the U.S. Department of the Treasury andused to fund construction of the related vessels. On November 29, 2005, weredeemed the outstanding $36.8 million principal balance of bonds, paid $0.8million of accrued interest, and made a make-whole payment of $4.0 million asrequired under the trust indenture. We funded the redemption using funds fromour revolving credit agreement. After writing off $2.7 million in unamortizeddeferred financing costs, and after costs and expenses relating to thetransaction, we recorded a loss on reduction of debt of $6.9 million. Retirementof the Title XI bonds improved our borrowing flexibility, and eliminatedcertain restrictive covenants, collateral requirements, and working capitalconstraints.

***Restrictive Covenants.****  *The agreements governing our credit facility and termloans contain restrictive covenants that, among others, (a) prohibit distributionsunder defined events of default, (b) restrict investments and sales ofassets, and (c) require us to adhere to certain financial covenants,including defined ratios of fixed charge coverage and funded debt to EBITDA(earnings before interest, taxes, depreciation and amortization and loss onreduction of debt, as defined).

*Issuancesof Common Units.**  *On October 14,2005, we sold 950,000 common units in a public offering under our shelfregistration statement. The net proceeds of $33.1 million from the offering,after payment of underwriting discounts and commissions but before payment ofexpenses, were used to repay borrowings under our credit agreement. On October 18,2005, we issued 125,000 units to the seller in connection with our acquisitionof Sea Coast. On June 1, 2005, we issued and sold 500,000 common units ina private placement for proceeds of $16.0 million, before expenses associatedwith the offering. A shelf registration statement with respect to the Sea Coastissuance and the June 2005 private placement was declared effective by theSecurities and Exchange Commission in February 2006. On August 14,2007, we issued 250,000 common units to certain sellers in connection with ouracquisition of Smith Maritime, Go Big and Sirius Maritime.

*Contractual Obligationsand Contingencies.**  *Ourcontractual obligations at June 30, 2007 consisted of the following (inthousands):

**Payments Due byPeriod**

| ** **                                                   | ** ** | **Total** | ** **  | **Less than  1 Year** | ** ** | **2-3 Years** | ** ** | **4-5 Years** | ** ** | **After   5 Years** | ** ** |
|--------------------------------------------------------------|------------|-----------|-------------|---------------------------------|------------|--------------------|------------|--------------------|------------|-------------------------------|------------|
| Long-term  debt and capital lease obligations                |       | $         | 244,287     |                            |       | $                  | 18,466     |               |       | $                             | 18,170     |   | $ | 114,325 |   | $ | 93,326 |   |
| Interest on  long-term debt and capital lease obligations(2) |       | 29,729    |        |                            | 6,379      |               |       | 10,747             |       | 9,186                         |       | 3,417 |   |
| Operating lease  obligations                                 |       | 7,614     |        |                            | 3,093      |               |       | 2,836              |       | 717                           |       | 968 |   |
| Purchase  obligations(1)                                     |       | 84,825    |        |                            | 35,304     |               |       | 38,521             |       | 11,000                        |       | — |   |
|                                                         | ** ** | **$**     | **366,455** | ** **                      | ** ** | **$**              | **63,242** |               | ** ** | **$**                         | **70,274** | ** ** | **$** | **135,228** | ** ** | **$** | **97,711** | ** ** |

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(1)          Capital expendituresrelating to shipyard payments for the construction of three new 28,000-barreldouble-hull tank barges, three new 80,000-barrel double-hull tank bargesand four new 50,000-barrel double-hull tank barges.

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(2)          Interest is only on fixedrate debt. See Item 7A—Quantitative and Qualitative Disclosures About MarketRisk—for discussion of interest on variable rate debt.

Certain executive officers of K-Sea General Partner GPLLC have entered into employment agreements with K-Sea Transportation Inc.,our indirect wholly owned corporate subsidiary. Each of these employmentagreements had an initial term of one year, which is automatically extended forsuccessive one-year terms unless either party gives 30 days written noticeprior to the end of the term that such party desires not to renew theemployment agreement. The employment agreements currently provide for anaggregate base annual salary of $930,000. In addition, each employee iseligible to receive an annual bonus award based upon consideration of ourpartnership performance and individual performance. If the employee’semployment is terminated without cause or if the employee resigns for goodreason, the employee will be entitled to severance in an amount equal to thegreater of (a) the product of 1.3125 (1.75 multiplied by .75)multiplied by the employee’s base salary at the time of termination orresignation and (b) the product of 1.75 multiplied by the remaining termof the employee’s non-competition provisions multiplied by the employee’s basesalary at the time of termination or resignation.

We are a party to various claims and lawsuits in theordinary course of business for monetary relief arising principally frompersonal injuries, collision or other casualty and to claims arising undervessel charters. All of these personal injury, collision and casualty claimsare fully covered by insurance, subject to deductibles ranging from $25,000 to$100,000. We accrue on a current basis for estimated deductibles we expect topay.

The European Union is currently working toward a newdirective for the insurance industry, called “Solvency 2”, that is expected tobecome law within three to four years and require increases in the level offree, or unallocated, reserves required to be maintained by insurance entities,including protection and indemnity clubs that provide coverage for the maritimeindustry. The West of England Ship Owners Insurance Services Ltd. (“WOE”),a mutual insurance association based in Luxembourg, provides our protection andindemnity insurance coverage and would be impacted by the new directive. Inanticipation of these new regulatory requirements, the WOE has assessed itsmembers an additional capital call which it believes will contribute toachievement of the projected required free reserve increases. Our capital call,payable during calendar year 2007, will be approximately $1.1 million, of which$0.7 million was paid in February 2007. A further request for capital maybe made in the future; however, the amount of such further assessment, if any,cannot be reasonably estimated at this time. As a shipowner member of the WOE,we have an interest in the WOE’s free reserves, and therefore have recorded theadditional $1.1 million capital call as an investment, at cost, subject toperiodic review for impairment. This amount is included in other assets in the June 30,2007 consolidated balance sheet.

EW Transportation Corp., a predecessor to ourpartnership, and many other marine transportation companies operating in NewYork have come under audit with respect to the New York State PetroleumBusiness Tax (“PBT”), which is a tax on vessel fuel consumed while operating inNew York State territorial waters. An industry group in which we and EWTransportation Corp. participate has come to a final agreement with the NewYork taxing authority on a calculation methodology for the PBT. Effective January 1,2007, we and the other marine transportation companies began rebilling this taxto customers. For applicable periods prior to 2007, we accrued an estimatedliability using the agreed methodology. In accordance with the agreementsentered into in connection with our initial public offering, any liabilityresulting from the PBT prior to January 14, 2004 (the effective date ofthe initial public offering) is a retained liability of the predecessor.

As discussed in note 4 to our financial statements,one of our tank barges struck submerged debris in the U.S. Gulf of Mexico,causing significant damage which resulted in the barge eventually capsizing. Atthe time of the incident, the barge was carrying approximately 120,000 barrelsof No. 6 fuel oil, a heavy oil product. In January 2006, submergedoil recovery operations were suspended and a monitoring program, 

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which sought to determineif any recoverable oil could be found on the ocean floor, was begun. In February 2007,the Coast Guard agreed to end the cleanup and response phase, including ourobligation to conduct any further monitoring of the area around the spill site.Our insurers responded to the pollution-related costs and environmental damagesresulting from the incident, paying approximately $65 million less $60,000 intotal deductibles, and are pursuing their own financial recovery efforts. Ourincident response effort is complete. We are not aware of any further recovery,cleanup or other costs. However, if any such costs are incurred, they areexpected to be paid by the insurers.

EW Transportation LLC, anaffiliate, and its predecessors have been named, together with a large numberof other companies, as co-defendants in 39 civil actions by various parties,including former employees, alleging unspecified damages from past exposure toasbestos and second-hand smoke aboard some of the vessels that it contributedto us in connection with our initial public offering. EW Transportation LLC andits predecessors have been dismissed from 38 of these lawsuits for an aggregatesum of approximately $47,000 and are seeking to settle the other case. We maybe subject to litigation in the future involving these plaintiffs and othersalleging exposure to asbestos due to alleged failure to properly encapsulatefriable asbestos or remove friable asbestos on our vessels, as well as forexposure to second-hand smoke and other matters.

**Inflation**

During the last threeyears, inflation has had a relatively minor effect on our financial results.Our contracts generally contain escalation clauses whereby certain costincreases, including labor and fuel, can be passed through to our customers.

**Related PartyTransactions**

We lease our Staten Island office and pier facilitiesfrom, and charter certain vessels to, affiliates of an employee. Additionally,we utilize one of these affiliates for tank cleaning services. Please readnote 8 to our audited consolidated financial statements included elsewherein this report.

KSP Investors A L.P., KSPInvestors B L.P., and KSP Investors C L.P. and their controlled affiliates haveagreed to indemnify us for claims associated with certain retained liabilities.For more information regarding the indemnification obligations and otherrelated party transactions, please read “Certain Relationships and RelatedTransactions” in Item 13 of this report.

**Seasonality**

We operate our tankvessels in markets that exhibit seasonal variations in demand and, as a result,in charter rates. For example, movements of clean oil products, such as motorfuels, generally increase during the summer driving season. In certain regions,movements of black oil products and distillates, such as heating oil, generallyincrease during the winter months, while movements of asphalt productsgenerally increase in the spring through fall months. Unseasonably cold wintersresult in significantly higher demand for heating oil in the northeasternUnited States. Meanwhile, our operations along the West Coast and in Alaskahistorically have been subject to seasonal variations in demand that vary fromthose exhibited in the East Coast and Gulf Coast regions. The summer drivingseason can increase demand for automobile fuel in all of our markets and,accordingly, the demand for our services. A decline in demand for, and level ofconsumption of, refined petroleum products could cause demand for tank vesselcapacity and charter rates to decline, which would decrease our revenues andcash flows. Our West Coast operations provide seasonal diversificationprimarily as a result of service to our Alaskan markets, which experience thegreatest demand for petroleum products in the summer months, due to weatherconditions. Considering the above, we believe seasonal demand for our servicesis lowest during our third fiscal quarter.  We do not see any significant seasonality inthe Hawaiian market.

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**CRITICAL ACCOUNTINGPOLICIES**

The accounting treatmentof a particular transaction is governed by generally accepted accountingprinciples, or GAAP, and, in certain circumstances, requires us to makeestimates, judgments and assumptions that we believe are reasonable based uponinformation available. We base our estimates, judgments and assumptions onhistorical experience and known facts that we believe to be reasonable underthe circumstances. Actual results may differ from these estimates underdifferent assumptions and conditions. We believe that, of our significantaccounting policies discussed in note 2 to our audited consolidatedfinancial statements, the following may involve a higher degree of judgment.

**Revenue Recognition**

We earn revenue undercontracts of affreightment, voyage charters, time charters and bareboatcharters. For contracts of affreightment and voyage charters, revenue isrecognized based upon the relative transit time in each period, with expensesrecognized as incurred. Although contracts of affreightment and certaincontracts for voyage charters may be effective for a period in excess of oneyear, revenue is recognized over the transit time of individual voyages, whichare generally less than ten days in duration. For time charters and bareboatcharters, revenue is recognized ratably over the contract period, with expensesrecognized as incurred. Estimated losses on contracts of affreightment andcharters are accrued when such losses become evident.

**Depreciation**

Vessels and equipment arerecorded at cost, including capitalized interest where appropriate, anddepreciated using the straight-line method over the estimated useful lives ofthe individual assets as follows: tank vessels—ten to twenty-five years;tugboats—ten to twenty years; and pier and office equipment—five years. Forsingle-hull tank vessels, these useful lives are limited to the remainingperiod of operation prior to mandatory retirement as required by OPA 90. Alsoincluded in vessels are drydocking expenditures that are capitalized andamortized over three years. Major renewals and betterments of assets are capitalizedand depreciated over the remaining useful lives of the assets. Maintenance andrepairs that do not improve or extend the useful lives of the assets areexpensed. To date, our experience confirms that these policies are reasonable,although there may be events or changes in circumstances in the future thatindicate the recovery of the carrying amount of a vessel might not be possible.Examples of events or changes in circumstances that could indicate that therecoverability of a vessel’s carrying amount should be assessed might include achange in regulations such as OPA 90, or continued operating losses, orprojections thereof, associated with a vessel or vessels. If events or changesin circumstances as set forth above indicate that a vessel’s carrying amountmay not be recoverable, we would then be required to estimate the undiscountedfuture cash flows expected to result from the use of the vessel and itseventual disposition. If the sum of the undiscounted expected future cash flowsis less than the carrying amount of the vessel, we would recognize animpairment loss to the extent the carrying value exceeds its fair value byappraisal. Our assumptions and estimates would include, but not be limited to,the estimated fair market value of the assets and their estimated future cashflows, which are based on additional assumptions such as asset utilization,length of service of the asset and estimated salvage values. Although webelieve our assumptions and estimates are reasonable, deviations from the assumptionsand estimates could produce a materially different result.

**Amortization ofDrydocking Expenditures**

Drydocking expendituresare capitalized and amortized over three years. Drydocking of vessels isrequired by both the U.S. Coast Guard and by the applicable classificationsociety, which in our case is the American Bureau of Shipping. Such drydockingactivities include, but are not limited to, the inspection, refurbishment andreplacement of steel, engine components, tailshafts, mooring equipment and other

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parts ofthe vessel. Amortization of drydocking expenditures is included in depreciationand amortization expense.

**Accounts Receivable**

We extend credit to ourcustomers in the normal course of business. We regularly review our accounts,estimate the amount of uncollectible receivables each period, and establish anallowance for uncollectible amounts. The amount of the allowance is based onthe age of unpaid amounts, information about the current financial strength ofcustomers, and other relevant information. Estimates of uncollectible amountsare revised each period, and changes are recorded in the period they becomeknown. Historically, credit risk with respect to our trade receivables hasgenerally been considered minimal because of the financial strength of ourcustomers.

**Deferred IncomeTaxes**

We provide deferred taxesfor the tax effects of differences between the financial reporting and taxbases of assets and liabilities at enacted tax rates in effect in thejurisdictions where we operate for the years in which the differences areexpected to reverse. A valuation allowance is provided, if necessary, fordeferred tax assets that are not expected to be realized.

**New AccountingPronouncements**

On June 2, 2005, the FASB issued FASB Statement No. 154,“Accounting Changes and Error Corrections-a replacement of APB No. 20 andFAS No. 3” (“FAS 154”). FAS 154 replaces APB Opinion No. 20, “AccountingChanges” (“APB 20”) and FASB Statement No. 3, “Reporting AccountingChanges in Interim Financial Statements” and changes the requirements for theaccounting for and reporting of a change in accounting principle. FAS 154applies to all voluntary changes in accounting principle. It also applies tochanges required by an accounting pronouncement in the unusual instance thatthe pronouncement does not include specific transition provisions. When apronouncement includes specific transition provisions, those provisions shouldbe followed. We adopted FAS 154 as of July 1, 2006, and such adoption didnot have a significant impact on our financial position, results of operationsor cash flows.

On February 16, 2006 the FASB issued FASBStatement No. 155, “Accounting for Certain Hybrid Financial Instruments,an amendment of FASB Statements No. 133 and 140” (“FAS 155”). FAS 155amends FASB Statement No. 133, “Accounting for Derivative Instruments andHedging Activities” and FASB Statement No. 140, “Accounting for Transfersand Servicing of Financial Assets and Extinguishments of Liabilities”. We arerequired to adopt FAS 155 as of July 1, 2007, and do not expect that suchadoption will have a significant impact on our financial position, results ofoperations or cash flows.

In June 2006, the FASB issued FASB InterpretationNo. 48, “Accounting for Uncertainty in Income Taxes—an interpretation ofFASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting foruncertainty in income taxes recognized in an enterprise’s financial statementsin accordance with FASB Statement No. 109, “Accounting for Income Taxes”. FIN48 prescribes a recognition threshold and measurement attribute for financialstatement recognition and measurement of a tax position taken or expected to betaken in a tax return. FIN 48 also provides guidance on derecognition,classification, interest and penalties, accounting in interim periods,disclosure, and transition. FIN 48 is effective for our fiscal year beginning July 1,2007, and we are currently analyzing its impact, if any.

In September 2006, the FASB issued FASB StatementNo. 157, “Fair Value Measurements” (“FAS 157”). FAS 157 defines fairvalue, establishes a framework for measuring fair value in generally acceptedaccounting principles, and expands disclosures about fair value measurements. FAS157 applies 

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under other accountingpronouncements that require or permit fair value measurements. FAS 157 iseffective for fiscal years beginning after November 15, 2007, and we arecurrently analyzing its impact, if any.

In September 2006,the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108,“Considering the Effects of Prior Year Misstatements when QuantifyingMisstatements in Current Year Financial Statements” (“SAB 108”). SAB 108provides guidance on quantifying and evaluating the materiality of unrecordedmisstatements. SAB 108 does not require prior period restatement as a result ofadopting the new guidance if management properly applied its previous approachto assessing unrecorded misstatements and all relevant qualitative factors wereconsidered. The cumulative effect of the initial application of SAB 108, ifany, would be reported in the carrying amounts of assets and liabilities at thebeginning of the year, with an offsetting adjustment to the beginning balanceof retained earnings. The nature and amount of each of the individualmisstatements corrected would be required to be disclosed. SAB 108 is effectivefor the first fiscal year ending after November 15, 2006. We adopted SAB108 for the fiscal year ended June 30, 2007, and such adoption did nothave a significant impact on our financial position, results of operations orcash flows.

**ITEM 7A.**        QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Our primary market risk is the potential impact ofchanges in interest rates on our variable rate borrowings. After consideringthe interest rate swap agreement discussed below, as of June 30, 2007approximately $100.4 million of our long- term debt bears interest at fixedinterest rates ranging from 6.25% to 6.63%. Borrowings under our creditagreement and certain other term loans, totaling $143.9 million at June 30,2007, bear interest at a floating rate based on LIBOR, which will subject us toincreases or decreases in interest expense resulting from movements in thatrate. Based on our total outstanding floating rate debt as of June 30,2007, the impact of a 1% change in interest rates would result in a change ininterest expense, and a corresponding impact on income before income taxes, ofapproximately $1.4 million annually.

We utilize an interest rate swap to reduce ourexposure to market risk from changes in interest rates. The primary objectiveof this contract is to reduce the aggregate risk of higher interest costsassociated with variable rate debt. The interest rate swap contract wecurrently hold has been designated as a cash flow hedge and, accordingly, gainsand losses resulting from changes in the fair value of this contract arerecognized as other comprehensive income as required by SFAS No. 133. Weare exposed to credit related losses in the event of non-performance bycounterparties to these instruments, however the counterparties are majorfinancial institutions and we consider such risk of loss to be minimal. We donot hold or issue derivative financial instruments for trading purposes.

As of June 30, 2007,we had one outstanding interest rate swap agreement which expires on May 1,2013 concurrently with the hedged term loans. As of such date, the notionalamount of the swap was $75.9 million, we are paying a fixed rate of 6.63%, andwe are receiving a variable interest rate of 6.72%. The fair value of the swap contract was $0.4 million as of June 30,2007.

**ITEM 8.**                FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA.

The financial statementsset forth on pages F-1 to F-26 of this report are incorporatedherein by reference.

**ITEM 9.**                CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

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**ITEM 9A.**        CONTROLSAND PROCEDURES.

***Evaluation of Disclosure Controls and Procedures***

In accordance withExchange Act Rules 13a-15 and 15d-15, we carried out an evaluation,under the supervision and with the participation of management, including ourChief Executive Officer and Chief Financial Officer, of the effectiveness ofour disclosure controls and procedures as of the end of the period covered bythis report. Based on that evaluation, our Chief Executive Officer and ChiefFinancial Officer concluded that our disclosure controls and procedures wereeffective as of June 30, 2007.

***Changes in Internal Control Over Financial Reporting***

There has been no changein our internal control over financial reporting that occurred during the threemonths ended June 30, 2007 that has materially affected, or is reasonablylikely to materially affect, our internal control over financial reporting.

***Management’s Report on Internal Control Over FinancialReporting***

See page F-2 ofthis report for Management’s Report on Internal Control Over FinancialReporting.

**ITEM 9B.**       OTHERINFORMATION.

None.

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**PART III**

**ITEM 10.**         DIRECTORS,EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

K-Sea General Partner GP LLC, as the general partnerof K-Sea General Partner L.P., our general partner, manages our operations andactivities. Our general partner is not elected by our unitholders and is notsubject to re-election on a regular basis. Unitholders are not entitled toelect the directors of K-Sea General Partner GP LLC or directly or indirectlyparticipate in our management or operation.

Setforth below is information concerning the directors and executive officers ofK-Sea General Partner GP LLC as of September 7, 2007. Executive officersand directors are elected for one-year terms.

| Name                  | ** ** | ** ** | ** ** | **Age**                                          | ** ** | **Position with K-Sea General Partner  GP LLC** |
|-----------------------|------------|------------|------------|--------------------------------------------------|------------|-------------------------------------------------|
| James J. Dowling      |       | 61         |       | Chairman of the Board                            |
| Timothy J. Casey      |       | 46         |       | President, Chief  Executive Officer and Director |
| Anthony S. Abbate     |       | 67         |       | Director                                         |
| Barry J. Alperin      |       | 67         |       | Director                                         |
| Brian P. Friedman     |       | 51         |       | Director                                         |
| Frank Salerno         |       | 48         |       | Director                                         |
| John J. Nicola        |       | 53         |       | Chief Financial Officer                          |
| Thomas M. Sullivan    |       | 48         |       | Vice President,  Operations                      |
| Richard P. Falcinelli |       | 46         |       | Vice President,  Administration and Secretary    |
| Gregory J. Haslinsky  |       | 44         |       | Vice President, Sales  and Marketing             |
| Charles Kauffman      |       | 56         |       | Vice President,  Corporate Development           |

 

*JamesJ. Dowling*has served as our Chairman of the Boardsince July 2003, has served as Chairman of the Board of EW TransportationLLC (formerly K-Sea Transportation LLC) since January 2002 and has servedas a director of EW Transportation LLC since its formation in April 1999.Mr. Dowling has been a Managing Director of Jefferies Capital Partners, aprivate investment firm, since January 2002, and is a director of variousprivate companies in which Jefferies Capital Partners has an interest. JefferiesCapital Partners is the manager of Furman Selz Investors II L.P. and itsaffiliated entities, principal owners of our general partner.

*TimothyJ. Casey*has served as our President, Chief ExecutiveOfficer and Director since July 2003. Mr. Casey has served asPresident, Chief Executive Officer and Director of EW Transportation LLC since April 1999.Mr. Casey is also a board member for American Waterways Operators and TheSeamen’s Church Institute.

*AnthonyS. Abbate*has served as a Director since February 2004.Mr. Abbate was President, Chief Executive Officer and a director ofInterchange Financial Services Corporation, a bank holding company, since 1984until his retirement in 2007 and President, Chief Executive Officer and a directorof its principal subsidiary, Interchange Bank, from 1981 until his retirementin 2007. In April 2007, Mr. Abbate joined the Board of Directors ofSussex Bancorp, a bank holding company.

*BarryJ. Alperin* has served as a Director since February 2004.Mr. Alperin is a business consultant who retired from Hasbro Inc. in1996 after 11 years in various senior executive positions, including ViceChairman and Director. Mr. Alperin is currently on the board of HenrySchein, Inc., a distributor of healthcare products to office-basedpractitioners, and The Hain Celestial Group, Inc., a natural and organicbeverage, snack, specialty food and personal care products company.

*BrianP. Friedman* has served as a director since July 2003.Since 1997, Mr. Friedman has been President of Jefferies Capital Partners,a private investment firm. Mr. Friedman also serves as Chairman of theExecutive Committee of Jefferies & Company, Inc., a globalsecurities and investment banking firm. Mr. Friedman serves as a directorof Jefferies Group, Inc. As a result of his management of various private 

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equity funds and thesignificant equity positions those funds hold in their portfolio companies, Mr. Friedmanserves on several boards of directors of private portfolio companies.

*FrankSalerno*has served as a Director since February 2004.Mr. Salerno has served as a director for WisdomTree Investments, Inc.(formerly known as Index Development Partners) since July 2005 and as adirector for Crystal International Travel Group since April 2006. From mid-1999until his retirement in February 2004, Mr. Salerno was ManagingDirector and Chief Operating Officer of Merrill Lynch Investment Advisors—AmericasInstitutional Division, an investment advisory company.

*JohnJ. Nicola*has served as our Chief Financial Officersince July 2003, and has served as Chief Financial Officer of EWTransportation LLC since July 2000. Mr. Nicola was employed from November 1993to July 2000 by Maersk Sealand, a container shipping company, in varioussenior financial management roles, including Chief Financial Officer of Maersk’sEast Coast and Gulf terminal operating subsidiary. Mr. Nicola is aCertified Public Accountant and a member of the American Institute of CertifiedPublic Accountants.

*ThomasM. Sullivan*has served as our Vice President ofOperations since July 2003. Mr. Sullivan served as Vice President ofOperations for EW Transportation LLC since April 1999. Mr. Sullivanalso served as Vessel Supervisor for EW Transportation LLC’s predecessor from March 1995until April 1999.

*RichardP. Falcinelli* has served as our Vice President ofAdministration and Secretary since July 2003. Mr. Falcinelli hasserved as Vice President of Administration and Secretary of EW TransportationLLC since April 1999.

*GregoryJ. Haslinsky*has served as our Vice President, Salesand Marketing since October 2005 and has been employed by K-SeaTransportation since December 1999 in various sales capacities. Mr. Haslinskywas employed from November 1988 to November 1999 by Maritrans, amarine transportation company, holding various sales and marketing positionswithin the organization.

*Charles Kauffman*has served as our Vice President, Corporate Development since the acquisitionof Sea Coast Transportation in October 2005. Mr. Kauffman was employedfrom February 1984 to October 2005 by Saltchuk Resources Inc., aprivately held maritime company, where he held various senior managementpositions, including President of Sea Coast Transportation since July 2002.

**Meetings andCommittees of the Board of Directors**

***Meetings***

K-Sea General Partner GPLLC’s board of directors held six meetings during fiscal 2007. During fiscal2007, each director attended at least 75% of the aggregate of (1) thetotal number of meetings of the board of directors of K-Sea General Partner GPLLC and (2) the total number of meetings held by all committees of suchboard on which he served.

***Audit Committee***

K-Sea General Partner GP LLC has a standing auditcommittee consisting of Messrs. Abbate, Alperin (Chairman) and Salerno. Theboard of directors of K-Sea General Partner GP LLC has determined that allmembers of the audit committee are independent within the meaning of thelisting standards of the New York Stock Exchange and the applicable rules ofthe Securities and Exchange Commission. In addition, the board of directors ofK-Sea General Partner GP LLC has determined that Mr. Abbate is an auditcommittee financial expert within the meaning of the rules of theSecurities and Exchange Commission.

The primary responsibilities of the audit committeeare to assist the board of directors of K-Sea General Partner GP LLC inoverseeing (1) the integrity of our financial statements, (2) ourindependent 

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registered publicaccounting firm’s qualifications, independence, and performance, (3) theeffectiveness of our internal controls and procedures and our internal auditfunction, and (4) our compliance with legal and regulatory requirements.The audit committee has the sole authority to appoint, retain and terminate ourindependent registered public accounting firm, which reports directly to theaudit committee.

The audit committee hasestablished procedures for the receipt, retention and treatment of complaintswe receive regarding accounting, internal accounting controls or auditingmatters and the confidential, anonymous submission by our employees of concernsregarding questionable accounting or auditing matters.

***Compensation Committee***

K-Sea General Partner GPLLC has a standing compensation committee consisting of Messrs Alperin, Dowlingand Friedman. The compensation committee, among other tasks, determines andapproves the chief executive officer’s compensation, makes recommendations tothe board with respect to other executive officer compensation, and reviewsfrom time to time the compensation and benefits of non-employee directors.

***Conflicts Committee***

K-Sea General Partner GPLLC has a standing conflicts committee consisting of Messrs. Abbate,Alperin and Salerno. The conflicts committee reviews specific matters that theboard of directors of K-Sea General Partner GP LLC believes may involveconflicts of interest and takes such other action as may be required under theterms of our partnership agreement.

**DirectorIndependence**

For information ondirector independence, please read “Item 13. Certain Relationships and RelatedTransactions, and Director Independence.”

**Policies andProcedures for Approval of Related Person Transactions**

The Board of Directors ofK-Sea General Partner GP LLC has adopted a policy pursuant to which relatedparty transactions are reviewed, approved or ratified. The policy applies toany transaction in which (1) we are a participant, (2) any relatedperson has a direct or indirect material interest and (3) the amountinvolved exceeds $120,000, but excludes any transaction that does not requiredisclosure under Item 404(a) of Regulation S-K. The ConflictsCommittee is responsible for reviewing, approving and ratifying any relatedperson transaction.

**Code of BusinessConduct and Ethics**

The board of directors ofK-Sea General Partner GP LLC has adopted a code of business conduct and ethicsfor all employees, officers and directors. If any amendments are made to thecode or if K-Sea General Partner GP LLC grants any waiver, including anyimplicit waiver, from a provision of the code that the SEC or the New YorkStock Exchange (“NYSE”) requires us to disclose, we will disclose the nature ofsuch amendment or waiver on our website or in a current report on Form 8-K.

**CorporateGovernance Guidelines**

The board of directors ofK-Sea General Partner GP LLC has adopted corporate governance guidelines inaccordance with the rules of the New York Stock Exchange.

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**Availability ofCorporate Governance Documents**

Copies of the boardcommittee charters, code of business conduct and ethics and corporategovernance guidelines are available, without charge, on our website at *www.k-sea.com* and in print, free ofcharge, upon written request to the Secretary, K-Sea General Partner GP LLC,One Tower Center Blvd., 17th Floor, EastBrunswick, New Jersey 08816.

**AnnualCertification**

We have filed the requiredcertifications under Section 302 of the Sarbanes-Oxley Act of 2002 asExhibits 31.1 and 31.2 to this report. For fiscal 2006, we submitted to theNYSE the CEO certification required by Section 303A.12(a) of the NYSE’sListed Company Manual. For fiscal 2007, we expect to submit this certificationto the NYSE within 30 days after filing this report.

**Executive Sessionsof the Board of Directors**

Messrs. Abbate, Alperin, Dowling, Friedman andSalerno, who are non-management directors ofK-Sea General Partner GP LLC, meet at regularly scheduled executive sessionswithout management. These meetings are chaired on a rotating basis by thechairmen of the audit committee and compensation committee. Persons wishing tocommunicate with our non-management directors may do so by writing to them atK-Sea General Partner GP LLC, c/o Board of Directors, One Tower Center Blvd.,17th Floor, East Brunswick, New Jersey 08816.

Messrs. Abbate,Alperin, and Salerno, who are independent non-management directors of K-SeaGeneral Partner GP LLC, meet at least annually in executive sessions withoutmanagement and the other directors. Mr. Abbate serves as the presidingdirector at those executive sessions.

**Communications withIndependent Directors**

Persons wishing tocommunicate with our independent non-management directors may do so by writingto them at K-Sea General Partner GP LLC, c/o Board of Directors, One TowerCenter Blvd., 17th Floor,East Brunswick, New Jersey 08816.

**Payments to ourGeneral Partner**

K-Sea General Partner LPdoes not receive any management fee or other compensation in connection withits management of us; however, K-Sea General Partner LP or its affiliates whoperform services for us and/or our subsidiaries are reimbursed at cost for allexpenses incurred on our behalf which are necessary or appropriate to theconduct of our business. These costs totaled approximately $0 and $7,290 duringfiscal 2007 and fiscal 2006, respectively. We also directly pay the fees of theindependent directors of K-Sea General Partner GP LLC and reimbursemeeting-related expenses of all directors of K-Sea General Partner GP LLC.

**Section 16(a) BeneficialOwnership Reporting Compliance**

Section 16(a) of the Securities Exchange Actof 1934 requires our officers and directors, and persons who own more than 10%of a registered class of our equity securities, to file reports of beneficialownership and changes in beneficial ownership with the SEC. Officers, directorsand greater than 10% unitholders are required by SEC regulations to furnish uswith copies of all Section 16(a) forms.

Based solely on our reviewof the copies of such forms we received, or representations from certainreporting persons that no Form 4s were required for those persons, webelieve that during the fiscal year ended June 30, 2007, all of ourofficers, directors, and greater than 10% beneficial owners complied on atimely basis with all applicable filing requirements under Section 16(a) ofthe Securities Exchange Act of 

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1934,except that a Form 3 for EW Transportation LLC and a Form 4 for eachof Mr. Friedman , Mr. Sullivan and Park Avenue Transportation Inc.was filed late.

**ITEM 11.**         EXECUTIVECOMPENSATION.

**CompensationDiscussion and Analysis**

This Compensation Discussionand Analysis is intended to provide investors with an understanding of ourcompensation policies and decisions regarding our named executive officers forfiscal 2007. Our named executive officers are our Chief Executive Officer, ourChief Financial Officer and our three other most highly compensated executiveofficers for fiscal 2007.

**ExecutiveCompensation Philosophy**

In establishingexecutive compensation, we believe that:

·       basesalaries should reflect the basic duties and responsibilities of the executiveand be reasonably competitive with comparator group companies;

·       annualcash bonuses should reflect our annual results, performance against budget,progress toward our short and long-term strategic and operating goals, andindividual performance and contribution; and

·       equity awards encouragesignificant executive equity ownership to further align executive interests toour unitholders.

**Purpose of OurExecutive Compensation Program**

Our primarybusiness objective is to increase our distributable cash flow (“DCF”) per unit,which serves as a basis for our distribution payments to unitholders, byexecuting the following business strategies:

·       expandingour fleet through newbuildings and accretive and strategic acquisitions;

·       maximizingfleet utilization and improving productivity;

·       maintainingsafe, low-cost and efficient operations;

·       balancingour fleet deployment between longer-term contracts and shorter-term business toprovide stable cash flows through business cycles, while preserving flexibilityto respond to changing market conditions; and

·       attractingand maintaining customers by adhering to high standards of performance,reliability and safety.

For additional information regarding our businessstrategies, please see “Items 1 and 2. Business and Properties—Our Partnership.”

The purpose of ourexecutive compensation program is to assist us in achieving our businessobjectives by developing and retaining talented senior executives with acompetitive compensation package, and to motivate them to achieve our strategicgoals and increase our DCF and unitholder value. DCF is a non-GAAP financialmeasure which is among the measures used to evaluate our operating performanceand our ability to make cash distributions.

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**Role of theCompensation Committee**

***Responsibilities and Authority***

The Compensation Committee of K-Sea General Partner GPLLC has overall responsibility for determining the compensation of our namedexecutive officers. The specific duties and responsibilities of theCompensation Committee are described above under “Item 10. Directors, ExecutiveOfficers and Corporate Governance—Meetings and Committees of the Board ofDirectors—Compensation Committee” and in the charter of the CompensationCommittee, which is available on the “Investor Relations—Governance” section ofour website at www.k-sea.com.

For fiscal 2007, thecompensation payable to all of our named executive officers was reviewed andapproved by the Compensation Committee. The Compensation Committee seeks inputfrom Timothy J. Casey, our President and Chief Executive Officer, regarding theamount of compensation payable to, and the individual performance of, our namedexecutive officers (other than Mr. Casey).

***Independent Compensation Consultant***

During fiscal 2007, theCompensation Committee retained Pearl Meyer and Partners (“PMP”) as anindependent consultant on executive compensation matters. The CompensationCommittee met with PMP multiple times over several months to review and refinethe partnership’s compensation methodology. The Compensation Committeeconsidered advice and information from PMP in determining the amount and formof compensation for named executive officers and other employees. This workincluded establishing a comparator group of companies, providing relevantmarket data and alternatives to consider for named executive officercompensation, and meeting with the Compensation Committee and Mr. Casey todiscuss executive compensation matters. The Partnership has not engaged PMP forany other purpose.

***Timing of Decisions***

The Compensation Committee meets after the end of eachfiscal year to review base salaries for the then-current year, to considerincentive compensation (consisting of cash bonuses and equity-based awards) andto review and, as appropriate, make changes to our executive compensationprogram. The Compensation Committee also meets at other times during the yearand acts by written consent when necessary and appropriate. During fiscal 2007,the Compensation Committee met five times. The Chairman of the CompensationCommittee also met with members of our management team and representatives ofPMP on several occasions to discuss our executive compensation policies andprograms.

We do not time the releaseof material non-public information for the purpose of affecting the values ofexecutive compensation. At the time of making equity-based compensationdecisions, the Compensation Committee may be aware of material non-publicinformation and takes such information into account, but it does not adjust thesize of grants to reflect possible market reaction. Prior to August 2007,the Compensation Committee made grants of equity-based compensation on aperiodic basis to reflect specific achievements. In August 2007, theCompensation Committee decided to consider grants of equity-based compensationon an annual basis. In the future, the Compensation Committee expects toconsider grants of equity-based compensation shortly after the end of thefiscal year, although specific grants may be made at other times to recognizethe promotion of an employee, a change in responsibility or a specificachievement.

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**Elements ofCompensation**

Our executivecompensation program includes three main elements: a base salary, an annualcash bonus and an annual equity-based incentive award. These individualcomponents are designed to:

·       througha market-competitive base salary that is consistent with the executive’sposition and level of responsibility, provide a minimum level of compensationto each individual;

·       throughan annual cash bonus, reward individuals who contribute to the financial andoperational success of our partnership during the current fiscal year; and

·       throughequity-based incentive awards, reward individuals who contribute to thefinancial and operational success of our partnership during the current fiscalyear and, at the same time, further align the executives’ interests with thelong-term interests of our unitholders.

We view the various components of compensation asrelated, but distinct, and emphasize “pay for performance.”  A significant portion of total executivecompensation reflects a risk aspect, and is tied to our financial and strategicgoals. Our compensation philosophy is to foster entrepreneurship at all levelsof the organization by making long-term equity-based incentives, in particularthrough participation in the growth of our quarterly distributions, asignificant component of executive compensation. We determine the appropriatelevel for each compensation component based in part, but not exclusively, onour view of internal equity and consistency, and other considerations we deemrelevant, such as rewarding extraordinary performance. The CompensationCommittee has not yet adopted any policies for allocating compensation betweenlong-term and currently paid out compensation, between cash and non-cashcompensation, or among different forms of non-cash compensation. TheCompensation Committee is currently evaluating the partnership’s executivecompensation program and may adopt such policies in the future.

As described inmore detail below, these elements are designed to reward partnership andindividual performance.

·       *Partnership Performance*:   Partnership performance ismeasured by various metrics, such as EBITDA (earnings before interest, taxesand depreciation), DCF on an aggregate and per unit basis, vessel utilizationand average daily rates, other vessel operating measures, and financing andcompliance objectives. The Compensation Committee also considers otherachievements during the year when evaluating our performance.

·       *IndividualPerformance*:   Individual performance is evaluated based onindividual expertise, leadership, ethics and personal performance against goalsand objectives.

***Employment Agreements***

Timothy J. Casey, John J. Nicola, Thomas M. Sullivanand Richard P. Falcinelli have entered into employment agreements with K-SeaTransportation Inc., one of our indirect wholly owned subsidiaries. Theemployment agreements contemplate that each employee will serve as an officerof the general partner of our general partner and other affiliates. Each of theemployment agreements had an initial term of one year. The term of eachemployment agreement is automatically extended for successive one-year termsunless either party gives 30-days written notice prior to the end of theterm that such party desires not to renew the employment agreement.

Each employment agreement established an annual basesalary for the named executive officer, which has been subsequently increasedby the Compensation Committee. Under the employment agreement, each employee iseligible to receive an annual incentive bonus based upon the financialperformance of us and our subsidiaries. The board of directors of K-Sea GP willdetermine the amount of any incentive bonus award and may issue additionalawards to each employee in the amounts and at the times it so determines. 

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Further, Messrs. Casey,Nicola, Sullivan and Falcinelli are furnished an automobile for business useand reimbursed for reasonable costs of insurance, gasoline and repairs for theautomobile in accordance with our reimbursement policies and upon submission ofsatisfactory evidence of such costs.

Each employment agreementalso provides for certain payments upon termination of employment. For moreinformation, please read below “Executive Compensation Tables—PotentialPayments upon Termination or Change in Control.”  The Compensation Committee is currently inthe process of evaluating potential revisions to the employment agreementsbased on a review of current market practice and after receiving input fromPMP.

***Comparator Group***

The Compensation Committee evaluates the executivecompensation programs and practices for our executive officers against acomparator group in order to achieve a competitive level of compensation. Thecomparator group was selected based on, among other things, industry, EBITDA,equity market capitalization and enterprise value. For fiscal 2007, thecomparator group consists of the following 12 transportation companies andsix master limited partnerships:

*TransportationCompanies*

·       CeladonGroup, Inc.

·       CovenantTransportation Group, Inc.

·       InternationalShipholding Corporation

·       Maritrans, Inc.

·       MartenTransport, Ltd.

·       P.A.M.Transportation Services, Inc.

·       PatriotTransportation Holding, Inc.

·       Saia, Inc.

·       U.S.Shipping Partners L.P.

·       U.S.Xpress Enterprises, Inc.

·       UniversalTruckload Services, Inc.

·       USA Truck, Inc.

*Master LimitedPartnerships*

·       AtlasPipeline Partners, L.P.

·       GlobalPartners L.P.

·       HilandPartners, L.P.

·       HollyEnergy Partners, L.P.

·       MartinMidstream Partners, L.P.

·       ExterranPartners, L.P.

The Compensation Committee compares the companies’executive compensation programs as a whole, and also compares the pay ofindividual executives if the jobs are sufficiently similar to make a 

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comparison meaningful. Moreover,when comparing a named executive officer’s compensation with others in thecomparator group, the Compensation Committee seeks comparisons based on ourexecutive’s duties and responsibilities and not merely based on the executive’stitle. For example, we do not have a chief operating officer and thetraditional duties performed by a person with that title are allocated amongseveral different people at our partnership.

The Compensation Committeeuses the comparator group data to ensure that executive officer compensation asa whole is appropriately competitive, given our performance. The CompensationCommittee, however, does not target a specific percentile of comparator groupcompensation in determining the level of our executive officer compensation. Thecomposition of the comparator group is subject to change from time to timebased on a review by the Compensation Committee to reflect, among other things,best practices in executive compensation, changes in our business including thesize and complexity thereof, and changes in the competitive marketplaceresulting from mergers and acquisitions or other activity.

***Partnership Performance***

The CompensationCommittee evaluates our financial condition and results of operations, ourperformance in light of industry fundamentals and how effectively managementadapts to changing industry conditions and opportunities during the year inpreparing our partnership to capitalize on opportunities in the future. Inaddition, the Compensation Committee considered the following accomplishments,among others, in measuring partnership performance during fiscal 2007:

·       fiscal2007 DCF was a record and meaningfully above the prior year’s DCF;

·       increasesin per unit distributions to unitholders for each quarter of fiscal 2007;

·       theexecution of definitive agreements for the acquisition of Smith Maritime, Ltd.,Go Big Chartering, LLC and Sirius Maritime LLC;

·       thepartnership’s progress toward replacing its single-hull vessels, includingrecent newbuilding orders;

·       theacquisition of several tug boats to improve the efficiency of the partnership’stank barge fleet;

·       improvementsin average daily rates for the partnership’s coastwise and local tank bargefleets;

·       consistencyin the partnership’s net utilization of its tank barges; and

·       improvements in safetyresults.

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***Base Salary***

Inevaluating the base salaries of our named executive officers, the CompensationCommittee considered the historical and expected future performance of eachsuch executive and competitive market data provided by PMP. In general, theCompensation Committee targets base salaries that are competitive with similarpositions in the comparator group. Based on a review of base salaries for thecomparator group and after considering the partnership’s performance and theindividual performance of each executive, the Compensation Committee increasedthe base salaries of our named executive officers as follows:

| **Name**              | ** ** | ** ** | ** ** | **Fiscal 2008 Base Salary(1)** | ** ** | **Increase Over Fiscal 2007** | ** ** |
|-----------------------|------------|------------|------------|-----------------------------------------------|------------|----------------------------------------------|------------|
| Timothy J. Casey      |       |       | $          | 300,000                                       |       |                                         |       | $ | 50,000 |   |   |
| John J. Nicola        |       |       | $          | 210,000                                       |       |                                         |       | $ | 10,000 |   |   |
| Thomas Sullivan       |       |       | $          | 210,000                                       |       |                                         |       | $ | 10,000 |   |   |
| Richard P. Falcinelli |       |       | $          | 210,000                                       |       |                                         |       | $ | 10,000 |   |   |
| Charles Kauffman      |       |       | $          | 210,000                                       |       |                                         |       | $ | 8,311 |   |   |

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(1)          EffectiveJuly 1, 2007.

***Annual Cash Bonus***

Theamount of the annual cash bonus is determined by the Compensation Committee onan annual basis after considering partnership and individual performance. Forfiscal 2007, the Compensation Committee had targeted an annual cash bonus of80% of base salary for Mr. Casey and 40% of base salary for other namedexecutive officers. The partnership performed significantly above theCompensation Committee’s expectations in fiscal 2007. Based on that performanceand after considering the individual performance of each named executiveofficer, the Compensation Committee decided to award cash bonuses in excess ofthe targeted amounts. The following table sets forth the amount of each namedexecutive officer’s annual cash bonus for fiscal 2007 and the percentage ofsuch bonus in relation to the named executive officer’s salary for fiscal 2007:

| **Name**               | ** ** | ** ** | ** ** | **Total Annual Cash  Bonus for Fiscal 2007** | ** ** | **Percentage of Fiscal  2007 Salary** | ** ** |
|------------------------|------------|------------|------------|-----------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| Timothy J. Casey       |       |       | $          | 300,750                                                               |       |                                                 |       | 120 | % |   |
| John J. Nicola         |       |       | $          | 90,225                                                                |       |                                                 |       | 45 | % |   |
| Thomas Sullivan        |       |       | $          | 90,225                                                                |       |                                                 |       | 45 | % |   |
| Richard P.  Falcinelli |       |       | $          | 90,225                                                                |       |                                                 |       | 45 | % |   |
| Charles Kauffman       |       |       | $          | 90,225                                                                |       |                                                 |       | 45 | % |   |

 

***Equity-Based Incentive Awards***

In respect of fiscal 2007, the Compensation Committeemade phantom unit grants in amounts intended to result in approximately 50% ofthe executive’s total annual incentive compensation being equity based. A “phantom”unit entitles the grantee to receive a common unit upon the vesting of thephantom unit or, in the discretion of the Compensation Committee, cashequivalent to the fair market value of a common unit. Holders of phantom unitsalso have the right to receive an amount in cash equal to, and payable at thesame time as, the cash distribution made with respect to a common unit duringthe period the phantom unit is outstanding. The Compensation Committee believesthat making a portion of an executive’s compensation contingent on long-termunit price performance more closely aligns the executive’s interests with thoseof our unitholders. Like cash bonuses, phantom unit awards reflect progresstoward our corporate goals and individual performance.

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Thefollowing table sets forth awards of phantom units on August 7, 2007, withrespect to each named executive officer’s performance in fiscal 2007:

| **Name**               | ** ** | ** ** | ** ** | **Phantom Units** | ** ** | **Grant Date Fair Value** | ** ** |
|------------------------|------------|------------|------------|------------------------|------------|------------------------------------------|------------|
| Timothy J. Casey       |       |       | 7,000      |                   |       |                                     | $          | 299,250 |   |   |
| John J. Nicola         |       |       | 2,100      |                   |       |                                     | $          | 89,775 |   |   |
| Thomas Sullivan        |       |       | 2,100      |                   |       |                                     | $          | 89,775 |   |   |
| Richard P.  Falcinelli |       |       | 2,100      |                   |       |                                     | $          | 89,775 |   |   |
| Charles Kauffman       |       |       | 2,100      |                   |       |                                     | $          | 89,775 |   |   |

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(1)          Determined bymultiplying the number of phantom units granted to a named executive officer by$42.75, the closing price of our common units on the NYSE on August 7,2007, which was the date of grant.

The awards of phantomunits for fiscal 2007 vest in five equal annual installments beginning onOctober 1, 2008, subject to earlier vesting or forfeiture as provided inthe applicable award agreement.

***Perquisites and Other Benefits***

Messrs. Casey, Nicola, Sullivan and Falcinelliare furnished an automobile for business use and reimbursed for reasonablecosts of insurance, gasoline and repairs for the automobile in accordance withour reimbursement policies and upon submission of satisfactory evidence of suchcosts. Mr. Kauffman receives an automobile allowance.

We seek to provide benefitplans, such as medical, life and disability insurance, in line with marketconditions. Executive officers are eligible for the same benefit plans providedto other exempt employees, including insurance plans and supplemental planschosen and paid for by employees who wish additional coverage. We do not haveany special insurance plans for executive officers.

**Other CompensationRelated Matters**

***Equity Ownership***

Although we encourage our executive officers to retainownership in our partnership, we do not have a policy requiring maintenance ofa specified equity ownership level. In the aggregate, as of June 30, 2007,our named executive officers beneficially owned an aggregate of 29,300 commonunits and 46,000 phantom units. Additionally, certain of our named executiveofficers receive approximately 9.4% of the cash distributions received by ourgeneral partner and its affiliates through their ownership interest in theseentities. These arrangements further tie the interests of these executiveofficers to the interests of unitholders.

Our policies prohibit ourexecutive officers from using puts, calls or options to hedge the economic riskof their ownership.

***Recovery of Prior Awards***

We do not have a policywith respect to adjustment or recovery of awards or payments if relevantperformance measures upon which previous awards were based are restated orotherwise adjusted in a manner that would reduce the size of such award orpayment.

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**Impact of Tax andAccounting Treatment**

***Accounting Treatment***

Effective July 1,2005, we adopted SFAS 123R, which requires that companies recognize in theirfinancial statements the cost of employee services received in exchange forawards of equity instruments based on the grant date fair value of thoseawards.

***Tax Treatment***

Section 162(m) of the Code generallydisallows a tax deduction to publicly traded corporations for compensation inexcess of $1 million paid to the Chief Executive Officer or any of the fourother most highly compensated officers. Because we are organized as a limitedpartnership, we are not subject to the provisions of Section 162(m) ofthe Code.

Section 409A of theCode imposes new constraints on nonqualified deferred compensation, and someawards under our long-term incentive plan and severance benefits underemployment agreements with our officers may be subject to these new rules.Failure to comply with Section 409A may result in the early taxation ofdeferred compensation and the imposition of a 20% penalty. Employers generallywill have until December 31, 2007 to amend plans and arrangements tocomply with Section 409A. We intend to design our compensationarrangements to be either exempt from Section 409A or to comply with Section 409A,and we may be required to amend certain arrangements before December 31,2007 to achieve this result.

**COMPENSATIONCOMMITTEE REPORT**

TheCompensation Committee has reviewed and discussed with management thecompensation discussion and analysis required by Item 402(b) of RegulationS-K. Based on the review and discussion referred to above, the CompensationCommittee recommended to the board of directors that this compensationdiscussion and analysis be included in this Form 10-K.

|   | Compensation Committee:      |
|--------|------------------------------|
|   | James J. Dowling  (Chairman) |
|   | Barry J. Alperin             |
|   | Brian P. Friedman            |

 

**COMPENSATIONCOMMITTEE INTERLOCKS AND INSIDER PARTICIPATION**

None of our executive officers serves as a member ofthe board of directors or compensation committee of any entity that has one ormore of its executive officers serving as a member of our general partner’sboard of directors or compensation committee.

There are no mattersrelating to interlocks or insider participation that we are required to report.

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**EXECUTIVECOMPENSATION TABLES**

**SummaryCompensation Table**

| Name and Principal Position    | ** ** | ** ** | ** ** | **Fiscal Year** | ** ** | **Salary($)** | ** ** | **Bonus($)** | ** ** | **Stock  Awards($)(1)** | ** ** | **Option  Awards($)** | ** ** | **Non-Equity  Incentive  Plan  Compensation($)** | ** ** | **Change in  Pension  Value and  Nonqualified  Deferred**

**Compensation  Earnings($)** | ** ** | **All Other  Compensation  ($)(2)(3)** | ** ** | **Total($)** | ** ** |
|-----------------------------------------------|------------|------------|------------|----------------------|------------|---------------|------------|--------------|------------|-------------------------|------------|-----------------------|------------|--------------------------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|--------------|------------|
| Timothy J. Casey                              |       |       | 2007       |                 |       | $             | 250,000    |         | $          | 300,750                 |       |                  | $          | 202,117                                          |       |                                                                                               |       | $                                           | —     |         |       |   | $ | — |   |   |   | $ | — |   |   |   | $ | 21,616 |   |   | $ | 774,483 |   |
| President and Chief Executive Officer         |       |       |       |                 |       |          |       |         |       |                    |       |                  |       |                                             |       |                                                                                               |       |                                        |       |         |       |   |   |   |   |   |   |   |   |   |   |
| John J. Nicola                                |       |       | 2007       |                 |       | $             | 200,000    |         | $          | 90,225                  |       |                  | $          | 67,372                                           |       |                                                                                               |       | $                                           | —     |         |       |   | $ | — |   |   |   | $ | — |   |   |   | $ | 18,194 |   |   | $ | 375,791 |   |
| Chief  Financial Officer                      |       |       |       |                 |       |          |       |         |       |                    |       |                  |       |                                             |       |                                                                                               |       |                                        |       |         |       |   |   |   |   |   |   |   |   |   |   |
| Thomas M. Sullivan                            |       |       | 2007       |                 |       | $             | 200,000    |         | $          | 90,225                  |       |                  | $          | 67,372                                           |       |                                                                                               |       | $                                           | —     |         |       |   | $ | — |   |   |   | $ | — |   |   |   | $ | 18,911 |   |   | $ | 376,508 |   |
| Vice President, Operations                    |       |       |       |                 |       |          |       |         |       |                    |       |                  |       |                                             |       |                                                                                               |       |                                        |       |         |       |   |   |   |   |   |   |   |   |   |   |
| Richard P. Falcinelli                         |       |       | 2007       |                 |       | $             | 200,000    |         | $          | 90,225                  |       |                  | $          | 67,372                                           |       |                                                                                               |       | $                                           | —     |         |       |   | $ | — |   |   |   | $ | — |   |   |   | $ | 20,741 |   |   | $ | 378,338 |   |
| Vice  President, Administration and Secretary |       |       |       |                 |       |          |       |         |       |                    |       |                  |       |                                             |       |                                                                                               |       |                                        |       |         |       |   |   |   |   |   |   |   |   |   |   |
| Charles Kauffman                              |       |       | 2007       |                 |       | $             | 201,689    |         | $          | 90,225                  |       |                  | $          | 34,100                                           |       |                                                                                               |       | $                                           | —     |         |       |   | $ | — |   |   |   | $ | — |   |   |   | $ | 10,942 |   |   | $ | 336,956 |   |
| Vice President, Corporate Development         |       |       |       |                 |       |          |       |         |       |                    |       |                  |       |                                             |       |                                                                                               |       |                                        |       |         |       |   |   |   |   |   |   |   |   |   |   |

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(1)                This amount reflects the compensation cost recognizedby us during fiscal 2007 under SFAS 123R for grants made in fiscal 2007 andprior years. Pursuant to SEC rules, the amounts shown exclude the impact ofestimated forfeitures related to service-based vesting conditions. Theseamounts reflect our recognized compensation expense for these awards under SFAS123R, and do not correspond to the actual value that will be recognized by thenamed executive officers.

(2)                Represents contributions to our 401(k) SavingsPlan during fiscal 2007 and the value of personal use of an automobile.

**Grants ofPlan-Based Awards Table**

We did not make any grantsof plan-based awards during fiscal 2007.

**Outstanding EquityAwards at Fiscal Year-End**

Thefollowing table sets forth information concerning the outstanding equity awardsmade to each named executive officer as of June 30, 2007.

| ** **    | ** ** | **Stock Awards(1)** | ** ** |
|---------------|------------|--------------------------|------------|
| **Name**      | ** ** | ** **               | ** ** | **Number of Shares or  Units  of Stock  That Have  Not Vested(#)** | ** ** | **Market Value of  Shares or Units of Stock  That Have  Not Vested($)(2)** | ** ** | **Equity Incentive  Plan Awards: Number of  Unearned Shares,  Units or Other  Rights  That Have  Not Vested(#)** | ** ** | **Equity Incentive  Plan Awards: Market or  Payout Value of  Unearned Shares,  Units or Other Rights  That Have  Not Vested(#)** | ** ** |
| T. Casey      |       |                     | 21,000     |   |   |   | $ | 990,150 |   |   |   | — |   |   |   | — |   |   |
| J. Nicola     |       |                     | 7,000      |   |   |   | $ | 330,050 |   |   |   | — |   |   |   | — |   |   |
| T. Sullivan   |       |                     | 7,000      |   |   |   | $ | 330,050 |   |   |   | — |   |   |   | — |   |   |
| R. Falcinelli |       |                     | 7,000      |   |   |   | $ | 330,050 |   |   |   | — |   |   |   | — |   |   |
| C. Kauffman   |       |                     | 4,000      |   |   |   | $ | 188,600 |   |   |   | — |   |   |   | — |   |   |
|               |            |                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          Represents phantom unitawards that vest in five annual installments. All phantom unit awards aresubject to accelerated vesting on a change in control or the termination of theemployee’s employment due to death, disability or retirement and to such otherterms as are set forth in the award agreement. Holders of phantom units havethe right to  receive an amount in cashequal to, and payable at the same time as, the cash distribution made withrespect to a common unit during the period the phantom unit is outstanding.

(2)          Calculatedusing the closing price of our common units on the NYSE on June 29, 2007of $47.15. 

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**Option Exercisesand Stock Vested Table**

Thefollowing table sets forth the number of shares acquired upon the vesting ofphantom unit awards, and the value realized upon exercise or vesting of suchawards, for each of our named executive officers in fiscal 2007.

| ** **    | ** ** | **Stock Awards** | ** ** |
|---------------|------------|-----------------------|------------|
| **Name**      | ** ** | ** **            | ** ** | **Number of Shares  Acquired on Vesting(#)** | ** ** | **Value Realized on  Vesting($)(1)** | ** ** |
| T. Casey      |       |                  | 6,000      |   |   |   | $ | 204,060 |   |   |
| J. Nicola     |       |                  | 2,000      |   |   |   | $ | 68,020 |   |   |
| T. Sullivan   |       |                  | 2,000      |   |   |   | $ | 68,020 |   |   |
| R. Falcinelli |       |                  | 2,000      |   |   |   | $ | 68,020 |   |   |
| C. Kauffman   |       |                  | 1,000      |   |   |   | $ | 34,010 |   |   |
|               |            |                       |            |  |  |  |  |  |  |  |  |  |

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(1)          Representsthe number of common units multiplied by the closing price of our common unitson the NYSE on the vesting date.

**Pension Benefits**

We do not maintain anyplans that provide for payments or other benefits at, following or inconnection with retirement, other than a 401(k) plan that is available toall U.S. employees.

**Non-QualifiedDeferred Compensation**

We do not maintain anydefined contribution or other plan that provides for the deferral of compensationon a basis that is not tax-qualified under the Internal Revenue Code.

**Potential Paymentsupon Termination or Change-in-Control**

Timothy J. Casey, John J. Nicola, Thomas M. Sullivanand Richard P. Falcinelli have entered into employment agreements with K-SeaTransportation Inc., one of our indirect wholly owned subsidiaries. Theemployment agreements do not provide for any payments in the event of a changein control. If the employee’s employment is terminated without cause  or if the employee resigns for good reason,the employee is entitled to severance in an amount equal to the greater of (a) theproduct of 1.3125 (1.75 multiplied by .75) multiplied by the employee’s basesalary at the time of termination or resignation and (b) the product of1.75 multiplied by the remaining term of the employee’s non-competitionprovisions multiplied by the employee’s base salary at the time of terminationor resignation. In addition, we will make COBRA payments on behalf of theemployee for a period of one year. If the employee is terminated for cause orterminates employment without good reason (other than death or disability), theemployee is entitled to receive only earned but unpaid compensation andbenefits. If the employee is terminated due to death, the employee’s designatedbeneficiary or, if none, his estate, is entitled to receive an amount equal toone-half of the employee’s annual base salary at the time of death. If theemployee is terminated due to disability, the employee is entitled to receivean amount equal to one-half of the employee’s annual base salary at the time ofdisability and, if the employee so elects, COBRA payments for one yearfollowing termination.

Under theemployment agreements, “cause” and “good reason” are defined as follows:

·       *Cause:*   the employee (1) after repeated noticesand warnings, fails to perform his reasonably assigned duties as reasonablydetermined by us, (2) materially breaches certain provisions of theemployment agreement, or (3) commits or engages in a felony or any intentionaldishonest, unethical or fraudulent act which materially damages our reputation.

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·       *Good reason:  *the resignation of the employee after therelocation of our principal office outside of a 75-mile radius of ourcurrent location unless the new location is mutually agreed upon by us and theemployee.

If a change in control were to have occurred as of June 30,2007, all phantom units awarded to named executive officers awards under ourlong-term incentive plan would have immediately vested. In addition, all suchawards would immediately vest upon the death, disability or retirement (afterreaching age 65) of the named executive. If the named executive officer isterminated other than in connection with a change in control or the executive’sdeath, disability or retirement (after reaching age 65), any unvested phantomunits awarded to such executive would be forfeited.

Thefollowing tables set forth potential amounts payable to our named executiveofficers upon termination of employment under various circumstances, as ifterminated on June 30, 2007.

| ** **                               | ** ** | **Change in Control** | ** ** |
|------------------------------------------|------------|---------------------------------|------------|
| ** **                               | ** ** | **Casey**                       | ** ** | **Nicola** | ** ** | **Sullivan** | ** ** | **Falcinelli** | ** ** | **Kauffman** | ** ** |
| Accelerated  vesting of phantom units(1) |       | $                               | 990,150    |   | $ | 330,050 |   | $ | 330,050 |   | $ | 330,050 |   | $ | 188,600 |   |
|                                          |            |                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          Determinedby multiplying the number of unvested phantom units as of June 30, 2007 by$47.15, which was the closing price of our common units on the NYSE on June 29,2007.

| ** **        | ** ** | **Termination Without Cause or Resignation for Good Reason(1)** | ** ** |
|-------------------|------------|----------------------------------------------------------------------------------------------------|------------|
| ** **        | ** ** | **Casey**                                                                                          | ** ** | **Nicola** | ** ** | **Sullivan** | ** ** | **Falcinelli** | ** ** | **Kauffman** | ** ** |
| Severance payment |       | $                                                                                                  | 328,125    |   | $ | 262,500 |   | $ | 262,500 |   | $ | 262,500 |   |   | — |   |   |
| COBRA payments    |       | 13,886                                                                                             |       | 4,980 |   | 13,886 |   | 13,886 |   |   | — |   |   |
| Total             |       | $                                                                                                  | 342,011    |   | $ | 267,480 |   | $ | 276,386 |   | $ | 276,386 |   |   | — |   |   |

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(1)          Ifthe employee is terminated for cause or terminates employment without goodreason (other than death or disability), the employee is entitled to receiveonly earned but unpaid compensation and benefits.

| ** **                            | ** ** | **Termination in the Event of Death** | ** ** |
|---------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                            | ** ** | **Casey**                                                      | ** ** | **Nicola** | ** ** | **Sullivan** | ** ** | **Falcinelli** | ** ** | **Kauffman** | ** ** |
| Severance payment                     |       | $                                                              | 125,000    |   | $ | 100,000 |   | $ | 100,000 |   | $ | 100,000 |   | $ | — |   |
| COBRA payments                        |       | 13,886                                                         |       | 4,980 |   | 13,886 |   | 13,886 |   | — |   |
| Accelerated  vesting of phantom units |       | 990,150                                                        |       | 330,050 |   | 330,050 |   | 330,050 |   | 188,600 |   |
| Total                                 |       | $                                                              | 1,129,036  |   | $ | 435,030 |   | $ | 443,936 |   | $ | 443,936 |   | $ | 188,600 |   |

 

| ** **                            | ** ** | **Termination in the Event of Disability** | ** ** |
|---------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                            | ** ** | **Casey**                                                           | ** ** | **Nicola** | ** ** | **Sullivan** | ** ** | **Falcinelli** | ** ** | **Kauffman** | ** ** |
| Severance payment                     |       | $                                                                   | 125,000    |   | $ | 100,000 |   | $ | 100,000 |   | $ | 100,000 |   | $ | — |   |
| COBRA payments                        |       | 13,886                                                              |       | 4,980 |   | 13,886 |   | 13,886 |   | — |   |
| Accelerated  vesting of phantom units |       | 990,150                                                             |       | 330,050 |   | 330,050 |   | 330,050 |   | 188,600 |   |
| Total                                 |       | $                                                                   | 1,129,036  |   | $ | 435,030 |   | $ | 443,936 |   | $ | 443,936 |   | $ | 188,600 |   |

 

**DirectorCompensation**

K-Sea GP pays no additional remuneration to itsemployees for serving as directors. Also, neither Mr. Dowling nor Mr. Friedmanreceives any remuneration for serving as a director; however, they arereimbursed for expenses attendant to board membership.

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Thefollowing table sets forth a summary of the compensation paid to non-employeedirectors in fiscal 2007:

| **Name**          | ** ** | ** ** | ** ** | **Fees Earned or  Paid in Cash   ($)** | ** ** | **Stock  Awards  ($)(1)** | ** ** | **Option  Awards  ($)** | ** ** | **Non-Equity  Incentive Plan  Compensation  ($)** | ** ** | **Change in  Pension Value and  Nonqualified  Deferred  Compensation  Earnings  ($)** | ** ** | **All Other  Compensation  ($)** | ** ** | **Total  ($)(2)(3)** | ** ** |
|-------------------|------------|------------|------------|-----------------------------------------------------------------|------------|---------------------------|------------|-------------------------|------------|--------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|----------------------|------------|
| Brian P. Friedman |       |       | $          | —                                                          |       |                      | $          | —                  |       |                                                   | $          | —                                                                                               |       |                                  |       | $                    | —     |   |   |   | $ | — |   |   |   | $ | — |   |   |   | $ | — |   |   |
| James J. Dowling  |       |       | —     |                                                            |       | $                         | 93,750     |                    |       | —                                                 |       |                                                                                                 |       | —                                |       |                 |       | — |   |   |   | — |   |   |   | $ | 93,750 |   |   |
| Anthony S. Abbate |       |       | $          | 13,000                                                          |       |                      | $          | 29,802                  |       |                                                   | —     |                                                                                                 |       |                                  | —     |                 |       |   | — |   |   |   | — |   |   |   | $ | 42,802 |   |   |
| Barry J. Alperin  |       |       | $          | 23,000                                                          |       |                      | $          | 29,802                  |       |                                                   | —     |                                                                                                 |       |                                  | —     |                 |       |   | — |   |   |   | — |   |   |   | $ | 52,802 |   |   |
| Frank Salerno     |       |       | $          | 13,000                                                          |       |                      | $          | 29,802                  |       |                                                   | —     |                                                                                                 |       |                                  | —     |                 |       |   | — |   |   |   | — |   |   |   | $ | 42,802 |   |   |

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(1)             Represents the number of previously issued phantomunits that vested during 2007 multiplied by the closing price of our commonunits on the date of grant.

(2)             Each of Messrs. Abbate, Alperin and Salernoreceived an annual retainer of $5,000 during fiscal 2007 in consideration oftheir services as director of our K-Sea GP. In addition, for each board meetingthat Messrs. Abbate, Alperin and Salerno attend they receive a fee of$1,000. Furthermore, Messrs. Abbate, Alperin and Salerno, receive $1,000for each committee meeting they attend (or $500 in the case of an auditcommittee meeting that falls on the same day as a board meeting). Mr. Alperinreceives an additional $1,000 for each audit committee meeting for his servicesas chairman of the audit committee. On August 7, 2007, the CompensationCommittee increased the annual retainer for independent directors to $10,000and granted each independent director 5,000 phantom units, which vest in fiveequal annual installments beginning on October 1, 2008. Holders of phantomunits also have the right to receive an amount in cash equal to, and payable atthe same time as, the cash distribution made with respect to a common unitduring the period the phantom unit is outstanding.

(3)             We also reimburse directors for out-of-pocket expensesattendant to Board membership.

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**ITEM 12.**         SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATEDSECURITYHOLDER MATTERS.

A diagram depicting ourcurrent organizational structure is presented below.

**OrganizationalStructure of K-Sea Transportation Partners L.P.**

****

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**K-SeaTransportation Partners L.P.**

Thefollowing table sets forth the beneficial ownership of units of K-SeaTransportation Partners L.P. as of September 7, 2007 by beneficial ownersof 5% or more of such units by each director and named executive officer ofK-Sea General Partner GP LLC and by all directors and named executive officersas a group.

| **Name of Beneficial Owners** (1)              | ** ** | ** ** | ** ** | **Common  Units(2)** | ** ** | **Percentage  of  Common  Units** | ** ** | **Subordinated  Units** | ** ** | **Percentage  of  Subordinated  Units** | ** ** | **Percentage of  Total  Common  and  Subordinated  Units** | ** ** |
|--------------------------------------------------------------------|------------|------------|------------|----------------------|------------|-----------------------------------|------------|-------------------------|------------|-----------------------------------------|------------|-----------------------------------------------------------------|------------|
| ***Beneficial  Owners of 5% or More***                             |       |       |       |                 |       |                              |       |                    |       |                                    |       |                                                            |       |   |   |   |   |   |   |
| EW Transportation LLC(3)                                           |       | 1,041,250  |       |                 | 14.7       | %                                 |       |                    | 3,123,750  |                                    |       |                                                            | 100.0      | % |   |   | 40.9 | % |   |
| EW Holding Corp.(4)                                                |       | —     |       |                 | —     |                              |       |                    | 1,181,818  |                                    |       |                                                            | 37.8       | % |   |   | 11.6 | % |   |
| EW Transportation Corp.                                            |       | —     |       |                 | —     |                              |       |                    | 454,545    |                                    |       |                                                            | 14.6       | % |   |   | 4.5 | % |   |
| Tortoise Energy  Infrastructure Corporation(5)                     |       | 571,300    |       |                 | 8.1        | %                                 |       |                    | —     |                                    |       |                                                            | —     |   |   |   | 5.6 | % |   |
| Tortoise Capital  Advisors, L.L.C.(5)                              |       | 995,139    |       |                 | 14.1       | %                                 |       |                    | —     |                                    |       |                                                            | —     |   |   |   | 9.8 | % |   |
| ***Directors  and Executive Officers***                            |       |       |       |                 |       |                              |       |                    |       |                                    |       |                                                            |       |   |   |   |   |   |   |
| James J. Dowling                                                   |       | 12,000     |       |                 | *          |                              |       |                    | —     |                                    |       |                                                            | —     |   |   |   | * |   |   |
| Timothy J. Casey                                                   |       | 16,000     |       |                 | *          |                              |       |                    | —     |                                    |       |                                                            | —     |   |   |   | * |   |   |
| Anthony S. Abbate                                                  |       | 4,750      |       |                 | *          |                              |       |                    | —     |                                    |       |                                                            | —     |   |   |   | * |   |   |
| Barry J. Alperin                                                   |       | 5,750      |       |                 | *          |                              |       |                    | —     |                                    |       |                                                            | —     |   |   |   | * |   |   |
| Brian P. Friedman(6)                                               |       | 1,052,050  |       |                 | 14.9       | %                                 |       |                    | 3,123,750  |                                    |       |                                                            | 100.0      | % |   |   | 41.0 | % |   |
| Frank Salerno                                                      |       | 4,050      |       |                 | *          |                              |       |                    | —     |                                    |       |                                                            | —     |   |   |   | * |   |   |
| John J. Nicola                                                     |       | 12,500     |       |                 | *          |                              |       |                    | —     |                                    |       |                                                            | —     |   |   |   | * |   |   |
| Thomas M. Sullivan                                                 |       | 5,600      |       |                 | *          |                              |       |                    | —     |                                    |       |                                                            | —     |   |   |   | * |   |   |
| Richard P. Falcinelli                                              |       | 6,200      |       |                 | *          |                              |       |                    | —     |                                    |       |                                                            | —     |   |   |   | * |   |   |
| Charles Kauffman                                                   |       | 2,000      |       |                 | *          |                              |       |                    | —     |                                    |       |                                                            | —     |   |   |   | * |   |   |
| All directors and executive officers as a group (11  persons) |       | 1,124,675  |       |                 | 15.9       | %                                 |       |                    | 3,123,750  |                                    |       |                                                            | 100.0      | % |   |   | 41.7 | % |   |

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*                    Less than 1%.

(1)          Unless otherwise noted,each beneficial owner has sole voting and dispositive power with respect to thecommon and subordinated units set forth opposite such holder’s name.

(2)          Holders of restrictedunits do not have voting or investment power with respect to such units priorto vesting. Restricted units that are exercisable within 60 days of the date ofthis report are deemed outstanding for purposes of determining the beneficialownership and computing the percentage ownership of such person, but are notdeemed outstanding for purposes of computing the percentage ownership of anyother person. Accordingly, the following common units that may be issued uponthe vesting of restricted units are included in the table: Mr. Dowling—3,000;Mr. Casey—6,000; Mr. Nicola—2,000; Mr. Sullivan—2,000; Mr. Falcinelli—2,000;and Mr. Kauffman—1,000.

(3)          EW Transportation LLC isowned by individual investors, including certain of our directors and executiveofficers, and by KSP Investors A L.P., KSP Investors B L.P. and KSP Investors CL.P. (each, a “KSP Entity”). The table below sets forth the economic interestin, and beneficial ownership of equity interests of, EW Transportation LLC.,which beneficial ownership includes units beneficially owned by EW HoldingCorp. and EW Transportation Corp., its wholly owned subsidiaries. The addressof EW Transportation LLC is One Tower Center Blvd. 17th FL, East Brunswick, New Jersey 08816.

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(4)          EW Holding Corp.’sbeneficial ownership includes units beneficially owned by EW TransportationCorp., its wholly owned subsidiary. The address of each entity is One TowerCenter Blvd. 17th FL, East Brunswick, New Jersey 08816.

(5)          Based solely on aSchedule 13G/A filed with the Securities and Exchange Commission on February 13,2007 by Tortoise Energy Infrastructure Corporation (“TYG”) and Tortoise CapitalAdvisors, L.L.C., an investment advisor to TYG and certain managed accounts (“TCA”).TCA acts as an investment advisor to certain closed-end investment companies,including TYG. TCA, by virtue of investment advisory agreements with theseinvestment companies, has all investment and voting power over securities ownedof record by these investment companies. However, despite their delegation ofinvestment and voting power to TCA, these investment companies may be deemed tobe the beneficial owner of the securities they own of record because they havethe right to acquire investment and voting power through termination of theirinvestment advisory agreement with TCA. Thus, TCA has reported that it sharesvoting power and dispositive power over the securities owned of record by theseinvestment companies, and TYG has reported that it shares voting power anddispositive power over the securities owned of record by it. TCA also acts asan investment advisor to certain managed accounts. Under contractual agreementswith individual account holders, TCA, with respect to the securities held inthe managed accounts, shares investment and voting power with certain accountholders, and has no voting power but shares investment power with certain otheraccount holders. Including shares owned of record by TYG and certain managedaccounts, TCA has shared voting power with respect to 944,227 common units andshared dispositive power with respect to 995,139 common units. TYG has sharedvoting and dispositive power with respect to 571,300 common units. TCA is notthe record owner of any common units and disclaims any beneficial interest insuch common units. The address of each entity is 10801 Mastin Boulevard, Suite 222,Overland Park, Kansas 66210.

(6)          Mr. Friedmanowns 51% of Park Avenue Transportation Inc., the general partner of each KSPEntity and, therefore, may be deemed to beneficially own the common andsubordinated units held by EW Transportation LLC. The address of each KSPEntity and Park Avenue Transportation Inc. is 520 Madison Avenue, 12thFloor, New York, New York 10022.

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**EW TransportationLLC**

Thefollowing table sets forth the economic interest in, and the beneficialownership of equity interests of, EW Transportation LLC as of September 7,2007:

| **Name of Beneficial Owner**                                                     | ** ** | ** ** | ** ** | **Economic  Interest** | ** ** | **Equity  Interest** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|------------|------------|------------------------|------------|----------------------|------------|
| KSP Investors A L.P.                                                                            |       |       | 57.6       | %                      |       |                 | 62.9       | % |   |
| KSP Investors B L.P.                                                                            |       |       | 19.8       | %                      |       |                 | 21.7       | % |   |
| KSP Investors C L.P.                                                                            |       |       | 12.6       | %                      |       |                 | 13.7       | % |   |
| Park Avenue  Transportation Inc.(1)                                                             |       |       | 90.0       | %                      |       |                 | 98.3       | % |   |
| James J. Dowling(2)                                                                             |       |       | —     |                   |       |                 | —     |   |   |
| Timothy J. Casey                                                                                |       |       | 5.5        | %                      |       |                 | *          |   |   |
| Anthony S. Abbate                                                                               |       |       | —     |                   |       |                 | *          |   |   |
| Barry J. Alperin                                                                                |       |       | —     |                   |       |                 | *          |   |   |
| Brian P. Friedman(1)                                                                            |       |       | 90.0       | %                      |       |                 | 98.3       | % |   |
| Frank Salerno                                                                                   |       |       | —     |                   |       |                 | *          |   |   |
| John J. Nicola                                                                                  |       |       | 1.3        | %                      |       |                 | *          |   |   |
| Thomas M. Sullivan                                                                              |       |       | 1.3        | %                      |       |                 | *          |   |   |
| Richard P. Falcinelli                                                                           |       |       | 1.3        | %                      |       |                 | *          |   |   |
| Charles Kauffman                                                                                |       |       | —     |                   |       |                 | —     |   |   |
| All directors and executive officers of K-Sea  General Partner GP LLC   as a group (11 persons) |       |       | 99.5       | %                      |       |                 | 99.9       | % |   |

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*                    Less than 1%.

(1)          Park AvenueTransportation Inc. is the general partner of each of KSP Investors AL.P., KSP Investors B L.P. and KSP Investors C L.P. (each, a “KSP Entity”)and, therefore, has sole voting and dispositive power with respect to theequity interests of EW Transportation LLC owned by each KSP Entity. Mr. Friedmanowns 51% of the outstanding shares of capital stock of Park AvenueTransportation Inc., the general partner of each KSP Entity. In addition, Mr. Friedmanhas an economic interest in FS Private Investments LLC, which in turn has aneconomic interest in each KSP Entity. Mr. Friedman also has directeconomic interests in certain of the KSP Entities.

(2)          Mr. Dowlingis a limited partner in KSP Investors C L.P. and has an effective 1.38%economic interest in EW Transportation LLC.

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**K-Sea GeneralPartner GP LLC**

Thefollowing table sets forth the economic interest in, and the beneficialownership of equity interests of, K-Sea General Partner GP LLC, the generalpartner of our general partner, as of September 7, 2007:

| **Name of Beneficial Owner**                                                   | ** ** | ** ** | ** ** | **Economic Interest/  Equity Interest** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|------------|------------|---------------------------------------------------|------------|
| KSP Investors A L.P.                                                                          |       |       | 57.6       | %                                                 |       |
| KSP Investors B L.P.                                                                          |       |       | 19.8       | %                                                 |       |
| KSP Investors C L.P.                                                                          |       |       | 12.6       | %                                                 |       |
| Park Avenue  Transportation Inc.(1)                                                           |       |       | 90.0       | %                                                 |       |
| James J. Dowling(2)                                                                           |       |       | —     |                                              |       |
| Timothy J. Casey                                                                              |       |       | 5.5        | %                                                 |       |
| Anthony S. Abbate                                                                             |       |       | —     |                                              |       |
| Barry J. Alperin                                                                              |       |       | —     |                                              |       |
| Brian P. Friedman(1)                                                                          |       |       | 90.0       | %                                                 |       |
| Frank Salerno                                                                                 |       |       | —     |                                              |       |
| John J. Nicola                                                                                |       |       | 1.3        | %                                                 |       |
| Thomas M. Sullivan                                                                            |       |       | 1.3        | %                                                 |       |
| Richard P. Falcinelli                                                                         |       |       | 1.3        | %                                                 |       |
| Charles Kauffman                                                                              |       |       | —     |                                              |       |
| All directors and executive officers of K-Sea  General Partner GP LLC as a group (11 persons) |       |       | 99.5       | %                                                 |       |

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*                    Less than 1%.

(1)          Park AvenueTransportation Inc. is the general partner of each of KSP Investors AL.P., KSP Investors B L.P. and KSP Investors C L.P. (each, a “KSP Entity”)and, therefore, has sole voting and dispositive power with respect to theequity interests of K-Sea General Partner GP LLC owned by each KSP Entity.Mr. Friedman owns 51% of the outstanding shares of capital stock of thegeneral partner of each KSP Entity.

(2)          Mr. Dowlinghas an effective 1.38% economic interest in K-Sea General Partner GP LLC.

**Equity CompensationPlan Information**

Thefollowing table sets forth in tabular format a summary of our equity planinformation as of September 7, 2007:

| ** **                                                 | ** ** | **(a)**    | ** ** | **(b)**                                                                                                                                      | ** ** | **(c)**                                                                                             | ** ** |
|------------------------------------------------------------|------------|------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|
| **Plan Category**                                     | ** ** | ** ** | ** ** | **Number of securities  to be issued upon  exercise of  outstanding options,  warrants and  rights** | ** ** | **Weighted-average  exercise price of  outstanding  options,  warrants and  rights** | ** ** | **Number of securities  remaining available for  future issuance under  equity compensation plans  (excluding securities   reflected in column (a))** | ** ** |
| Equity  compensation plans approved by securityholders(1)  |       |       | —     |                                                                                                                                         |       |                                                                                                | —     |   |   |   | 288,269 | (2) |   |
| Equity compensation plans not approved by  securityholders |       |       | —     |                                                                                                                                         |       |                                                                                                | —     |   |   |   | — |   |   |
| Total                                                      |       |       | —     |                                                                                                                                         |       |                                                                                                | —     |   |   |   | 288,269 |   |   |
|                                                            |            |            |            |                                                                                                                                              |            |                                                                                                     |            |  |  |  |  |  |  |  |  |

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(1)          The K-Sea TransportationPartners L.P. Long-Term Incentive Plan is our only equity compensation plan. Nooptions, warrants or rights have been issued under this plan.

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(2)          Anaggregate of 151,731 restricted units have been issued under the K-SeaTransportation Partners L.P. Long-Term Incentive Plan.

**ITEM 13.**         CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

**Distributions andPayments to Our General Partner and Its Affiliates**

We generally distribute 98.05% of our available cashto our unitholders, including EW Transportation LLC, EW Holding Corp. and EWTransportation Corp. in their capacity as holders of an aggregate of 3,123,750 subordinatedunits and 1,041,250 common units, and the remaining 1.95% of our available cashto our general partner. If distributions exceed the $0.50 per unit minimumquarterly distribution and other higher target levels, our general partner isentitled to increasing percentages of the distributions, up to 50% of thedistributions above the highest target level. We refer to the rights to theincreasing distributions as “incentive distribution rights.”  Please read “Market For Registrant’s CommonEquity, Related Securityholder Matters and Issuer Purchases of EquitySecurities—Incentive Distribution Rights” in Item 5 of this report.Assuming we pay the $0.50 per unit minimum quarterly distribution on all of ouroutstanding units, our general partner would receive an annual distribution of$404,894 on its 1.95% general partner interest, and affiliates of our generalpartner would receive an annual distribution of approximately $6,247,500 ontheir subordinated units and $2,082,500 on their common units. In July 2007,the board of directors of the general partner of our general partner increasedthe quarterly cash distribution to $0.70 per common unit. If distributionscontinue at that level on all of our outstanding units, our general partnerwould receive an annual distribution of $1,965,626 on its 1.95% general partnerinterest and incentive distribution rights, and affiliates of our generalpartner would receive an annual distribution of approximately $8,746,500 ontheir subordinated units and $2,915,500 on their common units. No assurancescan be made, however, that distributions will continue at that level.

Our general partner and its affiliates do not receivea management fee or other compensation for the management of our partnership.Our general partner and its affiliates are entitled to be reimbursed, however,for all direct and indirect expenses incurred on our behalf. Our generalpartner has sole discretion in determining the amount of these expenses. Thesereimbursed expenses totaled approximately $0 and $7,290 in fiscal 2007 andfiscal 2006, respectively.

If our general partner withdraws or is removed, itsgeneral partner interest and its incentive distribution rights will either besold to the new general partner for cash or converted into common units, ineach case for an amount equal to the fair market value of those interests.

Upon our liquidation, thepartners, including our general partner, will be entitled to receiveliquidating distributions according to their particular capital accountbalances.

**Omnibus Agreement**

We are a party to anomnibus agreement with KSP Investors A L.P. (“KSP A”), KSP Investors B L.P.(“KSP B”), KSP Investors C L.P. (“KSP C” and, together with KSP A and KSP B,the “KSP Entities”),  EW TransportationLLC, EW Acquisition Corp., EW Holding Corp., EW Transportation Corp., K-SeaGeneral Partner LP (our general partner), K-Sea General Partner GP LLC (thegeneral partner of our general partner), K-Sea OLP GP LLC (the general partnerof our operating partnership) and K-Sea Operating Partnership L.P. (ouroperating partnership).

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***Noncompetition***

Under the omnibusagreement, neither the KSP Entities nor their controlled affiliates may engage,either directly or indirectly, in the business of providing refined petroleumproduct marine transportation, distribution and logistics services in theUnited States to the extent such business generates qualifying income forfederal income tax purposes. The restriction does not apply to the assets thatwere retained by our predecessors at the closing of our initial public offeringin January 2004. Except as provided above, neither the KSP Entities northeir controlled affiliates are prohibited from engaging in activities in whichthey compete directly or indirectly with us. Jefferies Capital Partners, andthe funds it manages, are not prohibited from owning assets or engaging inbusinesses that compete directly or indirectly with us.

***Indemnification***

Under the omnibus agreement, the KSP Entities, EWTransportation LLC and the subsidiaries of EW Transportation LLC(collectively, “the Indemnitors”) have jointly and severally agreed toindemnify us until January 14, 2009 against certain environmental andtoxic tort liabilities and, until January 14, 2014, against certain othertoxic tort liabilities associated with the operation of the assets before January 14,2004. Liabilities resulting from changes in law after the closing of ourinitial public offering are excluded from the environmental indemnity. We haveagreed to indemnify the Indemnitors for events and conditions associated withthe operation of our assets that occur on or after January 14, 2004 to theextent the Indemnitors are not required to indemnify us. There is an aggregatecap of $10 million on the amount of indemnity coverage provided by theIndemnitors for the environmental and toxic tort liabilities.

The Indemnitorshave also agreed to indemnify us for liabilities related to:

·       certaindefects in title to the assets contributed to us and failure to obtain certainconsents and permits necessary to conduct our business that arise before January 14,2008;

·       eventsand conditions associated with any assets retained by the Indemnitors or any oftheir respective affiliates, whether occurring before or after January 14,2004;

·       certainliabilities retained by EW Holding Corp., EW Transportation LLC and EWTransportation Corp.; and

·       certain income taxliabilities attributable to the operation of the assets contributed to us priorto the time they were contributed to us in connection with our initial publicoffering.

***Amendments***

The omnibus agreement maynot be amended without the prior approval of the conflicts committee if theproposed amendment will, in the reasonable discretion of our general partner,adversely affect holders of our common units.

**Operations Manager**

We currently employWilliam Sullivan as an operations manager at our Staten Island, New Yorklocation. William Sullivan is the brother of Thomas Sullivan, our VicePresident, Operations. William Sullivan received total compensation of approximately$145,000 in respect of fiscal 2007.

**Properties**

We lease our StatenIsland, New York office and pier facilities from, and charter certain vesselsto, affiliates of an employee who is not an executive officer or director. Additionally,we utilize one of these affiliates for tank cleaning services. Please readnote 8 to our audited consolidated financial statements included elsewherein this report.

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**Director Independence**

The board of directors ofK-Sea General Partner GP LLC has determined that Messrs. Abbate, Alperinand Salerno are independent within the meaning of the listing standards forgeneral independence of the New York Stock Exchange. Under the listingstandards, the audit committee is required to be composed solely of directorswho are independent. The standards for audit committee membership includeadditional requirements under rules of the SEC.

Thelisting standards relating to general independence consist of both arequirement for a board determination that the director has no material relationshipwith the listed company and a listing of several specific relationships thatpreclude independence. To assist it in making determinations of independence,the board has adopted categorical standards as permitted under the listingstandards. Although the board considers all relevant facts and circumstances inassessing whether a director is independent, relationships falling within thecategorical standards are not required to be disclosed or separately discussedin this report in connection with the board’s independence determinations. Arelationship falls within the categorical standards adopted by the board if it:

·       isa type of relationship addressed in

·        the rules of the SECrequiring proxy statement disclosure of relationships and transactions, or

·   the provisions of the New York Stock ExchangeListed Company Manual listing relationships that preclude a determination ofindependence,

but under those rules neither requires disclosurenor precludes a determination of independence, or

·       consistsof charitable contributions by us to an organization where a director is anexecutive officer and does not exceed the greater of $1 million or 2% ofthe organization’s gross revenue in any of the last three years.

None of the independentdirectors had relationships relevant to an independence determination that wereoutside the scope of the board’s categorical standards.

Because we are a limitedpartnership, the listing standards of the New York Stock Exchange do notrequire K-Sea General Partner GP LLC to have a majority of independentdirectors or a nominating/corporate governance or compensation committee.

**ITEM14.**         PRINCIPAL ACCOUNTANT FEESAND SERVICES.

Thefollowing table presents fees for services rendered by PricewaterhouseCoopersLLP during fiscal 2007 and fiscal 2006.

| ** **             | ** ** | **Year Ended  June 30, 2007** | ** ** | **Year Ended  June 30, 2006** | ** ** |
|------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| Audit fees(1)          |       |                                         | $          | 1,341,700                                    |       |   |   | $ | 1,200,350 |   |   |
| Audit-related  fees(2) |       |                                         | 53,146     |                                         |       |   | 264,060 |   |   |
| Tax fees(3)            |       |                                         | 586,939    |                                         |       |   | 701,387 |   |   |
| All other fees         |       |                                         | —     |                                         |       |   | — |   |   |
| Total                  |       |                                         | $          | 1,981,785                                    |       |   |   | $ | 2,165,797 |   |   |

----

(1)          Fees for audit of annualfinancial statements and internal control over financial reporting under theSarbanes Oxley Act of 2002, reviews of the related quarterly financialstatements, and reviews of documents filed with the SEC.

(2)          Fees for professionalservices for consultations related to financial accounting and reportingstandards, compliance with the Sarbanes Oxley Act of 2002, and due diligencerelated to acquisitions.

89

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(3)          Fees related toprofessional services for tax compliance, tax advice and tax planning.

The audit committee hasconsidered whether the provision of the non-audit services described above iscompatible with maintaining the independence of PricewaterhouseCoopers LLP anddetermined that the provision of such services was compatible with maintainingsuch independence.

**Audit CommitteePolicies and Procedures for Pre-approval of Audit and Non-Audit Services**

Consistent with SECpolicies regarding auditor independence, the audit committee is responsible forpre-approving all audit and non-audit services performed by the independentregistered public accounting firm. In addition to its approval of the auditengagement, the audit committee takes action at least annually to authorize theperformance by the independent registered public accounting firm of severalspecific types of services within the categories of audit-relatedservices and tax services. Audit-related services include assurance andrelated services that are reasonably related to the performance of the audit orreview of the financial statements. Authorized tax services include compliance-relatedservices such as services involving tax filings, as well as consulting servicessuch as tax planning, transaction analysis and opinions. Services are subjectto pre-approval of the specific engagement if they are outside the specifictypes of services included in the periodic approvals covering servicecategories or if they are in excess of specified fee limitations. The auditcommittee may delegate pre-approval authority to subcommittees. During 2007, nopre-approval requirements were waived.

90

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**PART IV**

**ITEM 15.**         EXHIBITSAND FINANCIAL STATEMENT SCHEDULES.

**(a)(1)   Financial Statements.**

See “Indexto Financial Statements” set forth on page F-1.

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

None.

**(a)(3)   Exhibits.**

| Exhibit   Number | ** ** | ** ** | ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   | **Description** |
|------------------|------------|------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------|
| 2.1*             |       | —     |       | Agreement and Plan of  Merger, dated June 25, 2007, by and among K-Sea Acquisition1, LLC, K-Sea  Transportation Partners L.P., Smith Maritime, Ltd., Go Big Chartering, LLC,  Gordon L. K. Smith, The Gordon L. K. Smith Trust, Barbara Smith SML Trust,  235LX, LLC and the other parties signatory thereto (incorporated by reference  to Exhibit 10.1 to the Partnership’s Current Report on Form 8-K  filed with the with the Securities and Exchange Commission on June 27,  2007). |
| 2.2*             |       | —     |       | Agreement and  Plan of Merger, dated June 25, 2007, by and among Sea Coast  Transportation LLC, K-Sea Transportation Partners L.P., Sirius Maritime, LLC,  RCD Maritime Enterprises, LLC, Smith Maritime, LLC, WS Maritime Pacific, LLC  and the other parties signatory thereto (incorporated by reference to  Exhibit 10.2 to the Partnership’s Current Report on Form 8-K  filed with the with the Securities and Exchange Commission on June 27,  2007).                             |
| 3.1*             |       | —     |       | Certificate of  Limited Partnership of K-Sea Transportation Partners L.P. (incorporated  by reference to Exhibit 3.1 to the Partnership’s Registration Statement  on Form S-1 (Registration No. 107084), as amended (the  “Registration Statement”), originally filed with the Securities and Exchange  Commission on July 16, 2003).                                                                                                                                          |
| 3.2*             |       | —     |       | Third Amended and  Restated Agreement of Limited Partnership of K-Sea Transportation  Partners L.P. (including specimen unit certificate for the common units)  (incorporated by reference to Exhibit 3.1 to the Partnership’s Current  Report on Form 8-K filed with the Securities and Exchange  Commission on May 5, 2006).                                                                                                                                                                |
| 3.3*             |       | —     |       | Certificate of  Limited Partnership of K-Sea Operating Partnership L.P. (incorporated  by reference to Exhibit 3.3 to the Registration Statement).                                                                                                                                                                                                                                                                                                                                                           |
| 3.4*             |       | —     |       | Amended and  Restated Agreement of Limited Partnership of K-Sea Operating  Partnership L.P. (incorporated by reference to Exhibit 3.4 to the  Partnership’s Quarterly Report on Form 10-Q for the period ended  December 31, 2003).                                                                                                                                                                                                                                                           |
| 3.5*             |       | —     |       | Certificate of  Limited Partnership of K-Sea General Partner L.P. (incorporated by  reference to Exhibit 3.5 to the Registration Statement).                                                                                                                                                                                                                                                                                                                                                                 |
| 3.6*             |       | —     |       | First Amended and  Restated Agreement of Limited Partnership of K-Sea General Partner L.P.  (incorporated by reference to Exhibit 3.6 to the Partnership’s Quarterly  Report on Form 10-Q for the period ended December 31, 2003).                                                                                                                                                                                                                                                            |
| 3.7*             |       | —     |       | Certificate of  Formation of K-Sea General Partner GP LLC (incorporated by reference to  Exhibit 3.7 to the Registration Statement).                                                                                                                                                                                                                                                                                                                                                                         |

91

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| 3.8*        |   | — |   | First Amended and  Restated Limited Liability Company Agreement of K-Sea General Partner  GP LLC (incorporated by reference to Exhibit 3.8 to the Partnership’s  Quarterly Report on Form 10-Q for the period ended  December 31, 2003).                                                                                                                                                                                                                            |
|-------------|--------|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.1*        |   | — |   | Registration  Rights Agreement, dated August 14, 2007, by and among K-Sea  Transportation Partners L.P., RCD Maritime Enterprises, LLC, Smith Maritime,  LLC, Robert C. Dorn and Gordon L.K. Smith (incorporated by reference to  Exhibit 4.1 to the Partnership’s Current Report on Form 8-K  filed with the with the Securities and Exchange Commission on August   20, 2007).                                                                               |
| 10.1*       |   | — |   | Contribution,  Conveyance and Assumption Agreement, dated as of January 14, 2004, among  K-Sea Investors L.P., K-Sea Transportation LLC, EW Holding Corp.,  K-Sea Transportation Corp., K-Sea Transportation Partners L.P.  and K-Sea Operating Partnership L.P. (incorporated by reference to  Exhibit 10.2 to the Partnership’s Quarterly Report on Form 10-Q  for the period ended December 31, 2003).                                                      |
| 10.2*       |   | — |   | Omnibus  Agreement, dated as of January 14, 2004, among K-Sea Investors  L.P., K-Sea Acquisition Corp., New EW Holding Corp., New K-Sea  Transportation Corp., K-Sea General Partner L.P., K-Sea General  Partner GP LLC, K-Sea Transportation Partners L.P., K-Sea OLP GP,  LLC and K-Sea Operating Partnership L.P. (incorporated by reference to  Exhibit 10.3 to the Partnership’s Quarterly Report on Form 10-Q  for the period ended December 31, 2003). |
| 10.3.1*     |   | — |   | K-Sea  Transportation Partners L.P. Long-Term Incentive Plan (incorporated by  reference to Exhibit 10.7 to the Partnership’s Quarterly Report on  Form 10-Q for the period ended March 31, 2004).                                                                                                                                                                                                                                                                  |
| 10.3.2*     |   | — |   | Form of  Director Phantom Unit Award Agreement (incorporated by reference to  Exhibit 10.1 to the Partnership’s Current Report on Form 8-K  filed with the Securities and Exchange Commission on October 7, 2004).                                                                                                                                                                                                                                             |
| 10.3.3*     |   | — |   | Form of  Employee Phantom Unit Award Agreement (incorporated by reference to  Exhibit 10.2 to the Partnership’s Current Report on Form 8-K  filed with the Securities and Exchange Commission on October 7, 2004).                                                                                                                                                                                                                                             |
| 10.4*       |   | — |   | K-Sea  Transportation Partners L.P. Employee Unit Purchase Plan (incorporated by  reference to Exhibit 4.2 to the Partnership’s Registration Statement on  Form S-8 (Registration No. 333-117251) filed on  July 9, 2004).                                                                                                                                                                                                                                     |
| 10.5*† |   | — |   | Employment  Agreement, dated as of January 14, 2004, between K-Sea  Transportation Inc. and Timothy J. Casey (incorporated by reference to  Exhibit 10.9 to the Partnership’s Quarterly Report on Form 10-Q  for the period ended December 31, 2003).                                                                                                                                                                                                          |
| 10.6*† |   | — |   | Employment  Agreement, dated as of January 14, 2004, between K-Sea  Transportation Inc. and John J. Nicola (incorporated by reference to  Exhibit 10.10 to the Partnership’s Quarterly Report on Form 10-Q  for the period ended December 31, 2003).                                                                                                                                                                                                           |
| 10.7*† |   | — |   | Employment  Agreement, dated as of January 14, 2004, between K-Sea  Transportation Inc. and Richard P. Falcinelli (incorporated by reference to  Exhibit 10.11 to the Partnership’s Quarterly Report on Form 10-Q  for the period ended December 31, 2003).                                                                                                                                                                                                    |

92

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| 10.8*† |   | — |   | Employment Agreement,  dated as of January 14, 2004, between K-Sea Transportation Inc.  and Thomas M. Sullivan (incorporated by reference to Exhibit 10.12 to  the Partnership’s Quarterly Report on Form 10-Q for the period  ended December 31, 2003).                                                                                                                                                                                                                                                                                                                                                                  |
|-------------|--------|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.9*† |   | — |   | Form of  Indemnification Agreement (incorporated by reference to Exhibit 10.12 to  the Partnership’s Annual Report on Form 10-K for the fiscal year  ended June 30, 2005)                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.10*      |   | — |   | Amended and Restated  Loan and Security Agreement, dated as of August 14, 2007, among K-Sea  Operating Partnership L.P., as borrower, LaSalle Bank National Association  and Citibank, N.A., as co-syndication agents, Citizens Bank of Pennsylvania  and HSBC Bank USA National Association, as co-documentation agents, and  KeyBank National Association, as administrative agent and collateral trustee,  and the lenders party thereto (incorporated by reference to Exhibit 10.1  to the Partnership’s Current Report on Form 8-K filed with the  with the Securities and Exchange Commission on August  20, 2007). |
| 10.11*      |   | — |   | Loan and Security  Agreement dated as of March 24, 2005 by and between The CIT  Group/Equipment Financing, Inc., as Lender, and K-Sea Operating  Partnership L.P., as Borrower (incorporated by reference to Exhibit 10.2  to the Partnership’s Current Report on Form 8-K filed with the  Securities and Exchange Commission on March 30, 2005).                                                                                                                                                                                                                                                                    |
| 10.12*      |   | — |   | Master Loan and  Security Agreement dated as of April 3, 2006 by and among K-Sea Operating  Partnership L.P., as Borrower, Key Equipment Finance Inc., as Lender, and  K-Sea Transportation Partners L.P., K-Sea Transportation Inc. and Sea Coast  Transportation LLC, as Guarantors (incorporated by reference to  Exhibit 10.1 to the Partnership’s Current Report on Form 8-K  filed with the Securities and Exchange Commission on April 7, 2006).                                                                                                                                                                   |
| 10.13*      |   | — |   | Bridge Loan  Agreement, dated as of August 14, 2007, among K-Sea Operating  Partnership L.P., KBCM Bridge LLC, as administrative agent, KeyBank National  Association, as collateral trustee, and the lenders party thereto  (incorporated by reference to Exhibit 10.2 to the Partnership’s Current  Report on Form 8-K filed with the with the Securities and Exchange  Commission on August  20, 2007).                                                                                                                                                                                                                |
| 21.1        |   | — |   | List of Subsidiaries.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 23.1        |   | — |   | Consent of  PricewaterhouseCoopers LLP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 23.2        |   | — |   | Consent of  PricewaterhouseCoopers LLP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 31.1        |   | — |   | Certification of  Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 31.2        |   | — |   | Certification of  Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 32.1        |   | — |   | Certification of  Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 32.2        |   | — |   | Certification of  Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |

93

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| 99.1* |   | — |   | Loan Agreement, dated as  of March 17, 2005, between K-Sea Operating Partnership L.P. and First  Union Commercial Corporation (incorporated by reference to Exhibit 10.3  to the Partnership’s Quarterly Report on Form 10-Q for the period  ended March 31, 2005).                               |
|-------|--------|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 99.2* |   | — |   | Loan Agreement,  dated as of June 28, 2005, between K-Sea Operating Partnership L.P. and  Citizens Asset Finance, a d/b/a of Citizens Leasing Corporation (incorporated  by reference to Exhibit 10.16 to the Partnership’s Annual Report on  Form 10-K for the fiscal year ended June 30, 2005). |
| 99.3* |   | — |   | Loan Agreement  dated December 19, 2005 between K-Sea Canada Corp. (as Borrower) and  Citizens Leasing Corp. d/b/a Citizens Asset Finance (as Lender) (incorporated  by reference to Exhibit 10.3 to the Partnership’s Quarterly Report on  Form 10-Q for the period ended December 31, 2005).    |
| 99.4* |   | — |   | Loan Agreement dated as of  May 12, 2006 among K-Sea Operating Partnership L.P., as Borrower,  Citizens Leasing Corporation, as Lender, and Citizens Leasing Corporation, as  agent and collateral trustee for the other lenders that may become parties to  the loan agreement.                                      |
| 99.5  |   | — |   | Audited Consolidated  Balance Sheet of K-Sea General Partner L.P., dated as of June 30, 2007.                                                                                                                                                                                                                         |

----

*       Incorporatedby reference, as indicated.

†       Managementcontract, compensatory plan or arrangement.

94

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.
|                         | K-SEA TRANSPORTATION  PARTNERS L.P. |
|-------------------------|-------------------------------------|
|                    |                                | By: K-SEA GENERAL  PARTNER L.P.,  its General Partner. |
|                    |                                | By: K-SEA GENERAL  PARTNER GP LLC,  its General Partner |
| September 12, 2007 | By:                                 | /s/ TIMOTHY J. CASEY |
|                    |                                | Timothy J. Casey |
|                    |                                | *President and Chief Executive Officer* |
|                         |                                     |  |  |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed by the following persons in the capacities and on the datesindicated:
|                        | **Signature** | ** **                          | ** ** | ** **              | **Title** | ** ** | ** ** | ** ** | **Date** | ** ** |
|------------------------|---------------|-------------------------------------|------------|-------------------------|-----------|------------|------------|------------|----------|------------|
| /s/ TIMOTHY J.  CASEY  |          | President and  Chief Executive      |       | September 12, 2007 |
| Timothy  J. Casey      |          | Officer and Director (Principal     |       |                    |
|                   |          | Executive Officer)                  |       |                    |
| /s/ JOHN J.  NICOLA    |          | Chief Financial  Officer (Principal |       | September 12, 2007 |
| John  J. Nicola        |          | Financial and Accounting Officer)   |       |                    |
| /s/ JAMES J.  DOWLING  |          | Chairman of the  Board and Director |       | September 12, 2007 |
| James  J. Dowling      |          |                                |       |                    |
| /s/ ANTHONY S.  ABBATE |          | Director                            |       | September 12, 2007 |
| Anthony  S. Abbate     |          |                                |       |                    |
| /s/ BARRY J.  ALPERIN  |          | Director                            |       | September 12, 2007 |
| Barry  J. Alperin      |          |                                |       |                    |
| /s/ BRIAN P.  FRIEDMAN |          | Director                            |       | September 12, 2007 |
| Brian  P. Friedman     |          |                                |       |                    |
| /s/ FRANK  SALERNO     |          | Director                            |       | September 12, 2007 |
| Frank Salerno          |          |                                |       |                    |

 

95

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**INDEXTO CONSOLIDATED STATEMENTS**
|                                                                                                                       | ** ** | ** ** | **Page** | ** ** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|------------|----------|------------|------------|
| Management’s Report on  Internal Control Over Financial Reporting                                                |       |       | F-2      |       |       |
| Report  of Independent Registered Public Accounting Firm                                                              |       |       | F-3      |       |       |
| Consolidated  Balance Sheets as of June 30, 2007 and 2006                                                        |       |       | F-4      |       |       |
| Consolidated  Statements of Operations for the fiscal years ended June 30, 2007, 2006  and 2005                  |       |       | F-5      |       |       |
| Consolidated  Statements of Partners’ Capital for the fiscal years ended June 30,  2007, 2006 and 2005 |       |       | F-6      |       |       |
| Consolidated  Statements of Cash Flows for the fiscal years ended June 30, 2007, 2006  and 2005                  |       |       | F-7      |       |       |
| Notes to Consolidated  Financial Statements                                                                           |       |       | F-8      |       |       |
|                                                                                                                       |            |            |          |            |            |  |  |

 

F-1

----

**Management’s Reporton Internal Control Over Financial Reporting**

Our management, including our Chief Executive Officerand Chief Financial Officer, is responsible for establishing and maintainingadequate internal control over financial reporting as defined in Rules 13a-15(f) and15d-15(f) of the Securities and Exchange Act of 1934. Managementassessed the effectiveness of our internal control over financial reporting asof June 30, 2007 based on the framework in “Internal Control—IntegratedFramework,” issued by the Committee of Sponsoring Organizations of the TreadwayCommission. Based on that assessment, management concluded that our internalcontrol over financial reporting was effective as of June 30, 2007, basedon those criteria.

Management’s assessment of the effectiveness of ourinternal control over financial reporting as of June 30, 2007 has beenaudited by PricewaterhouseCoopers LLP, an independent registered publicaccounting firm, as stated in their report which is included under the heading “Reportof Independent Registered Public Accounting Firm” on page F-3.

F-2

----

**Report ofIndependent Registered Public Accounting Firm**

To the General Partner and Unitholders of K-SeaTransportation Partners L.P.

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects,the financial position of K-Sea Transportation Partners L.P. and itssubsidiaries at June 30, 2007 and 2006, and the results of theiroperations and their cash flows for each of the three years in the period endedJune 30, 2007 in conformity with accounting principles generally acceptedin the United States of America.  Alsoin our opinion, the Partnership maintained, in all material respects, effectiveinternal control over financial reporting as of June 30, 2007, based oncriteria established in *Internal Control—IntegratedFramework* issued by the Committee of Sponsoring Organizations of theTreadway Commission (COSO). The Partnership’s management is responsible forthese financial statements, for maintaining effective internal control overfinancial reporting and for its assessment of the effectiveness of internalcontrol over financial reporting, included in the accompanying Management’sReport on Internal Control Over Financial Reporting. Our responsibility is toexpress opinions on these financial statements and on the Partnership’sinternal control over financial reporting based on our integrated audits. Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audits to obtain reasonable assurance about whether thefinancial statements are free of material misstatement and whether effectiveinternal control over financial reporting was maintained in all materialrespects. Our audits of the financial statements included examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, and evaluating the overall financial statement presentation.Our audit of internal control over financial reporting included obtaining anunderstanding of internal control over financial reporting, assessing the riskthat a material weakness exists, and testing and evaluating the design andoperating effectiveness of internal control based on the assessed risk. Ouraudits also included performing such other procedures as we considerednecessary in the circumstances. We believe that our audits provide a reasonablebasis for our opinions.

A company’s internal control over financial reportingis a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies andprocedures that (i) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions and dispositionsof the assets of the company; (ii) provide reasonable assurance thattransactions are recorded as necessary to permit preparation of financialstatements in accordance with generally accepted accounting principles, andthat receipts and expenditures of the company are being made only in accordancewith authorizations of management and directors of the company; and (iii) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have amaterial effect on the financial statements.

Becauseof its inherent limitations, internal control over financial reporting may notprevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.
| /s/ PRICEWATERHOUSECOOPERS LLP |
|--------------------------------|
| Florham Park, New  Jersey      |
| September 10,  2007       |

 

F-3

----

**K-SEA TRANSPORTATION PARTNERS L.P.CONSOLIDATED BALANCE SHEETS(in thousands)**

| ** **                                                       | ** ** | **June 30,** | ** **  |
|------------------------------------------------------------------|------------|-------------------|-------------|
| ** **                                                       | ** ** | **2007**          | ** **  | **2006** | ** ** |
| **Assets**                                                       |       |              |        |   |   |
| **Current Assets**                                               |       |              |        |   |   |
| Cash and cash equivalents                                        |       | $                 | 912         |   | $ | 826 |   |
| Accounts receivable, net                                         |       | 20,664            |        | 20,322 |   |
| Deferred taxes                                                   |       | 948               |        | 497 |   |
| Prepaid expenses and other current assets                        |       | 5,073             |        | 8,256 |   |
| **Total current assets**                                         | ** ** | **27,597**        | ** **  | **29,901** | ** ** |
| Vessels and equipment, net                                       |       | 358,580           |        | 316,237 |   |
| Construction in progress                                         |       | 13,285            |        | 5,452 |   |
| Deferred financing costs, net                                    |       | 1,106             |        | 1,007 |   |
| Goodwill                                                         |       | 16,385            |        | 16,579 |   |
| Other assets                                                     |       | 12,861            |        | 13,852 |   |
| **Total assets**                                                 | ** ** | **$**             | **429,814** | ** ** | **$** | **383,028** | ** ** |
| **Liabilities  and Partners’ Capital  Current Liabilities** |       |              |        |   |   |
| Current portion of long-term debt                                |       | $                 | 9,270       |   | $ | 7,745 |   |
| Accounts payable                                                 |       | 17,091            |        | 13,949 |   |
| Accrued expenses and other current liabilities                   |       | 12,044            |        | 8,677 |   |
| **Total current liabilities**                                    | ** ** | **38,405**        | ** **  | **30,371** | ** ** |
| Term loans and capital lease obligation                          |       | 137,946           |        | 131,620 |   |
| Credit line borrowings                                           |       | 97,071            |        | 54,015 |   |
| Deferred taxes                                                   |       | 3,739             |        | 3,079 |   |
| **Total liabilities**                                            | ** ** | **277,161**       | ** **  | **219,085** | ** ** |
| Commitments and  contingencies                                   |       |              |        |   |   |
| **Partners’  Capital**                                      |       | 152,653           |        | 163,943 |   |
| **Total  liabilities and partners’ capital**                | ** ** | **$**             | **429,814** | ** ** | **$** | **383,028** | ** ** |

 

See accompanying notes to consolidated financial statements.

F-4

----

**K-SEA TRANSPORTATION PARTNERS L.P.CONSOLIDATED STATEMENTS OF OPERATIONS(in thousands, except per unit amounts)**

| ** **                                                         | ** ** | **For the Years Ended June 30,** | ** ** |
|--------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                         | ** ** | **2007**                                                  | ** ** | **2006** | ** ** | **2005** | ** ** |
| Voyage revenue                                                     |       | $                                                         | 216,924    |   | $ | 176,650 |   | $ | 118,811 |   |
| Bareboat charter  and other revenue                                |       | 9,650                                                     |       | 6,118 |   | 2,583 |   |
| **Total revenues**                                                 | ** ** | **226,574**                                               | ** ** | **182,768** | ** ** | **121,394** | ** ** |
| Voyage expenses                                                    |       | 45,875                                                    |       | 37,973 |   | 24,220 |   |
| Vessel operating  expenses                                         |       | 96,005                                                    |       | 77,325 |   | 49,296 |   |
| General and  administrative expenses                               |       | 20,472                                                    |       | 17,309 |   | 11,163 |   |
| Depreciation and  amortization                                     |       | 33,415                                                    |       | 26,810 |   | 21,399 |   |
| Net (gain) loss  on sale of vessels                                |       | 102                                                       |       | (313 | ) | (264 | ) |
| Total operating expenses                                           |       | 195,869                                                   |       | 159,104 |   | 105,814 |   |
| **Operating income**                                               | ** ** | **30,705**                                                | ** ** | **23,664** | ** ** | **15,580** | ** ** |
| Interest expense,  net                                             |       | 14,097                                                    |       | 10,118 |   | 5,949 |   |
| Net loss on  reduction of debt                                     |       | —                                                    |       | 7,224 |   | 1,359 |   |
| Other (income)  expense, net                                       |       | (63                                                       | )          | (64 | ) | (27 | ) |
| **Income before provision for income taxes**                       | ** ** | **16,671**                                                | ** ** | **6,386** | ** ** | **8,299** | ** ** |
| Provision for  income taxes                                        |       | 851                                                       |       | 484 |   | 163 |   |
| **Net income**                                                     | ** ** | **$**                                                     | **15,820** | ** ** | **$** | **5,902** | ** ** | **$** | **8,136** | ** ** |
| **Other comprehensive income:**                                    | ** ** | ** **                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Fair market value  adjustment for interest rate swap, net of taxes |       | (698                                                      | )          | 1,136 |   | — |   |
| Foreign currency  translation adjustment                           |       | 2                                                         |       | 85 |   | — |   |
| **Comprehensive income**                                           | ** ** | **$**                                                     | **15,124** | ** ** | **$** | **7,123** | ** ** | **$** | **8,136** | ** ** |
| **General partner’s interest in net income**                  | ** ** | **$**                                                     | **316**    | ** ** | **$** | **118** | ** ** | **$** | **163** | ** ** |
| **Limited  partners’ interest:**                              |       |                                                      |       |   |   |   |   |
| **Net income**                                                     | ** ** | **$**                                                     | **15,504** | ** ** | **$** | **5,784** | ** ** | **$** | **7,973** | ** ** |
| **Net income per unit—basic**                                 | ** ** | **$**                                                     | **1.56**   | ** ** | **$** | **0.60** | ** ** | **$** | **0.95** | ** ** |
| **—diluted**                                                  | ** ** | **$**                                                     | **1.55**   | ** ** | **$** | **0.60** | ** ** | **$** | **0.95** | ** ** |
| **Weighted average units outstanding—basic**                  | ** ** | **9,936**                                                 | ** ** | **9,605** | ** ** | **8,372** | ** ** |
| **—diluted**                                                  | ** ** | **10,020**                                                | ** ** | **9,672** | ** ** | **8,419** | ** ** |

 

See accompanying notes to consolidated financial statements.

F-5

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**K-SEA TRANSPORTATION PARTNERS L.P.CONSOLIDATED STATEMENT OF PARTNERS’ CAPITAL(in thousands)**

| ** **                                                              | ** ** | **Limited Partners** | ** ** | ** **       | ** ** | **Accumulated  Other** | ** **  | ** **        | ** ** |
|-------------------------------------------------------------------------|------------|---------------------------|------------|------------------|------------|------------------------|-------------|-------------------|------------|
| ** **                                                              | ** ** | **Common**                | ** ** | **Subordinated** | ** ** | **General**            | ** **  | **Comprehensive** | ** ** | ** ** | ** ** |
| ** **                                                              | ** ** | **Units**                 | ** ** | **$**            | ** ** | **Units**              | ** **  | **$**             | ** ** | **Partner** | ** ** | **Income** | ** ** | **TOTAL** | ** ** |
| Balance of Partners’ Capital at June 30, 2004                 |       |                      | 4,165      |             |       | $                      | 85,760      |              | 4,165      |   | $ | 48,655 |   |   | $ | 1,283 |   |   |   |   |   |   | $ | 135,698 |   |
| Issuance of common units under long-term incentive plan            |       |                      | 2          |             |       | 65                     |        |              |       |   |   |   |   |   |   |   |   |   |   | 65 |   |
| Issuance of common units, net of costs of $54                           |       |                      | 500        |             |       | 15,946                 |        |              |       |   |   |   |   |   |   |   |   |   |   | 15,946 |   |
| Capital contribution                                                    |       |                      |       |             |       |                   |        |              |       |   |   |   | 328 |   |   |   |   |   |   | 328 |   |
| Distributions to partners                                               |       |                      |       |             |       | (8,935                 | )           |              |       | (8,934 | ) |   | (364 | ) |   |   |   |   |   | (18,233 | ) |
| Net income                                                              |       |                      |       |             |       | 4,006                  |        |              |       | 3,967 |   |   | 163 |   |   |   |   |   |   | 8,136 |   |
| Balance of Partners’ Capital at June 30, 2005                 |       |                      | 4,667      |             |       | 96,842                 |        | 4,165             |       | 43,688 |   |   | 1,410 |   |   |   |   |   |   | 141,940 |   |
| Issuance of common units under long-term incentive plan            |       |                      | 13         |             |       | 390                    |        |              |       |   |   |   |   |   |   |   |   |   |   | 390 |   |
| Issuance of common units, net of costs of $1,645                        |       |                      | 950        |             |       | 32,365                 |        |              |       |   |   |   |   |   |   |   |   |   |   | 32,365 |   |
| Issuance of common units for Sea Coast acquisition                      |       |                      | 125        |             |       | 4,376                  |        |              |       |   |   |   |   |   |   |   |   |   |   | 4,376 |   |
| Capital contribution                                                    |       |                      |       |             |       |                   |        |              |       |   |   |   | 792 |   |   |   |   |   |   | 792 |   |
| Fair market value adjustment for interest rate swap                     |       |                      |       |             |       |                   |        |              |       |   |   |   |   |   |   |   | 1,136 |   |   | 1,136 |   |
| Foreign currency translation adjustment                                 |       |                      |       |             |       |                   |        |              |       |   |   |   |   |   |   |   | 85 |   |   | 85 |   |
| Distributions to partners                                               |       |                      |       |             |       | (12,739                | )           |              |       | (9,663 | ) |   | (641 | ) |   |   |   |   |   | (23,043 | ) |
| Net income                                                              |       |                      |       |             |       | 3,276                  |        |              |       | 2,508 |   |   | 118 |   |   |   |   |   |   | 5,902 |   |
| Balance of Partners’ Capital at June 30, 2006                 |       |                      | 5,755      |             |       | 124,510                |        | 4,165             |       | 36,533 |   |   | 1,679 |   |   |   | 1,221 |   |   | 163,943 |   |
| Issuance of common units under long-term incentive plan            |       |                      | 23         |             |       | 731                    |        |              |       |   |   |   |   |   |   |   |   |   |   | 731 |   |
| Conversion of subordinated units to common  units                       |       |                      | 1,041      |             |       | 8,575                  |        | (1,041            | )          | (8,575 | ) |   |   |   |   |   |   |   |   | — | ** ** |
| Fair market value adjustment for interest rate swap, net  of taxes |       |                      |       |             |       |                   |        |              |       |   |   |   |   |   |   |   | (698 | ) |   | (698 | ) |
| Foreign currency translation adjustment                                 |       |                      |       |             |       |                   |        |              |       |   |   |   |   |   |   |   | 2 |   |   | 2 |   |
| Distributions to partners                                               |       |                      |       |             |       | (15,713                | )           |              |       | (10,121 | ) |   | (1,311 | ) |   |   |   |   |   | (27,145 | ) |
| Net income                                                              |       |                      |       |             |       | 9,619                  |        |              |       | 5,885 |   |   | 316 |   |   |   |   |   |   | 15,820 |   |
| Balance of  Partners’ Capital at June 30, 2007                | ** ** | ** **                | **6,819**  |             | ** ** | **$**                  | **127,722** | ** **        | **3,124**  | ** ** | **$** | **23,722** | ** ** | ** ** | **$** | **684** |   | ** ** | ** ** | **$** | **525** |   | ** ** | **$** | **152,653** | ** ** |
|                                                                         |            |                           |            |                  |            |                        |             |                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

See accompanying notes to consolidated financial statements.

F-6

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**K-SEA TRANSPORTATION PARTNERS L.P.CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands)**

| ** **                                                                         | ** ** | **For the Years Ended June 30** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2007**                                                 | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Cash flows from operating activities:**                                          |       |                                                     |       |   |   |   |   |
| Net income                                                                         |       | $                                                        | 15,820     |   | $ | 5,902 |   | $ | 8,136 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |       |                                                     |       |   |   |   |   |
| Depreciation and amortization                                                      |       | 33,720                                                   |       | 27,144 |   | 21,945 |   |
| Payment of drydocking expenditures                                                 |       | (15,357                                                  | )          | (12,506 | ) | (7,654 | ) |
| Provision for doubtful accounts                                                    |       | 454                                                      |       | 232 |   | 213 |   |
| Deferred income taxes                                                              |       | 395                                                      |       | 172 |   | (86 | ) |
| Net (gain) loss on sale of vessels                                                 |       | 102                                                      |       | (313 | ) | (264 | ) |
| Unit compensation costs                                                            |       | 803                                                      |       | 499 |   | 310 |   |
| Net loss on reduction of debt                                                      |       | —                                                   |       | 7,224 |   | 1,359 |   |
| Prepayment costs on long-term debt                                                 |       | —                                                   |       | (4,196 | ) | (293 | ) |
| Other                                                                              |       | 167                                                      |       | 71 |   | 136 |   |
| Changes  in operating working capital:                                             |       |                                                     |       |   |   |   |   |
| Accounts receivable                                                                |       | (796                                                     | )          | (2,301 | ) | (2,702 | ) |
| Prepaid expenses and other current assets                                          |       | 3,159                                                    |       | (2,362 | ) | (1,930 | ) |
| Accounts payable                                                                   |       | 1,014                                                    |       | 2,600 |   | 3,966 |   |
| Accrued expenses and other current liabilities                                     |       | 2,176                                                    |       | (1,677 | ) | 1,260 |   |
| Other assets                                                                       |       | (14                                                      | )          | 285 |   | (233 | ) |
| **Net cash provided by operating activities**                                      | ** ** | **41,643**                                               | ** ** | **20,774** | ** ** | **24,163** | ** ** |
| **Cash flows from investing activities:**                                          |       |                                                     |       |   |   |   |   |
| Vessel acquisitions                                                                |       | (16,184                                                  | )          | (13,105 | ) | (30,684 | ) |
| Acquisition of Sea Coast, net of cash acquired                                     |       | —                                                   |       | (76,512 | ) | — |   |
| Construction of tank vessels                                                       |       | (33,315                                                  | )          | (20,702 | ) | (16,816 | ) |
| Other capital expenditures                                                         |       | (14,756                                                  | )          | (9,050 | ) | (9,023 | ) |
| Proceeds from Title XI reserve funds                                               |       | —                                                   |       | 2,876 |   | — |   |
| Net proceeds on disposal of vessels                                                |       | 740                                                      |       | 11,095 |   | 622 |   |
| Other                                                                              |       | (189                                                     | )          | — |   | — |   |
| **Net cash used in investing activities**                                          | ** ** | **(63,704**                                              | **)**      | **(105,398** | **)** | **(55,901** | **)** |
| **Cash flows from financing activities:**                                          |       |                                                     |       |   |   |   |   |
| Net increase in credit line borrowings                                             |       | 43,056                                                   |       | 6,903 |   | 42,712 |   |
| Gross proceeds from issuance of common units                                       |       | —                                                   |       | 34,010 |   | 16,000 |   |
| Payments to Title XI reserve funds                                                 |       | —                                                   |       | (674 | ) | (1,618 | ) |
| Proceeds from issuance of long-term debt                                           |       | 14,891                                                   |       | 109,437 |   | 38,794 |   |
| Redemption of Title XI bonds                                                       |       | —                                                   |       | (36,788 | ) | — |   |
| Payment of term loans                                                              |       | (7,722                                                   | )          | (2,059 | ) | (44,699 | ) |
| Financing costs paid—equity offerings                                         |       | (98                                                      | )          | (1,645 | ) | (54 | ) |
| Financing costs paid—debt issuance                                            |       | (368                                                     | )          | (869 | ) | (930 | ) |
| Capital contribution from general partner                                          |       | —                                                   |       | 792 |   | 328 |   |
| Distributions to partners                                                          |       | (27,145                                                  | )          | (23,043 | ) | (18,233 | ) |
| Other                                                                              |       | (467                                                     | )          | (702 | ) | (853 | ) |
| **Net cash provided by financing activities**                                      | ** ** | **22,147**                                               | ** ** | **85,362** | ** ** | **31,447** | ** ** |
| **Cash and cash equivalents:**                                                     |       |                                                     |       |   |   |   |   |
| Net increase (decrease)                                                            | ** ** | **86**                                                   | ** ** | **738** | ** ** | **(291** | **)** |
| Balance at beginning of year                                                       |       | 826                                                      |       | 88 |   | 379 |   |
| **Balance at end of year**                                                         | ** ** | **$**                                                    | **912**    | ** ** | **$** | **826** | ** ** | **$** | **88** | ** ** |
| **Supplemental disclosure of cash flow  information:**                             |       |                                                     |       |   |   |   |   |
| Cash  paid during the year for:                                                    |       |                                                     |       |   |   |   |   |
| Interest, net of amounts capitalized                                               |       | $                                                        | 14,457     |   | $ | 9,767 |   | $ | 5,323 |   |
| Income taxes                                                                       |       | $                                                        | 13         |   | $ | 322 |   | $ | 55 |   |
| **Supplemental disclosure of non-cash  investing and financing activities:**       |       |                                                     |       |   |   |   |   |
| Acquisition  of Sea Coast Transportation LLC:                                      |       |                                                     |       |   |   |   |   |
| Fair value of net assets acquired                                                  |       |                                                     |       | $ | 82,382 |   |   |   |
| Less: Value of common units issued to seller                                       |       |                                                     |       | (4,376 | ) |   |   |
| Cash paid for the transaction (see note 3)                                         |       |                                                     |       | $ | 78,006 |   |   |   |
| Less: Cash acquired                                                                |       |                                                     |       | (1,494 | ) |   |   |
| Net cash paid for  the transaction                                                 |       |                                                     |       | $ | 76,512 |   |   |   |

 

See accompanying notes to consolidated financial statements.

F-7

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**K-SEA TRANSPORTATION PARTNERS L.P.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(dollars in thousands, except unit and per unit amounts)**

**Note 1:   Basisof Presentation**

K-Sea Transportation Partners L.P. (the “Partnership”)provides refined petroleum products marine transportation, distribution andlogistics services in the U.S. domestic marine transportation business. On January 14,2004, the Partnership completed its initial public offering of common unitsrepresenting limited partner interests and, in connection therewith, alsoissued to its predecessor companies an aggregate of 4,165,000 subordinatedunits representing limited partner interests. During the subordination periodthe subordinated units are not entitled to receive any distributions until thecommon units have received their minimum quarterly distribution plus anyarrearages from prior quarters. The subordination period will end once thePartnership meets certain financial tests described in the partnershipagreement, but it generally cannot end before December 31, 2008. When thesubordination period ends, all subordinated units will convert into commonunits on a one-for-one basis, and the common units will no longer be entitledto arrearages. If the Partnership meets certain financial tests described inthe partnership agreement, 25% of the subordinated units can convert intocommon units on or after December 31, 2006, and an additional 25% canconvert into common units on or after December 31, 2007. The Partnershipmet the required tests for early conversion of the first 25% of subordinatedunits and, as a result, 1,041,250 of these subordinated units converted tocommon units on February 14, 2007.

The Partnership’s generalpartner, K-Sea General Partner L.P., holds 202,447 general partner units (representingan approximate 2% general partner interest) and certain incentive distributionrights in the Partnership. Incentive distribution rights represent the right toreceive an increasing percentage of cash distributions after the minimumquarterly distribution, any cumulative arrearages on common units, and certaintarget distribution levels have been achieved. The target distribution levelsentitle the general partner to receive 15% of quarterly cash distributions inexcess of $0.55 per unit until all unitholders have received $0.625 per unit,25% of quarterly cash distributions in excess of $0.625 per unit until allunitholders have received $0.75 per unit, and 50% of quarterly cashdistributions in excess of $0.75 per unit. The Partnership is required todistribute all of its available cash from operating surplus, as defined in thepartnership agreement. On May 1, 2006, the Partnership’s general partneramended and restated the partnership agreement of the Partnership to, amongother things, provide that additional contributions by the general partner tothe Partnership upon the issuance of additional limited partner interests arenot mandatory. Previously the general partner was required to make a capitalcontribution to the Partnership upon the issuance of new limited partnerinterests to maintain its 2% interest. If the general partner does not makeadditional capital contributions upon the issuance of new common units, thegeneral partner’s percentage interest in the Partnership will decrease accordingly.

**Note 2:   Summaryof Significant Accounting Policies**

*Basisof Consolidation.**  *Theseconsolidated financial statements are for the Partnership and its wholly ownedsubsidiaries. All material inter-company transactions and balances havebeen eliminated in consolidation.

*Cashand Cash Equivalents.**  *ThePartnership considers all highly liquid investments with original maturities ofthree months or less to be cash equivalents.

*Vesselsand Equipment.**  *Vesselsand equipment are recorded at cost, including capitalized interest whereappropriate, and depreciated using the straight-line method over the estimateduseful lives of the 

F-8

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individual assets asfollows: tank vessels—ten to twenty-five years; tugboats—ten to twenty years;and pier and office equipment—five years. For single-hull tank vessels,such useful lives are limited to the remaining period of operation prior tomandatory retirement as required by the Oil Pollution Act of 1990 (“OPA 90”). OPA90 requires that the 26 (including three chartered-in) single-hull vesselscurrently operated by the Partnership, representing approximately 29% of totalbarrel-carrying capacity as of June 30, 2007, be retired or retrofitted todouble-hull by December 31, 2014.

Included in vessels and equipment are drydocking expendituresthat are capitalized and amortized over three years. Drydocking of vessels isrequired both by the United States Coast Guard and by the applicableclassification society, which in the Partnership’s case is the American Bureauof Shipping. Such drydocking activities include, but are not limited to, theinspection, refurbishment and replacement of steel, engine components,tailshafts, mooring equipment and other parts of the vessel.

Major renewals and betterments of assets arecapitalized and depreciated over the remaining useful lives of the assets. Leaseholdimprovements are capitalized and depreciated over the shorter of their usefullives or the remaining term of the lease. Maintenance and repairs that do notimprove or extend the useful lives of the assets are expensed.

The Partnership assesses impairment on long-livedassets used in operations when indicators of impairment are present. Animpairment loss would be recognized if the undiscounted cash flows estimated tobe generated by those assets are less than the assets’ carrying amounts, and tothe extent the carrying value exceeds fair value by appraisal.

When property items are retired, sold or otherwisedisposed of, the related cost and accumulated depreciation are removed from theaccounts with any gain or loss on the dispositions included in income. Assetsto be disposed of are reported at the lower of their carrying amounts or fairvalues, less the estimated costs of disposal.

*FuelSupplies.**  *Fuelused to operate the Partnership’s vessels, and on hand at the end of theperiod, is recorded at cost. Such amounts totaled $2,660 and $3,158 as of June 30,2007 and 2006, respectively, and are included in prepaid expenses and othercurrent assets in the consolidated balance sheets.

*DeferredFinancing Costs.**  *Directcosts associated with obtaining long-term financing are deferred and amortizedover the terms of the related financings. Deferred financing costs are statednet of accumulated amortization which, at June 30, 2007 and 2006, amountedto $457 and $187, respectively.

*Goodwill.**  *Goodwill represents the excess of the purchase priceover the fair value of the net assets of the acquired business at the date ofthe acquisition. The Partnership tests for impairment at least annually using atwo-step process. The first step identifies potential impairment by comparingthe fair value of a reporting unit with its book value, including goodwill. Ifthe fair value of the reporting unit exceeds the carrying amount, goodwill isnot impaired and the second step is not necessary. If the carrying valueexceeds the fair value, the second step calculates the possible impairment lossby comparing the implied fair value of goodwill with the carrying amount. Ifthe implied fair value of goodwill is less than the carrying amount, awrite-down is recorded.

*IntangibleAssets.**  *Includedin other assets are intangible assets acquired as part of business combinationswhich are recorded at fair value at their acquisition date and are amortized ona straight-line basis over their estimated useful lives. The Partnershipreviews intangible assets to evaluate whether events or changes have occurredthat would suggest an impairment of carrying value. An impairment would berecognized when expected undiscounted future operating cash flows are lowerthan the carrying value, and to the extent the carrying value exceeds fairvalue. Intangible assets are stated net of accumulated amortization, which at June 30,2007 and 2006 amounted to $4,694 and $2,690, respectively.

F-9

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*RevenueRecognition.**  *ThePartnership earns revenue under contracts of affreightment, voyage charters,time charters and bareboat charters. For contracts of affreightment and voyagecharters, revenue is recognized based upon the relative transit time in eachperiod, with expenses recognized as incurred. Although contracts ofaffreightment and certain contracts for voyage charters may be effective for aperiod in excess of one year, revenue is recognized over the transit time ofindividual voyages, which are generally less than ten days in duration. Fortime charters and bareboat charters, revenue is recognized ratably over thecontract period, with expenses recognized as incurred. Estimated losses oncontracts of affreightment and charters are accrued when such losses become evident.

*Useof Estimates.**  *Thepreparation of financial statements in conformity with generally acceptedaccounting principles requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosures of contingentassets and liabilities at the date of the financial statements, and revenuesand expenses during the reporting period. The most significant estimates relateto depreciation of the vessels, liabilities incurred from workers’compensation, commercial and other claims, the allowance for doubtful accountsand deferred income taxes. Actual results could differ from these estimates.

*Concentrationsof Credit Risk.**  *Financialinstruments which potentially subject the Partnership to concentrations ofcredit risk are primarily cash and cash equivalents and trade accountsreceivable. The Partnership maintains its cash and cash equivalents on depositat a financial institution in amounts that, at times, may exceed insurablelimits.

With respect to accounts receivable, the Partnershipextends credit based upon an evaluation of a customer’s financial condition andgenerally does not require collateral. The Partnership maintains an allowancefor doubtful accounts for potential losses, totaling $939 and $690 at June 30,2007 and 2006, respectively, and does not believe it is exposed toconcentrations of credit risk that are likely to have a material adverse effecton its financial position, results of operations or cash flows. For the fiscalyears ended June 30, 2007, 2006 and 2005, the Partnership’s allowance fordoubtful amounts was impacted by additional charges of $455, $232, and $213,and write-offs of $206, $209 and $117, respectively.

*CurrencyTranslation.**  *Assetsand liabilities related to the Partnership’s Canadian subsidiary are translatedat the exchange rate prevailing on the balance sheet date, and revenues andexpenses are translated at the weighted average exchange rate for the period. Translationgains and losses represent other comprehensive income and are reflected inpartners’ capital.

*Derivativeinstruments.**  *ThePartnership utilizes derivative financial instruments to reduce interest raterisks. The Partnership does not hold or issue derivative financial instrumentsfor trading purposes. Statement of Financial Accounting Standards No. 133,*Accounting for Derivative Instruments and HedgingActivities*, (“SFAS No. 133), as amended, establishes accountingand reporting standards for derivative instruments and hedging activities. Itrequires that an entity recognize all derivatives as either assets orliabilities in the statement of financial condition and measure thoseinstruments at fair value. Changes in the fair value of those instruments arereported in earnings or other comprehensive income depending on the use of thederivative and whether it qualifies for hedge accounting. The accounting forgains and losses associated with changes in the fair value of the derivativeand the effect on the consolidated financial statements will depend on itshedge designation and whether the hedge is highly effective in achievingoffsetting changes in fair value of cash flows of the asset or liabilityhedged.

*IncomeTaxes.**  *ThePartnership’s effective tax rate comprises the New York City UnincorporatedBusiness Tax and foreign taxes on its operating partnership, plus federal,state, local and foreign corporate income taxes on the income of the operatingpartnership’s corporate subsidiaries.

Deferred taxes represent the tax effects ofdifferences between the financial reporting and tax bases of the Partnership’sassets and liabilities, as applicable, at enacted tax rates in effect for theyears in which the 

F-10

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differences are expectedto reverse. The recoverability of deferred tax assets is evaluated and avaluation allowance established when it is more likely than not that someportion or all of the deferred tax assets will not be realized.

*Unit-BasedCompensation.**  *ThePartnership has adopted a long-term incentive plan that permits the granting ofawards to directors and employees in the form of restricted units and unitoptions. The Partnership recognizes compensation cost for the restricted unitson a straight-line basis over the vesting periods of the awards, which rangefrom three to five years. No unit options have been granted.

*NetIncome per Unit.**  *Basicnet income per unit is determined by dividing net income, after deducting theamount of net income allocated to the general partner interest, by the weightedaverage number of units outstanding during the period. Diluted net income perunit is calculated in the same manner as basic net income per unit, except thatthe weighted average number of outstanding units is increased to include thedilutive effect of outstanding unit options or restricted units granted underthe Partnership’s long-term incentive plan. For diluted net income per unit,the weighted average units outstanding were increased by 84, 67 and 47 for thefiscal years ended June 30, 2007, 2006 and 2005, respectively, due to thedilutive effect of restricted units.

As required by Emerging Issues Task Force Issue No. 03-6,“Participating Securities and the Two-Class Method under FASB Statement No. 128,Earnings per Share” (“EITF 03-6”), the general partner’s interest in netincome is calculated as if all net income for the year was distributedaccording to the terms of the partnership agreement, regardless of whetherthose earnings would or could be distributed. The partnership agreement doesnot provide for the distribution of net income; rather, it provides for thedistribution of available cash, which is a contractually defined term thatgenerally means all cash on hand at the end of each quarter after provision forcertain cash requirements. Unlike available cash, net income is affected bynon-cash items, such as depreciation and amortization.

As described in note 1 above, the general partner’sincentive distribution rights entitle it to receive an increasing percentage ofdistributions when the quarterly cash distribution exceeds $0.55 per unit. Forpurposes of EITF 03-6, the Partnership must calculate the general partner’sshare of net income under the assumption that such net income wasdistributable.Since net income did not exceed $0.55 per unit in any quarter for the threeyears ended June 30, 2007, 2006 and 2005, the Partnership did not use anyincreased percentages in calculating the general partner’s interest in netincome.

*Distributions per Unit.**  *Distributions to limited partnerswere $2.60 and $2.32 per unit for the years ended June 30, 2007 and 2006,respectively.

**Note 3:   Acquisitionof Sea Coast Transportation**

On October 18, 2005, the Partnership completedthe acquisition, through its wholly owned subsidiary, K-Sea OperatingPartnership L.P. (“K-Sea OLP”), of all of the membership interests in Sea CoastTransportation LLC (formerly Sea Coast Towing, Inc.) (“Sea Coast”) fromMarine Resources Group, Inc. (“MRG”). Also on October 18, 2005, SeaCoast acquired four tugboats from MRG. Sea Coast is a provider of marinetransportation and logistics services to major oil companies, oil traders andrefiners along the West Coast of the United States and Alaska. The aggregatepurchase price for Sea Coast and the four tugboats comprised $77,000 in cashand 125,000 common units representing limited partner interests in thePartnership. The Partnership financed the cash portion of the purchase pricethrough additional borrowings under its credit agreement, as described in note6 below. A registration statement on Form S-3 with respect to theresale of the common units issued to MRG was declared effective by theSecurities and Exchange Commission in February 2006.

Underthe purchase method of accounting, the Partnership has included Sea Coast’sresults of operations from October 18, 2005, the date of acquisition,through June 30, 2006. The aggregate recorded 

F-11

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purchase price was $82,382, comprising $77,000 ofcash, $4,376 in common units (based on the market value of the 125,000 commonunits at the acquisition date), and $1,006 of direct expenses. The Partnershipallocated the purchase price to the tangible assets, intangible assets, andliabilities acquired based on their fair values, which for the fixed assets andintangibles were based on consideration of independent appraisals. Thepurchased identifiable intangible assets are being amortized on a straight-linebasis over their respective estimated useful lives. The excess of the purchaseprice over the fair value of the acquired net assets has been recorded asgoodwill, which is not amortized but which will be reviewed annually forimpairment. The amount of goodwill that is deductible for tax purposes was$14,693. The total purchase price has been allocated as follows:

| Working capital             |   | $      | 550    |   |
|-----------------------------|--------|--------|--------|--------|
| Vessels and  equipment, net |   | 55,931 |   |
| Intangible assets           |   | 10,150 |   |
| Goodwill                    |   | 16,579 |   |
| Other assets                |   | 711    |   |
|                        |   | 83,921 |   |
| Capital lease  obligation   |   | 1,539  |   |
| Total purchase price        |   | $      | 82,382 |   |

 

The identifiableintangible assets purchased in the Sea Coast acquisition included those in thetable below. Amortization expense for the customer relationships and thecovenant not to compete for the year ended June 30, 2006 were $647 and$75, respectively; the annual amortization expense is $970 and $112,respectively.

| ** **               | ** ** | **Gross Value** | ** ** | **Weighted-  average  Useful Life** | ** ** |
|--------------------------|------------|----------------------|------------|------------------------------------------|------------|
| Customer  relationships  |       |                 | $          | 9,700                                    |       |   |   | 10 years |   |   |
| Covenant not to  compete |       |                 | 450        |                                     |       |   | 4 years |   |   |
| Total                    |       |                 | $          | 10,150                                   |       |   |   | 9.7 years |   |   |

 

Theexpected future amortization expense related to current intangible assets is asfollows:

| **Year ending June 30,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------|------------|------------|------------|------------|------------|
| 2008                                    |       | $          | 1,082      |       |
| 2009                                    |       | 1,082      |       |
| 2010                                    |       | 1,009      |       |
| 2011                                    |       | 970        |       |
| 2012 and  thereafter                    |       | 4,203      |       |
| Total                                   | ** ** | **$**      | **8,346**  | ** ** |

 

*Pro Forma Financial Information*

Theunaudited financial information in the table below summarizes the combinedresults of operations of the Partnership and Sea Coast, on a pro forma basis,as though the acquisition had been completed as of the beginning of each periodpresented. This pro forma financial data is presented for information purposesonly and is not necessarily indicative of the results of operations that wouldhave been achieved had the acquisition actually taken place at those dates. Theunaudited pro forma financial information combines the historical results ofthe Partnership with the historical results of Sea Coast for the fiscal 2006period preceding the October 18, 2005 acquisition. The unaudited pro formafinancial 

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information for the year ended June 30, 2005combines the historical results of the Partnership and Sea Coast for thatperiod. 

| ** **                                         | ** ** | **For the Year Ended June 30,** | ** ** |
|----------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                         | ** ** | **2006**                                                 | ** ** | **2005** | ** ** |
| ** **                                         | ** ** | **(unaudited)**                                          | ** ** |
| Revenues                                           |       |                                                     | $          | 201,338 |   |   |   | $ | 170,580 |   |   |
| Net income                                         |       |                                                     | $          | 7,996 |   |   |   | $ | 8,835 |   |   |
| Basic net income  per limited partner unit         |       |                                                     | $          | 0.81 |   |   |   | $ | 1.02 |   |   |
| Fully diluted net income  per limited partner unit |       |                                                     | $          | 0.81 |   |   |   | $ | 1.01 |   |   |

 

**Note 4:   Vesselsand Equipment and Construction in Progress**

At June 30,2007 and 2006, vessels and equipment and construction in progress comprised thefollowing:

| ** **                                      | ** ** | **2007** | ** **  | **2006**   | ** ** |
|-------------------------------------------------|------------|----------|-------------|------------|------------|
| Vessels                                         |       | $        | 475,441     |       | $          | 403,693 |   |
| Pier and office  equipment                      |       | 5,967    |        | 4,967      |       |
|                                            |       | 481,408  |        | 408,660    |       |
| Less accumulated  depreciation and amortization |       | (122,828 | )           | (92,423    | )          |
| Vessels and  equipment, net                     | ** ** | **$**    | **358,580** | ** ** | **$**      | **316,237** | ** ** |
| Construction in progress                        | ** ** | **$**    | **13,285**  | ** ** | **$**      | **5,452** | ** ** |

 

Depreciation and amortization of vessels and equipmentfor the fiscal years ended June 30, 2007, 2006 and 2005 was $31,411,$25,274 and $20,584, respectively. Such depreciation and amortization includesamortization of drydocking expenditures for the fiscal years ended June 30,2007, 2006 and 2005 of $9,826, $7,391 and $6,823, respectively.

Duringfiscal 2007, the Partnership took delivery of the following newbuild vessels:in June 2007, a 28,000-barrel tank barge, the DBL 22; in March 2007,a 100,000-barrel tank barge, the DBL 104; in January 2007, a 28,000-barreltank barge, the DBL 27; and in August 2006, a 28,000-barrel tankbarge, the DBL 26. Additionally, the Partnership acquired five tugboats duringthe year. These tank barges and tugboats cost, in the aggregate, $40,124. ThePartnership has also entered into agreements with shipyards for theconstruction of additional new tank barges, as follows:

| **Date of  Agreement** | ** ** | ** **                       | ** ** | **Vessels**                                                    | ** ** | **Expected Delivery** |
|------------------------|------------|----------------------------------|------------|----------------------------------------------------------------|------------|-----------------------|
| June 2006         |       | Three 28,000-barrel  tank barges |       | 1st Quarter fiscal 2008—3rd Quarter fiscal 2008 |
| August 2006       |       | Two  80,000-barrel tank barges   |       | 4th Quarter fiscal 2008—1st Quarter fiscal 2009 |
| December 2006     |       | One  80,000-barrel tank barge    |       | 1st Quarter fiscal 2009                                   |
| June 2007         |       | Four 50,000-barrel  tank barges  |       | 2nd Quarter fiscal 2010—2nd Quarter fiscal 2011 |

 

Construction in progress at June 30, 2007comprises expenditures for the 80,000-barrel and 28,000-barrel tankbarges described above.

On March 15, 2006 and May 11, 2006, the Partnershiptook delivery of two new 28,000-barrel tank barges, the DBL 28 and DBL 29.On December 30, 2005, the Partnership took delivery of a new 100,000-barreltank barge, the DBL 103. The total cost, after addition of certain specialequipment and integration with existing tugboats, plus capitalized interest,was approximately $23,421. As described in note 3, on October 18, 2005 thePartnership acquired Sea Coast, including $55,931 of vessels, pier and officeequipment. On October 20, 2005, the Partnership acquired an 85,000-barrelintegrated tug-barge unit for $13,105, including transaction costs.

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On June 28, 2005, thePartnership acquired an 80,000-barrel capacity double-hull tank barge fora purchase price of $10,000, excluding certain modifications made to the barge.The acquisition was financed using borrowings under a new term loan. On December 8,2004, the Partnership acquired ten tank barges and seven tugboats. The purchaseprice of $21,184 (including acquisition related costs) included a water treatmentfacility. The transaction was financed using the Partnership’s available creditlines and the purchase price was allocated to the individual assets acquiredbased on consideration of independent appraisals. In September 2004, thePartnership completed the double-hulling of the KTC 155, now renamed the DBL155, and accepted delivery of the vessel.

*Barge Incident*

On November 11, 2005,one of the Partnership’s tank barges, the DBL 152, struck submerged debris inthe U.S. Gulf of Mexico, causing significant damage which resulted in the bargeeventually capsizing. The barge was declared a constructive total loss, and thePartnership has received the total $11,000 insured value from its hull andmachinery insurers. The excess of this insurance recovery over the net bookvalue of the barge, totaling $415, is included as a net gain on disposal ofvessels in the consolidated statements of operations for the year ended June 30,2006.

**Note 5:   Financing**

***Credit Agreement***

On March 24, 2005, the Partnership entered into afive-year $80,000 revolving credit agreement with a syndicate of banks. The newcredit agreement replaced the Partnership’s existing $47,000 revolving creditagreement, which was repaid and terminated. On October 18, 2005, topartially finance the acquisition of Sea Coast (see note 3), the Partnershipamended the credit agreement to increase the available borrowings to $120,000,of which $77,000 was drawn down to pay the cash portion of the purchase price.On November 29, 2005, to fund the redemption of its Title XI bonds (seeTitle XI Bonds” below), the Partnership further amended the credit agreement toincrease the maximum borrowings to $155,000. On April 3, 2006, thePartnership used the net proceeds from the issuance of $80,000 in new termloans to repay outstanding borrowings under the credit agreement, and furtheramended it to reduce the available borrowings, to release certain vessels fromthe collateral pool, and to reduce certain covenant requirements. During fiscal2007, the Partnership further amended the credit agreement to add additionalbank participants, increase the available borrowings, amend certain financialcovenants and reduce interest rates.

As of June 30, 2007, the credit agreementprovided for available borrowings of $125,000, contained a $20,000 sublimit forletters of credit and allowed the Partnership to request an increase in thetotal borrowing availability by up to $25,000, up to a maximum of $150,000, solong as no default or event of default has occurred and is continuing.Obligations under the credit agreement are collateralized by a first prioritysecurity interest, subject to permitted liens, on certain of the Partnership’svessels having an orderly liquidation value equal to at least 1.25 times theamount of the obligations (including letters of credit) outstanding. Borrowingsunder the credit agreement bear interest, at the option of the Partnership, ata rate per annum equal to (a) the greater of the prime rate (8.25% atJune 30, 2007) and the federal funds rate (5.25% at June 30, 2007)plus 0.5% (a “base rate loan”), or (b) the 30-day London InterbankOffered Rate, or LIBOR (5.32% at June 30, 2007), plus a margin of 0.70% to1.60% based upon the ratio of Total Funded Debt to EBITDA, as defined in theagreement. The Partnership also incurs commitment fees, payable quarterly, onthe unused amount of the facility at a rate ranging from 0.15% to 0.30% basedupon the ratio of Total Funded Debt to EBITDA, as defined in the agreement. Asof June 30, 2007, outstanding borrowings under this facility totaled$94,350.

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During the year, thePartnership also entered into a $5,000 revolver with a commercial bank tosupport its cash management activities. Advances under this facility bearinterest at 30-day LIBOR plus a margin of 1.40%; amounts outstanding at June 30,2007 totaled $2,721.

***Term Loans and Capital Lease Obligation***

Termloans and capital lease obligations outstanding at June 30, 2007 and 2006were as follows. Descriptions of these borrowings are included below:

| ** **                | ** ** | **2006** | ** **  | **2005**   | ** ** |
|---------------------------|------------|----------|-------------|------------|------------|
| Term loans due:           |       |     |        |       |       |
| May 1, 2013.         |       | $        | 75,923      |       | $          | 79,696 |   |
| January 1, 2013      |       | 13,360   |        | 13,345     |       |
| June 1, 2014         |       | 20,321   |        | 5,430      |       |
| December 31, 2012    |       | 9,889    |        | 10,675     |       |
| March 24, 2008       |       | 9,821    |        | 10,656     |       |
| April 30, 2013       |       | 16,607   |        | 17,893     |       |
| November 4, 2008     |       | 23       |        | —     |       |
| Capital lease  obligation |       | 1,272    |        | 1,670      |       |
|                      |       | 147,216  |        | 139,365    |       |
| Less current portion      |       | 9,270    |        | 7,745      |       |
|                      | ** ** | **$**    | **137,946** | ** ** | **$**      | **131,620** | ** ** |

 

On April 3, 2006, thePartnership entered into an agreement with a lending institution under whichthe Partnership borrowed $80,000, for which it pledged six tugboats and sixtank barges as collateral. The Partnership used the proceeds of theseloans to repay indebtedness under its credit agreement. Borrowings are represented by six notes which have been assigned to otherlending institutions. These loans bear interest at a rate equal to LIBOR onone-month Eurodollar deposits plus 1.40%, and are repayable in 84 monthlyinstallments with the remaining principal payable at maturity. The agreementcontains certain prepayment premiums. Borrowings outstanding on these loanstotal $75,923 as of June 30, 2007. Alsoon April 3, 2006, the Partnership entered into an agreement with thelending institution to swap the one-month, LIBOR based, variable interestpayments on the $80,000 of loans for a fixed payment at a rate of 5.2275%, overthe same terms as the loans. This swap will result in a fixed interest rate onthe Notes of 6.6275% for their seven-year term. This swap contract has beendesignated as a cash flow hedge. Therefore, the unrealized gains and lossesduring fiscal 2007 and 2006 resulting from the change in fair value of the swapcontract have been reflected in other comprehensive income. The fair value ofthe swap contract of $446 and $1,136 as of June 30, 2007 and 2006,respectively, is included in other assets in the consolidated balance sheet.

On December 19, 2005, one of the Partnership’ssubsidiaries entered into a seven year Canadian dollar term loan to refinancepurchase of an integrated tug-barge unit. The proceeds of $13,000 were used torepay borrowings under the credit agreement which had been used to financepurchase of the unit. The loan bears interest at a fixed rate of 6.59%, isrepayable in 84 monthly installments of CDN $136 with the remaining principalamount payable at maturity, and is collateralized by the related tug-barge unitand one other tank barge. Borrowings outstanding on this loan total $13,360 asof June 30, 2006.

In May 2006, the Partnership entered into anagreement to borrow up to $23,000 to partially finance construction of two28,000-barrel and one 100,000-barrel tank barges. The third andfinal vessel was delivered, and the note termed-out, during the fourth quarterof fiscal 2007. The loan bears interest at 30-day LIBOR plus 1.40%, andis repayable, plus accrued interest, over seven years, with the remaining 

F-15

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principal amount payableat maturity. The loan is collateralized by the related tank barges and twoother tank vessels. Borrowings outstanding on this loan total $20,321 at June 30,2007.

In March 2005, the Partnership entered into anagreement to borrow up to $11,000 to partially finance construction of a 100,000-barreltank barge. The loan bears interest at 30-day LIBOR plus 1.05%, and isrepayable in monthly principal installments of $66 with the remaining principalamount payable at maturity. The loan is collateralized by the related tankbarge. Borrowings outstanding on this loan totaled $9,889 at June 30,2007.

In March 2005 the Partnership entered into athree-year term loan in the amount of $11,700. The loan bears interest at afixed rate of 6.25% annually, and is repayable in monthly principalinstallments of $70 with the remaining principal amount payable at maturity. Theloan is collateralized by three vessels and the proceeds were used to refinancean existing term loan. Borrowings outstanding on this loan total $9,821 at June 30,2007, but it is classified as a long-term liability because the Partnershipintends to refinance it with its credit agreement.

In June 2005, thePartnership entered into an agreement to borrow up to $18,000 to finance thepurchase of an 80,000-barrel double-hull tank barge and construction oftwo 28,000-barrel double-hull tank barges. The loan bears interest at 30-dayLIBOR plus 1.71%, and is repayable in monthly principal installments of $107with the remaining principal amount payable at maturity. The loan iscollateralized by the related tank barges. Borrowings outstanding on this loanwere $16,607 at June 30, 2007.

***Title XI Bonds***

On June 7, 2002, thePredecessor issued bonds aggregating $40,441, in four series, through a privateplacement for the purpose of providing long-term financing for the constructionof four new double-hull tank vessels. The bonds were guaranteed by the MaritimeAdministration of the U.S. Department of Transportation (“MARAD”) pursuant toTitle XI of the Merchant Marine Act of 1936 (the “Title XI bonds”). On November 29,2005, the Partnership redeemed the outstanding $36,787 principal balance ofTitle XI bonds, paid $828 of accrued interest, and made a make-whole payment of$3,953 as required under the Trust Indenture. The Partnership funded theredemption using funds from its credit agreement. After writing off $2,702 inunamortized deferred financing costs relating to the Title XI bonds, and aftercosts and expenses relating to the transaction, the Partnership recorded a losson reduction of debt of $6,898. Retirement of the Title XI bonds improved thePartnership’s borrowing flexibility, and eliminated certain restrictivecovenants, collateral requirements, and working capital constraints.

***Restrictive Covenants***

The agreements governingthe credit agreement and the term loans contain restrictive covenants that,among others, (a) prohibit distributions under defined events of default, (b) restrictinvestments and sales of assets, and (c) require the Partnership to adhereto certain financial covenants, including defined ratios of fixed chargecoverage and funded debt to EBITDA, as defined in the agreement.

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***Interest***

Interestexpense, net of amounts capitalized, and interest income, was as follows: 

| ** **                 | ** ** | **For the Years Ended June 30,** | ** ** |
|----------------------------|------------|-----------------------------------------------------------|------------|
| ** **                 | ** ** | **2007**                                                  | ** ** | **2006** | ** ** | **2005** | ** ** |
| Interest costs  incurred   |       | $                                                         | 14,878     |   | $ | 10,670 |   | $ | 6,611 |   |
| Less interest  capitalized |       | 738                                                       |       | 471 |   | 570 |   |
| Interest expense           |       | 14,140                                                    |       | 10,199 |   | 6,041 |   |
| Interest income            |       | (43                                                       | )          | (81 | ) | (92 | ) |
| Interest expense, net      | ** ** | **$**                                                     | **14,097** | ** ** | **$** | **10,118** | ** ** | **$** | **5,949** | ** ** |

 

The weighted averageinterest rate on the term loans was 6.6% at June 30, 2007 and 2006,respectively, which debt is subject to prepayment fees. Interest payabletotaled $1,238 and $1,124 as of June 30, 2007 and 2006, respectively, andis included in accrued expenses and other current liabilities in theconsolidated balance sheets. At June 30, 2007 and 2006, accounts payableincluded book overdrafts of $2,022 and $1,555, respectively, representingoutstanding checks.

***Maturities of Long-Term Debt***

As of June 30,2007, maturities of long-term debt for each of the next five years were asfollows:

| 2008 |   | $       | 18,466 |   |
|------|--------|---------|--------|--------|
| 2009 |   | 8,957   |   |
| 2010 |   | 9,212   |   |
| 2011 |   | 103,874 |   |
| 2012 |   | 10,451  |   |

 

***Equity Financing***

On October 14, 2005,the Partnership closed a public offering of 950,000 common units. Net proceedsof $33,060 from the offering, after payment of underwriting discounts andcommissions but before payment of expenses associated with the offering, wereused to repay borrowings under the Partnership’s credit agreement. In addition,as described in note 4, the Partnership issued 125,000 common units to thesellers, valued at $4,376, in a transaction not involving a public offering. OnJune 1, 2005, the Partnership issued and sold 500,000 common units in aprivate placement for proceeds of $16,000, before expenses associated with theoffering. The proceeds were used to repay indebtedness incurred under thePartnership’s credit agreement in connection with its December 2004 vesselacquisition. A registration statement on Form S-3 with respect tothis private placement and the issuance of units in connection with the SeaCoast acquisition (see note 3) was filed and declared effective by theSecurities and Exchange Commission in February 2006.

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**Note 6:   IncomeTaxes**

Thecomponents of the provision for income taxes for the fiscal years ended June 30,2007, 2006 and 2005 are as follows:

| ** **                  | ** ** | **2007** | ** ** | **2006**   | ** ** | **2005** | ** ** |
|-----------------------------|------------|----------|------------|------------|------------|----------|------------|
| Current:                    |       |     |       |       |       |     |       |
| Federal                     |       | $        | 102        |       | $          | —   |       | $ | — |   |
| State and local             |       | 24       |       | —     |       | 159      |       |
| Foreign                     |       | 330      |       | 312        |       | 90       |       |
|                        |       | 456      |       | 312        |       | 249      |       |
| Deferred:                   |       |     |       |       |       |     |       |
| Federal                     |       | 152      |       | 59         |       | (267     | )          |
| State and local             |       | 218      |       | 79         |       | 181      |       |
| Foreign                     |       | 25       |       | 34         |       | —   |       |
|                        |       | 395      |       | 172        |       | (86      | )          |
| Provision for income  taxes | ** ** | **$**    | **851**    | ** ** | **$**      | **484**  | ** ** | **$** | **163** | ** ** |

 

Areconciliation of income tax expense, as computed using the federal statutoryincome tax rate of 34%, to the Partnership provision for income taxes for thefiscal years ended June 30, 2007, 2006 and 2005 is as follows:

| ** **                                            | ** ** | **2007** | ** ** | **2006**   | ** ** | **2005** | ** ** |
|-------------------------------------------------------|------------|----------|------------|------------|------------|----------|------------|
| Tax at federal  statutory rate of 34%                 |       | $        | 5,668      |       | $          | 2,171    |       | $ | 2,822 |   |
| Entities not  subject to federal income taxes         |       | (5,393   | )          | (1,885     | )          | (3,080   | )          |
| State and local  income taxes, net of federal benefit |       | 241      |       | 79         |       | 342      |       |
| Foreign taxes,  net of federal benefit                |       | 340      |       | 318        |       | 188      |       |
| Valuation  allowance                                  |       | —   |       | (201       | )          | 201      |       |
| Other                                                 |       | (5       | )          | 2          |       | (310     | )          |
| Total                                                 | ** ** | **$**    | **851**    | ** ** | **$**      | **484**  | ** ** | **$** | **163** | ** ** |

 

Significantcomponents of deferred income tax liabilities and assets as of June 30,2007 and 2006 are as follows:

| ** **                                                  | ** ** | **2007** | ** ** | **2006**   | ** ** |
|-------------------------------------------------------------|------------|----------|------------|------------|------------|
| Deferred tax  liabilities:                                  |       |     |       |       |       |
| Book basis of vessels and equipment in excess of tax  basis |       | $        | 4,461      |       | $          | 3,786 |   |
| Total deferred tax liabilities                              | ** ** | **$**    | **4,461**  | ** ** | **$**      | **3,786** | ** ** |
| Deferred tax assets:                                        |       |     |       |       |       |
| Allowance for doubtful accounts                             |       | $        | 58         |       | $          | 30 |   |
| Accrued expenses                                            |       | 898      |       | 467        |       |
| Net operating loss carry-forwards                           |       | 679      |       | 679        |       |
| Other                                                       |       | 35       |       | 28         |       |
| Total deferred  tax assets                                  | ** ** | **$**    | **1,670**  | ** ** | **$**      | **1,204** | ** ** |

 

The Partnership had temporary differences at June 30,2007 primarily related to the excess of the book basis of vessels and equipmentover the related tax basis in the amount of $121,508. This amount will resultin taxable income, in the years these differences reverse, that will beincluded in the overall allocation of taxable income to the unitholders of thePartnership.

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At June 30, 2007, thePartnership had New York City Unincorporated Business Tax net operating lossesof $2,026 and its corporate subsidiaries had state net operating losses of $29which begin to expire in 2011, and foreign net operating losses of $1,886 whichbegin to expire in 2016.

**Note 7:   Commitmentsand Contingencies**

The Partnership leases its New York office and pierfacilities from an affiliate of an employee under an agreement which extendsthrough April 2009. Terms of the agreement provide for annual rentalpayments of $400 annually through April 2009. Rent expense was $400 forthe fiscal years ended June 30, 2007, 2006 and 2005. In addition, asubsidiary of the Partnership leases office and pier facilities and a watertreatment facility in Virginia under an agreement with a third party thatextends through January 2010. The Virginia lease agreement requires annualrental payments of $250 through January 8, 2010. The subsidiary receives$84 from sublease of a portion of the Virginia property which extends to December 31,2009. The subsidiary has an option to buy the Virginia premises for anaggregate purchase price of $4,200. Rent expense, net of the sublease, for thefiscal years ended June 30, 2007, 2006 and 2005 was $166, $166 and $97,respectively. The Partnership and subsidiary are also responsible for realestate taxes, insurance and all other costs associated with occupying theseproperties. Effective July 1, 2006, the Partnership also leases officespace in New Jersey under an agreement with a third party that extends through December 2013.The New Jersey lease requires rental payments totaling $18 through December 2006,followed by annual rental payments of $234 through December 2008, $245through December 2010 and $254 through December 2013. Rent expensewas $220 for the fiscal year ended June 30, 2007.

Inconnection with the acquisition of Sea Coast Transportation LLC, thePartnership assumed agreements with the port authority in Seattle, Washingtoncovering the lease of terminal facilities and docking rights for its vessels. Thelease expires in October 2008 with a renewal option for one additionalfive-year term. The lease requires monthly payments of $26 with escalation eachyear based on the consumer price index. Rent expense for the years ended June 30,2007 and 2006 was $265 and $208, respectively. Additionally, the Partnershipleases four barges under non-cancelable operating leases which expire in August 2007through August 2009. The future minimum lease payments for the four bargeoperating leases as of June 30, 2007 are as follows:

| **Year ending June 30,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------|------------|------------|------------|------------|------------|
| 2008                                    |       | $          | 1,927      |       |
| 2009                                    |       | 1,323      |       |
| 2010                                    |       | 83         |       |
| 2011                                    |       | —     |       |
| 2012 and  thereafter                    |       | —     |       |
| Total                                   | ** ** | **$**      | **3,333**  | ** ** |

 

Charter expenses were $2,995 and $2,092 for the bargeoperating leases for the years ended June 30, 2007 and 2006, respectively.

Included in total revenues are time charter andbareboat charter revenues of $105,621, $60,582 and $21,747 for the fiscal yearsended June 30, 2007, 2006 and 2005, respectively. Such revenues include$513 for the fiscal years ended June 30, 2007, 2006 and 2005, related tovessels chartered to an affiliate of an employee. The Partnership also utilizessuch affiliate for tank cleaning services at a cost of $1,894, $1,609 and$2,318 for the years ended June 30, 2007, 2006 and 2005, respectively. ThePartnership’s time charters and bareboat charters extend over various periodswhich expire between 2008 and 2012.

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At June 30,2007, minimum contractually agreed future revenue under time and bareboatcharters was as follows:

| **Year ending June 30,** | ** ** | ** ** | ** **  | ** ** | ** ** |
|-----------------------------------------|------------|------------|-------------|------------|------------|
| 2008                                    |       | $          | 85,483      |       |
| 2009                                    |       | 19,729     |        |
| 2010                                    |       | 5,528      |        |
| 2011                                    |       | 5,528      |        |
| 2012 and  thereafter                    |       | 3,241      |        |
| Total                                   | ** ** | **$**      | **119,509** | ** ** |

 

The Partnership hasentered into employment agreements with certain of its executive officers. Eachof the employment agreements had an initial term of one year, which isautomatically extended for successive one-year terms unless either party gives30-days written notice prior to the end of the term that such partydesires not to renew the employment agreement. The employment agreementscurrently provide for annual base salaries aggregating $930. In addition, eachemployee is eligible to receive an annual bonus award based upon theperformance of the Partnership and individual performance. If the employee’semployment is terminated without cause or if the employee resigns for goodreason, the employee will be entitled to severance in an amount equal to thegreater of (a) the product of 1.3125 (1.75 multiplied by .75) multipliedby the employee’s base salary at the time of termination or resignation and (b) theproduct of 1.75 multiplied by the remaining term of the employee’snon-competition provisions multiplied by the employee’s base salary at the timeof termination or resignation.

The European Union iscurrently working toward a new directive for the insurance industry, called “Solvency2”, that is expected to become law within three to four years and requireincreases in the level of free, or unallocated, reserves required to bemaintained by insurance entities, including protection and indemnity clubs thatprovide coverage for the maritime industry. The West of England Ship OwnersInsurance Services Ltd. (“WOE”), a mutual insurance association based inLuxembourg, provides the Partnership’s protection and indemnity insurancecoverage and would be impacted by the new directive. In anticipation of thesenew regulatory requirements, the WOE has assessed its members an additionalcapital call which it believes will contribute to achievement of the projectedrequired free reserve increases. The Partnership’s capital call, payable duringcalendar year 2007, will be approximately $1,119, of which $683 was paid in February 2007.A further request for capital may be made in the future; however, the amount ofsuch further assessment, if any, cannot be reasonably estimated at this time. Asa shipowner member of the WOE, the Partnership has an interest in the WOE’sfree reserves, and therefore has recorded the additional $1,119 capital call asan investment, at cost, subject to periodic review for impairment. This amountis included in other assets in the June 30, 2007 balance sheet.

EW Transportation Corp., apredecessor to the Partnership, and many other marine transportation companiesoperating in New York have come under audit with respect to the New York StatePetroleum Business Tax (“PBT”), which is a tax on vessel fuel consumed whileoperating in New York State territorial waters. An industry group in which EWTransportation Corp. and the Partnership participate has come to a finalagreement with the New York taxing authority on a calculation methodology forthe PBT. Effective January 1, 2007, the Partnership and the other marinetransportation companies began rebilling this tax to customers. For applicableperiods prior to 2007, the Partnership accrued an estimated liability using theagreed methodology. In accordance with the agreements entered into inconnection with the Partnership’s initial public offering, any liabilityresulting from the PBT prior to January 14, 2004 (the effective date ofthe initial public offering) is a retained liability of the predecessor.

As discussed in note 4,one of the Partnership’s tank barges struck submerged debris in the U.S. Gulfof Mexico, causing significant damage which resulted in the barge eventuallycapsizing. At the time of the incident, the barge was carrying approximately120,000 barrels of No. 6 fuel oil, a heavy oil product. In 

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January 2006,submerged oil recovery operations were suspended and a monitoring program,which sought to determine if any recoverable oil could be found on the oceanfloor, was begun. In February 2007, the Coast Guard agreed to end thecleanup and response phase, including the Partnership’s obligation to conductany further monitoring of the area around the spill site. The Partnership’s insurersresponded to the pollution-related costs and environmental damages resultingfrom the incident, paying approximately $65,000 less $60 in total deductibles,and are pursuing their own financial recovery efforts. The Partnership’sincident response effort is complete. The Partnership is not aware of anyfurther recovery, cleanup or other costs. However, if any such costs areincurred, they are expected to be paid by the insurers.

The Partnership is thesubject of various claims and lawsuits in the ordinary course of business formonetary relief arising principally from personal injuries, collisions andother casualties. Although the outcome of any individual claim or action cannotbe predicted with certainty, the Partnership believes that any adverse outcome,individually or in the aggregate, would be substantially mitigated byapplicable insurance or indemnification from previous owners of thePartnership’s assets, and would not have a material adverse effect on thePartnership’s financial position, results of operations or cash flows. ThePartnership is also subject to deductibles with respect to its insurancecoverage that range from $25 to $100 per incident and provides on acurrent basis for estimated payments thereunder.

**Note 8:   Long-term Incentive Plan**

In January 2004,K-Sea General Partner GP LLC, the general partner of the Partnership’s generalpartner, adopted the K-Sea Transportation Partners L.P. Long-term IncentivePlan (the “Plan”) for directors and employees of K-Sea General Partner GP LLCand its affiliates. The Plan currently permits the grant of awards covering anaggregate of 440,000 common units in the form of restricted units and unitoptions and is administered by the Compensation Committee of the Board ofDirectors of K-Sea General Partner GP LLC. The Board of Directors of K-SeaGeneral Partner GP LLC, in its discretion, may terminate the Plan at any timewith respect to any restricted units for which a grant has not yet been made,and also reserves the right to alter or amend the Plan from time to time,including increasing the number of common units with respect to which awardsmay be granted subject to unitholder approval as required by the New York StockExchange. No change in any outstanding grant may be made, however, which wouldmaterially impair the rights of the participant without the consent of suchparticipant. Subject to certain exceptions, restricted units are subject toforfeiture if employment is terminated prior to vesting. As the restrictedunits vest, K-Sea General Partner GP LLC has the option to either acquirecommon units in the open market for delivery to the recipient or distributenewly issued common units from the Partnership. In all cases, K-Sea GeneralPartner GP LLC is reimbursed by the Partnership for such expenditures.

Unit compensation expenseamounted to $1,007, $652 and $413, for the years ended June 30, 2007, 2006and 2005, respectively. As of June 30, 2007, there was $2,014 ofunamortized compensation cost related to non-vested restricted units, which isexpected to be recognized over a remaining weighted-average vesting period of2.7 years. A summary of the status of the Partnership’s restricted unit awardsas of June 30, 2007 and 2006, and of changes in restricted units outstandingunder the Partnership’s long-term incentive plan during the year endedJune 30, 2007, is as follows:

| ** **                                                | ** ** | **Number of units** | ** ** | **Weighted-  Average Grant  Date Fair Value  per Unit** | ** ** |
|-----------------------------------------------------------|------------|-------------------------------|------------|-----------------------------------------------------------------------------|------------|
| Restricted unit awards  outstanding at June 30, 2006 |       |                          | 94,350     |                                                                        |       |   | $ | 31.97 |   |   |
| Units granted                                             |       |                          | 5,422      |                                                                        |       |   | $ | 32.13 |   |   |
| Units vested and issued                                   |       |                          | (22,900    | )                                                                           |       |   | $ | 31.89 |   |   |
| Restricted unit awards  outstanding at June 30, 2007 |       |                          | 76,872     |                                                                        |       |   | $ | 32.01 |   |   |

 

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**Note 9:   RetirementPlans**

Effective June 29, 2006, the Partnership’s moneypurchase pension plan was terminated and all the assets were merged into thePartnership’s 401(k) Savings Plan (the “Plan”). Also effective June 29,2006, the Sea Coast defined contribution plan was terminated and all the assetswere merged into the Plan. The Plan is a defined contribution plan thatqualifies under Section 401(k) of the Internal Revenue Code. The Plancovers all eligible employees. The Plan provides that eligible employees maymake contributions, subject to Internal Revenue Code limitations, and thePartnership will match the first two percent of employee compensationcontributed, subject to a maximum amount. In addition, the plan allows for anannual discretionary employer contribution up to five percent of an employee’sannual compensation. Employer contribution expense under the Plan totaled$2,981 for the year ended June 30, 2007. The Plan expenses for the fiscalyears ended June 30, 2006 and 2005, which excluded the money purchase pensionplan and the Sea Coast defined contribution plan, totaled $499 and $443,respectively.

Under the terms of the money purchase pension plan,the Partnership contributed five percent of each eligible employee’s annualcompensation, as defined in the plan document. For the money purchase plan,expenses totaled $1,127 and $1,000 for the fiscal years ended June 30,2006 and 2005, respectively.

In connection with thepurchase of Sea Coast, the Partnership acquired an additional defined contributionplan that qualified under Section 401(k) of the Internal Revenue Code.The plan covered all eligible employees and provided that eligible employeesmay make contributions, subject to Internal Revenue Code limitations, and thePartnership would match the first 25% of employee compensation contributed, upto a maximum of 4%. In addition, the plan allowed for an annual discretionaryemployer contribution up to 4% of an employee’s annual compensation. Employercontribution expenses under this plan totaled $372 from the acquisition datethrough June 30, 2006.

Accrued expenses for allpension plans totaled $2,173 and $1,251 as of June 30, 2007 and 2006,respectively, and are included in accrued expenses and other currentliabilities in the consolidated balance sheets. Additionally, accrued expensesfor payroll-related costs totaled $2,989 and $3,048 as of June 30, 2007and 2006, respectively, which are also included in accrued expenses and othercurrent liabilities in the consolidated balance sheets.

**Note 10:   Major Customers**

Two customers accountedfor 19% and 17% of consolidated revenues for the fiscal year ended June 30,2007, two customers accounted for 20% and 15% of consolidated revenues for thefiscal year ended June 30, 2006, and two customers accounted for 26% and16% of consolidated revenues for the fiscal year ended June 30, 2005.

**Note 11:   Fair Value of FinancialInstruments**

As of June 30, 2007,the fair value of long-term debt was approximately $243,685 based on theborrowing rates currently available to the Partnership for bank loans withsimilar terms and average maturities. The fair value of the Partnership’s otherfinancial instruments approximated their cost bases as such instruments areshort-term in nature or were recently negotiated.

**Note 12:   New Accounting Pronouncements**

On June 2, 2005, theFASB issued FASB Statement No. 154, “Accounting Changes and ErrorCorrections-a replacement of APB No. 20 and FAS No. 3” (“FAS 154”). FAS154 replaces APB Opinion No. 20, “Accounting Changes” (“APB 20”) and FASBStatement No. 3, “Reporting Accounting Changes in Interim FinancialStatements” and changes the requirements for the accounting for and reportingof a change in accounting principle. FAS 154 applies to all voluntary changesin accounting principle. It also applies to changes required by an accountingpronouncement in the unusual instance that the 

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pronouncementdoes not include specific transition provisions. When a pronouncement includesspecific transition provisions, those provisions should be followed. ThePartnership adopted FAS 154 as of July 1, 2006, and such adoption did nothave a significant impact on its financial position, results of operations orcash flows.

On February 16, 2006the FASB issued FASB Statement No. 155, “Accounting for Certain HybridFinancial Instruments, an amendment of FASB Statements No. 133 and 140” (“FAS155”). FAS 155 amends FASB Statement No. 133, “Accounting for DerivativeInstruments and Hedging Activities” and FASB Statement No. 140, “Accountingfor Transfers and Servicing of Financial Assets and Extinguishments ofLiabilities”. The Partnership is required to adopt FAS 155 as of July 1,2007, and does not expect that such adoption will have a significant impact onits financial position, results of operations or cash flows.

In June 2006, theFASB issued FASB Interpretation No. 48, “Accounting for Uncertainty inIncome Taxes—an interpretation of FASB Statement No. 109” (“FIN 48”). FIN48 clarifies the accounting for uncertainty in income taxes recognized in anenterprise’s financial statements in accordance with FASB Statement No. 109,“Accounting for Income Taxes”. FIN 48 prescribes a recognition threshold andmeasurement attribute for financial statement recognition and measurement of atax position taken or expected to be taken in a tax return. FIN 48 alsoprovides guidance on derecognition, classification, interest and penalties,accounting in interim periods, disclosure, and transition. FIN 48 is effectivefor the Partnership’s fiscal year beginning July 1, 2007, and thePartnership is currently analyzing its impact, if any.

In September 2006, the FASB issued FASB StatementNo. 157, “Fair Value Measurements” (“FAS 157”). FAS 157 defines fairvalue, establishes a framework for measuring fair value in generally acceptedaccounting principles, and expands disclosures about fair value measurements. FAS157 applies under other accounting pronouncements that require or permit fairvalue measurements. FAS 157 is effective for fiscal years beginning after November 15,2007, and the Partnership is currently analyzing its impact, if any.

In September 2006,the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108,“Considering the Effects of Prior Year Misstatements when QuantifyingMisstatements in Current Year Financial Statements” (“SAB 108”). SAB 108provides guidance on quantifying and evaluating the materiality of unrecordedmisstatements. SAB 108 does not require prior period restatement as a result ofadopting the new guidance if management properly applied its previous approachto assessing unrecorded misstatements and all relevant qualitative factors wereconsidered. The cumulative effect of the initial application of SAB 108, ifany, would be reported in the carrying amounts of assets and liabilities at thebeginning of the year, with an offsetting adjustment to the beginning balanceof retained earnings. The nature and amount of each of the individualmisstatements corrected would be required to be disclosed. SAB 108 is effectivefor the first fiscal year ending after November 15, 2006. The Partnershipadopted SAB 108 for the fiscal year ended June 30, 2007, and such adoptiondid not have a significant impact on our financial position, results ofoperations or cash flows.

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**Note 13:   Quarterly Results of Operations(Unaudited)**

Thefollowing summarizes certain quarterly results of operations for each of thefiscal years ended June 30, 2007 and 2006:

| ** **                                     | ** ** | **Three Months Ended**                                     | ** ** |
|------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                     | ** ** | **September 30**                                                | ** ** | **December 31** | ** ** | **March 31** | ** ** | **June 30** | ** ** |
| ** **                                     | ** ** | **(in thousands, except per unit amounts)** | ** ** |
| **Fiscal 2007**                                |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total revenues                                 |       |                                                                 | $          | 54,910 |   |   |   | $ | 56,031 |   |   |   | $ | 55,630 |   |   | $ | 60,003 |   |
| Operating income                               |       |                                                                 | $          | 7,517 |   |   |   | $ | 7,758 |   |   |   | $ | 7,601 |   |   | $ | 7,829 |   |
| Net income                                     |       |                                                                 | $          | 4,086 |   |   |   | $ | 3,946 |   |   |   | $ | 3,996 |   |   | $ | 3,792 |   |
| General partners’  interest in net income |       |                                                                 | $          | 82 |   |   |   | $ | 79 |   |   |   | $ | 80 |   |   | $ | 75 |   |
| Limited partners’  interest in net income |       |                                                                 | $          | 4,004 |   |   |   | $ | 3,867 |   |   |   | $ | 3,916 |   |   | $ | 3,717 |   |
| Net income per limited  partner unit:          |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                          |       |                                                                 | $          | 0.40 |   |   |   | $ | 0.39 |   |   |   | $ | 0.39 |   |   | $ | 0.37 |   |
| Diluted                                        |       |                                                                 | $          | 0.40 |   |   |   | $ | 0.39 |   |   |   | $ | 0.39 |   |   | $ | 0.37 |   |

 

| ** **                                            | ** ** | **Three Months Ended**                                     | ** ** |
|-------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                            | ** ** | **September 30**                                                | ** ** | **December 31** | ** ** | **March 31** | ** ** | **June 30** | ** ** |
| ** **                                            | ** ** | **(in thousands, except per unit amounts)** | ** ** |
| **Fiscal 2006**                                       |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total revenues                                        |       |                                                                 | $          | 37,200 |   |   |   | $ | 47,308 |   |   |   | $ | 46,089 |   |   | $ | 52,171 |   |
| Operating income                                      |       |                                                                 | $          | 6,150 |   |   |   | $ | 6,660 |   |   |   | $ | 4,093 |   |   | $ | 6,761 |   |
| Net income (loss)                                     |       |                                                                 | $          | 4,248 |   |   |   | $ | (2,646 | ) |   |   | $ | 1,216 |   |   | $ | 3,084 |   |
| General partners’  interest in net income (loss) |       |                                                                 | $          | 85 |   |   |   | $ | (53 | ) |   |   | $ | 24 |   |   | $ | 62 |   |
| Limited partners’  interest in net income (loss) |       |                                                                 | $          | 4,163 |   |   |   | $ | (2,593 | ) |   |   | $ | 1,192 |   |   | $ | 3,022 |   |
| Net income (loss) per  limited partner unit:          |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                 |       |                                                                 | $          | 0.47 |   |   |   | $ | (0.27 | ) |   |   | $ | 0.12 |   |   | $ | 0.30 |   |
| Diluted                                               |       |                                                                 | $          | 0.47 |   |   |   | $ | (0.27 | ) |   |   | $ | 0.12 |   |   | $ | 0.30 |   |

 

**Note 14:   SubsequentEvent**

On August 14, 2007 the Partnership, throughcertain wholly-owned subsidiaries, completed the acquisition of all of theequity interests in Smith Maritime Ltd., or Smith Maritime, Go Big CharteringLLC, or Go Big, and Sirius Maritime LLC, or Sirius Maritime. Smith Maritime, GoBig and Sirius Maritime are providers of marine transportation and logisticsservices to major oil companies, oil traders and refiners in Hawaii and alongthe West Coast of the United States. The aggregate purchase price for SmithMaritime, Go Big and Sirius Maritime was approximately $202,962, comprising$169,154 in cash, $23,573 of assumed debt, and 250,000 Partnership units valuedat approximately $10,235.

On August 14, 2007, the Partnership amended andrestated its revolving credit agreement with KeyBank National Association, asadministrative agent and lead arranger, to provide for (1) an increase inavailability to $175,000 under our senior secured revolving credit facility,with an increase in the term to seven years, (2) a $45,000 364-daysenior secured revolving credit facility, (3) amendments to certainfinancial covenants and (4) a reduction in interest rate margins. Undercertain conditions, the Partnership has the right to increase the revolvingfacility by up to $75,000, to a maximum total facility amount of $250,000. Therevolving facility and the 364-day facility are collateralized by a firstperfected security interest in vessels having a total fair market value ofapproximately $275,000 and certain equipment and machinery related to suchvessels. The revolving facility and the 364-day facility bear interest atthe London Interbank Offered Rate, or LIBOR, plus a margin ranging from 0.7% to1.5% depending on the Partnership’s ratio of total funded debt to EBITDA (asdefined in the agreement). On August 14, 2007, the Partnership borrowed$67,000 under the revolving facility and $45,000under the 364-dayfacility to fund a portion of the purchase price in connection with the SmithMaritime, Go Big and Sirius Maritime 

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acquisitions. As of August 14,2007, the Partnership had approximately $166,350 outstanding under therevolving facility and $45,000 outstanding under the 364-day facility.

Also on August 14, 2007, the Partnership enteredinto a bridge loan facility for up to $60,000 with an affiliate of KeyBank NationalAssociation. The bridge loan facility bears interest at an annual rate of LIBORplus 1.5%. The bridge loan facility matures on November 12, 2007. Thebridge loan facility is not collateralized until October 13, 2007 and,thereafter, will be collateralized by a second perfected security interest inthe vessels collateralizing the revolving facility and the 364-dayfacility. During an event of default, the bridge loan facility will bearinterest at an annual rate of LIBOR plus 7.5%. On August 14, 2007, thePartnership borrowed $60,000 under the bridge loan facility in connection withthe Smith Maritime, Go Big and Sirius Maritime acquisition.

Theacquisition of Smith Maritime, Go Big and Sirius Maritime are not included inthe results of operations and the income statement for the fiscal year ended June 30,2007. The Partnership will allocate the purchase price to the tangible assets,intangible assets, and liabilities acquired based on their fair values, whichfor the fixed assets and intangibles are based on consideration of independentappraisals. The purchased identifiable intangible assets will be amortized on astraight-line basis over their respective estimated useful lives. The excess ofthe purchase price over the fair value of the acquired net assets will berecorded as goodwill, which is not amortized but which will be reviewedannually for impairment. The Partnership’s preliminary allocation of thepurchase price is as follows:

| Current assets                                    |   | $       | 5,943   |   |
|---------------------------------------------------|--------|---------|---------|--------|
| Vessels and equipment, net                        |   | 152,500 |    |
| Intangible assets                                 |   | 17,250  |    |
| Goodwill                                          |   | 40,378  |    |
| Other assets                                      |   | 624     |    |
|                                              |   | 216,695 |    |
| Current liabilities and capital lease obligations |   | 13,733  |    |
| Total purchase price                              |   | $       | 202,962 |   |

 

The identifiable intangible assets purchased in theacquisition include customer relationships and covenants not to compete,whichwe estimate will be amortized over 10 and 3 years, respectively. An additional$2,250 of intangibles has been allocated to the excess fair market value of aleased vessel over its option price. The annual amortization expense iscurrently estimated at $1,500. A substantial portion of the goodwill isexpected to be deductible for tax purposes.

Theexpected future amortization expense related to the intangible assets is asfollows:

| **Year ending June 30,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------|------------|------------|------------|------------|------------|
| 2008                                    |       | $          | 1,250      |       |
| 2009                                    |       | 1,500      |       |
| 2010                                    |       | 1,500      |       |
| 2011                                    |       | 1,500      |       |
| 2012 and  thereafter                    |       | 9,250      |       |
| Total                                   | ** ** | **$**      | **15,000** | ** ** |

 

*Pro Forma FinancialInformation*

Theunaudited financial information in the table below summarizes the combinedresults of operations of the Partnership, Smith Maritime, Go Big and SiriusMaritime, on a pro forma basis, as though the acquisition had been completed asof the beginning of each period presented. This pro forma financial data ispresented for information purposes only and is not necessarily indicative ofthe results of 

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operations that would have been achieved had theacquisition actually taken place at those dates. The unaudited pro formafinancial information combines the historical results of the Partnership withthe historical results of Smith Maritime, Go Big and Sirius Maritime for thefiscal 2007 and 2006 periods.

| ** **                                         | ** ** | **For the Year Ended  June 30,** | ** ** |
|----------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                         | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| ** **                                         | ** ** | **(unaudited)**                                      | ** ** |
| Revenues                                           |       | $                                                    | 283,546    |   | $ | 229,347 |   |
| Net income                                         |       | $                                                    | 18,305     |   | $ | 2,029 |   |
| Basic net income  per limited partner unit         |       | $                                                    | 1.76       |   | $ | 0.20 |   |
| Fully diluted net income  per limited partner unit |       | $                                                    | 1.75       |   | $ | 0.20 |   |

 

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