**UNITED STATESSECURITIES 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, 2006**

**OR**

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

**Commissionfile number 001-31920**

**K-SEA TRANSPORTATION PARTNERS L.P.**

(Exact name of registrantas specified in its charter)

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

 

**One Tower CenterBoulevard, 17**th FloorEast Brunswick, New Jersey 08816

(Address of principalexecutive offices and zip code)

**(732) 565-3818**

(Registrant’s telephonenumber, including area code)

**Securities registered pursuant to Section 12(b) ofthe Act:**

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

 

**Securities registered pursuant to section 12(g) ofthe 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

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated 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  No x

The aggregate market valueof the registrant’s Common Units held by non-affiliates of the registrant wasapproximately $199.6 million as of December 30, 2005 based on $34.95 perCommon Unit, the closing price of the Common Units on the New York StockExchange on such date.

At September 6, 2006,5,754,900 Common Units and 4,165,000 Subordinated Units were outstanding.

Documents Incorporated by Reference: **None**

 

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**K-SEA TRANSPORTATION PARTNERS L.P.2006 ANNUAL REPORT ON FORM 10-KTABLE OF CONTENTS**
|                | ** ** |                                                                                                                        | **PAGE** |
|----------------|------------|------------------------------------------------------------------------------------------------------------------------|----------|
| PART I    |       |                                                                                                                   |     |   |
| ITEMS 1 and 2. |       | BUSINESS  and PROPERTIES                                                                                               |     | 1 |   |
| ITEM 1A        |       | RISK FACTORS                                                                                                           |     | 20 |   |
| ITEM 1B        |       | UNRESOLVED STAFF COMMENTS                                                                                              |     | 36 |   |
| ITEM 3.        |       | LEGAL  PROCEEDINGS                                                                                                     |     | 36 |   |
| ITEM 4.        |       | SUBMISSION  OF MATTERS TO A VOTE OF SECURITYHOLDERS                                                                    |     | 36 |   |
| PART II   |       |                                                                                                                   |     |   |   |
| ITEM 5.        |       | MARKET  FOR REGISTRANT’S COMMON EQUITY, RELATED SECURITYHOLDER MATTERS AND ISSUER  PURCHASES OF EQUITY SECURITIES |     | 37 |   |
| ITEM 6.        |       | SELECTED  FINANCIAL DATA                                                                                               |     | 40 |   |
| ITEM 7.        |       | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                            |     | 42 |   |
| ITEM 7A.       |       | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                            |     | 61 |   |
| ITEM 8.        |       | FINANCIAL  STATEMENTS AND SUPPLEMENTARY DATA                                                                           |     | 62 |   |
| ITEM 9.        |       | CHANGES  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE                                  |     | 62 |   |
| ITEM 9A.       |       | CONTROLS  AND PROCEDURES                                                                                               |     | 62 |   |
| ITEM 9B.       |       | OTHER  INFORMATION                                                                                                     |     | 62 |   |
| PART III  |       |                                                                                                                   |     |   |   |
| ITEM 10.       |       | DIRECTORS  AND EXECUTIVE OFFICERS OF THE REGISTRANT                                                                    |     | 63 |   |
| ITEM 11.       |       | EXECUTIVE  COMPENSATION                                                                                                |     | 67 |   |
| ITEM 12.       |       | SECURITY  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED  SECURITYHOLDER MATTERS                    |     | 72 |   |
| ITEM 13.       |       | CERTAIN  RELATIONSHIPS AND RELATED TRANSACTIONS                                                                        |     | 77 |   |
| ITEM 14.       |       | PRINCIPAL  ACCOUNTANT FEES AND SERVICES                                                                                |     | 79 |   |
| PART IV   |       |                                                                                                                   |     |   |   |
| ITEM 15.       |       | EXHIBITS  AND FINANCIAL STATEMENT SCHEDULES                                                                            |     | 80 |   |

 

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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 recent and proposed 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 of our insurance;

·       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 theUnited States domestic marine transportation business. We currently operate afleet of 61 tank barges, 2 tankers and 41 tugboats that serves a widerange of customers, including major oil companies, oil traders and refiners.With approximately 3.4 million barrels of capacity, we believe wecurrently operate the largest coastwise tank barge fleet in the United States,as measured by barrel-carrying capacity.

For the fiscal year ended June 30, 2006, ourfleet transported approximately 125 million barrels of refined petroleumproducts for our customers, including ExxonMobil, Conoco Philips, Rio Energy,Chevron and BP. Our five largest customers in fiscal 2006 have been doingbusiness with us for approximately 16 years on average. We do not assumeownership of any of the products we transport. During fiscal 2006, we derivedapproximately 79% of our revenue from longer-term contracts that are generallyfor periods of one year or more.

We have a high-quality, well-maintained fleet.Approximately 67% of our current barrel-carrying capacity is double-hulled.Furthermore, we will be permitted to continue to operate our single-hull tankvessels (except one 75,000-barrel vessel which phases out in January 2009)until January 1, 2015 in compliance with the Oil Pollution Act of 1990, orOPA 90, which mandates the phase-out of all single-hull tank vesselstransporting petroleum and petroleum products in U.S. waters. All of our tankvessels except two operate under the U.S. flag, and all but four are qualifiedto transport cargo between U.S. ports under the Jones Act, the federal statutesthat restrict foreign owners from operating in the U.S. maritime transportationindustry.

Our strategy to expand our business and increase ourdistributable cash flow includes the expansion of our fleet throughnewbuildings and strategic acquisitions. In August 2005, we signed anagreement to construct two additional 28,000-barrel tank barges. One wasdelivered in August 2006, while the other is expected to be delivered inthe second quarter of fiscal 2007. In November 2005, we signed anagreement to construct a new 100,000-barrel tank barge that is expectedto be delivered in the third quarter of fiscal 2007. These three vessels areexpected to cost, in the aggregate and after the addition of certain specialequipment, approximately $24.0 million. In June 2006, we signed anagreement to construct an additional four new 28,000-barrel tank bargesthat are expected to be delivered in the first and second quarters of fiscal2008. Also in August 2006, we signed an agreement to construct two 80,000-barreltank barges that are expected to be delivered in the second and third quartersof fiscal 2008. These six vessels are expected to cost, in the aggregate andafter addition of certain special equipment, approximately $50.0 million. Weexpect to finance these newbuildings from borrowings and cash from operations.

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.

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

·       *Expand our fleet through newbuildings and accretiveand strategic acquisitions.  *We have grown successfully in thepast through newbuildings and strategic acquisitions. We expect to continuethis 

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strategy by consistentlysurveying the marketplace to identify and pursue newbuilding opportunities andacquisitions that expand the services and products we offer or that expand ourgeographic presence. We took delivery of four new tank barges between December 2005and August 2006 and, as described above, acquired Sea Coast Transportationin October 2005.

·       *Maximize fleet utilization and improve 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.

·       *Maintain 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.

·       *Balance 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 2006, 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 2006from 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.

·       *Attract and maintain customers by adhering to highstandards 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 OperatingPartnership L.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 GP LLC, a Delaware limited liabilitycompany. K-Sea General Partner GP LLC has ultimate responsibility for managingour 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, 

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distribution terminals,power plants and ships. According to a June 2006 study by the Associationof Oil Pipe Lines, 29.9% of all domestic refined petroleum producttransportation was by water in 2004, making waterborne transportation the mostused mode of transportation for refined petroleum products after pipelines.

Among the laws governing the domestic tank vesselindustry is the Jones Act. Under the Jones Act, marine transportation betweenpoints in the United States, generally known as U.S. coastwise trade, islimited to U.S.-flag vessels that were built in the United States and areowned, manned and operated by U.S. citizens. All of our tank vessels except twooperate under the U.S. flag, and all but four are qualified to transport cargobetween U.S. ports under the Jones Act.

OPA 90 mandates the phase-out of all single-hull tankvessels transporting petroleum and petroleum products in U.S. waters at varyingtimes by January 1, 2015. The effect of this legislation has been, and isexpected to continue to be, the replacement of domestic single-hull tank vesselcapacity with newbuildings and retrofitting of existing single-hull tankvessels.

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***

Tank vessels are usedfrequently to continue the transportation of refined petroleum products alongthe distribution chain after these products have first been transported byanother method of transportation, such as a pipeline. For example, many areashave access to refined petroleum products only by using marine transportationas the last link in their distribution chain. In addition, tank vesseltransportation 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.

***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;

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·       *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.

·       *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.

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***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                       |       |       | 33         |                        |       |
| Chevron                  |       |       | 17         |                        |       |
| ConocoPhillips           |       |       | 10         |                        |       |
| ExxonMobil               |       |       | 10         |                        |       |
| Rio Energy               |       |       | 8          |                        |       |

 

Our two largest customers in fiscal 2006, based ongross revenue, were ExxonMobil and ConocoPhillips, each of which accounted formore than 10% of our fiscal 2006 consolidated revenue. Please read note 11to our audited consolidated financial statements included elsewhere in thisreport.

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**Our Vessels**

***Tank Vessel Fleet***

At June 30, 2006, ourfleet 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.       |                       |       |
| 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.       |                       |       |
| McCleary’s Spirit(6) |       | 1969       |       | 85,000          |       | 6,554                   |       |            | N.A.       |                       |       |
| DBL 81                    |       | 2003       |       | 82,000          |       | 5,667                   |       |            | N.A.       |                       |       |
| DBL 82                    |       | 2003       |       | 82,000          |       | 5,667                   |       |            | N.A.       |                       |       |
| Pacific                   |       | 1993       |       | 81,000          |       | 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.       |                       |       |
| Cascades(7)               |       | 1993       |       | 67,000          |       | 4,721                   |       |            | 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.       |                       |       |
| 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.       |                       |       |
| 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**              |       |       | ** ** | **2,256,785**   | ** ** | **161,986**             |       |            |       |                       |       |

 

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| **Vessel(1)**              | ** ** | ** ** | ** ** | **Year  Built** | ** ** | **Capacity  (barrels)** | ** ** | **Gross  Tons** | ** ** | **OPA 90  Phase-Out** | ** ** |
|----------------------------|------------|------------|------------|-----------------|------------|-------------------------|------------|-----------------|------------|----------------------------|------------|
| ***Single-Hull  Tankers*** |       |       |       |            |       |                    |       |            |       |                       |       |
| Great Lakes                |       | 1963       |       | 38,000          |       | 2,813                   |       |            | 2015       |                       |       |
| Great Gull                 |       | 1969       |       | 30,000          |       | 1,729                   |       |            | 2015       |                       |       |
|                       |       |       | ** ** | **68,000**      | ** ** | **4,542**               |       |            |       |                       |       |
| ***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                   |       |            | 2009       |                       |       |
| 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       |                       |       |
| 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       |                       |       |
| E 10                       |       | 1960       |       | 18,790          |       | 1,077                   |       |            | 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       |                       |       |
| KTC 11                     |       | 1964       |       | 10,700          |       | 614                     |       |            | 2015       |                       |       |
| KTC 9                      |       | 1948       |       | 8,900           |       | 624                     |       |            | 2015       |                       |       |
| Chalin                     |       | 1979       |       | 2,750           |       | 206                     |       |            | 2015       |                       |       |
| **Subtotal**               |       |       | ** ** | **1,099,931**   | ** ** | **68,229**              |       |            |       |                       |       |
| **Total  Fleet**           |       |       | ** ** | **3,356,716**   | ** ** | **230,215**             |       |            |       |                       |       |

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(1)          Excludes a potable waterbarge, which we also operate.

(2)          Built in 1974; double-hullingwas completed and the vessel redelivered in September 2004.

(3)          Built in 1986 andrebuilt in 1994.

(4)          Built in 1982 andrebuilt for petroleum transportation in 2004.

(5)          Vessel not qualified forJones Act trade due to foreign construction.

(6)          Built in 1969 andrebuilt in 2001.

(7)          Chartered-invessel.

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***Newbuildings***

Please read “—OurPartnership” above for a discussion of additional tank vessels we currentlyhave under construction and on order.

***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 June 30, 2006, we operated the followingtugboats:

**K-Sea Transportation Partners L.P. Tugboat Fleet**

| **Name**           | ** ** | ** ** | ** ** | **Year Built** | ** ** | **Horsepower** | ** ** | **Dimensions** | ** ** |
|--------------------|------------|------------|------------|---------------------|------------|----------------|------------|----------------|------------|
| Lincoln Sea        |       |       | 2000       |                |       |           | 8000       |           |       | 118.6’ x 40’ x 22’ |   |
| Rebel              |       |       | 1975       |                |       |           | 7200       |           |       | 150’ x 46’ x 22’ |   |
| Yankee             |       |       | 1976       |                |       |           | 7200       |           |       | 150’ x 46’ x 22’ |   |
| Irish Sea          |       |       | 1969       |                |       |           | 5750       |           |       | 135’ x 34’9” x 18’ |   |
| Volunteer          |       |       | 1982       |                |       |           | 4860       |           |       | 120’ x 37’ x 18’ |   |
| Adriatic Sea(1)    |       |       | 2004       |                |       |           | 4800       |           |       | 126’ x 34’ x 14’5” |   |
| Java Sea(2)        |       |       | 2005       |                |       |           | 4800       |           |       | 118’5” x 34’ x 14’5” |   |
| Pacific Freedom(3) |       |       | 1998       |                |       |           | 4500       |           |       | 120’ x 31’ x 15’ |   |
| Viking             |       |       | 1972       |                |       |           | 4300       |           |       | 132’5” x 34’ x 18’3” |   |
| Beaufort Sea       |       |       | 1971       |                |       |           | 4300       |           |       | 113’ x 32’3” x 15’5” |   |
| Pacific Wolf       |       |       | 1975       |                |       |           | 4100       |           |       | 111’ x 24’ x 13’ |   |
| William J. Moore   |       |       | 1970       |                |       |           | 4000       |           |       | 135’ x 35’ x 20’ |   |
| Tasman Sea         |       |       | 1976       |                |       |           | 3900       |           |       | 123’5” x 34’ x 16’4” |   |
| Norwegian Sea(4)   |       |       | 2006       |                |       |           | 3900       |           |       | 133’ x 34’ x 17.2” |   |
| Sea Hawk(5)        |       |       | 2006       |                |       |           | 3900       |           |       | 112’ x 32’ x 15’ |   |
| John Brix(6)       |       |       | 1999       |                |       |           | 3900       |           |       | 141’ x 35’ x 8’ |   |
| Pacific Avenger    |       |       | 1977       |                |       |           | 3900       |           |       | 140’ x 34’ x 17’ |   |
| Kara Sea           |       |       | 1974       |                |       |           | 3520       |           |       | 111’ x 32’ x 13’8” |   |
| Coral Sea          |       |       | 1973       |                |       |           | 3280       |           |       | 111’ x 32’ x 13’8” |   |
| Maryland           |       |       | 1962       |                |       |           | 3010       |           |       | 110’ x 28’ x 13’7” |   |
| Baltic Sea         |       |       | 1973       |                |       |           | 3000       |           |       | 101’ x 30’ x 13’1” |   |
| 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’ |   |
| Pacific Pride(7)   |       |       | 1989       |                |       |           | 2500       |           |       | 84’ x 28’ x 13’ |   |
| Sargasso Sea       |       |       | 1972       |                |       |           | 2460       |           |       | 105’ x 29.6’ x 15” |   |
| Bering Sea         |       |       | 1975       |                |       |           | 2250       |           |       | 105’ x 29’ x 13’3” |   |
| Pacific Patriot    |       |       | 1981       |                |       |           | 2000       |           |       | 77’ x 27’ x 12’ |   |
| Davis Sea          |       |       | 1982       |                |       |           | 2000       |           |       | 77.4’ x 26’ x 8.5” |   |
| Pacific Eagle(8)   |       |       | 2001       |                |       |           | 2000       |           |       | 98’ x 27’ x 13’ |   |

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| Tiger          |   |   | 1966 |   |   |   | 2000 |   |   | 88’  x 27’ 12’                 |   |
|----------------|--------|--------|------|--------|--------|--------|------|--------|--------|-----------------------------------------------|--------|
| Houma          |   |   | 1970 |   |   |   | 1950 |   |   | 89’9”  x 29’ x 11’        |   |
| Timor Sea      |   |   | 1960 |   |   |   | 1920 |   |   | 80’  x 24’ x 10’               |   |
| Odin           |   |   | 1982 |   |   |   | 1860 |   |   | 72’  x 27’5” x 11’8” |   |
| Taurus         |   |   | 1979 |   |   |   | 1860 |   |   | 78’5”  x 25’ x 11’7” |   |
| Falcon         |   |   | 1978 |   |   |   | 1800 |   |   | 80’  x 25’ x 11’5”        |   |
| Unimak         |   |   | 1972 |   |   |   | 1800 |   |   | 60’  x 22’ x 7’                |   |
| 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’                |   |
| Scotia Sea     |   |   | 1981 |   |   |   | 900  |   |   | 56’ x 24’ x 9’                 |   |

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(1)          Builtin 1978 and rebuilt in 2004.

(2)          Built in 1981 andrebuilt in 2005.

(3)          Builtin 1969 and rebuilt in 1998.

(4)          Builtin 1976 and rebuilt in 2006.

(5)          Built in 1978 andrebuilt in 2006.

(6)          Built in 1963 andrebuilt in 1999.

(7)          Builtin 1976 and rebuilt in 1989.

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

***IntegratedTug-Barge Units***

We currently operatethirteen ITBs. At June 30, 2006, ITBs represented approximately 38% of thebarrel-carrying capacity of our tank barge fleet.

**Bunkering**

For over 30 years, wehave specialized in the shipside delivery of fuel, known as bunkering, for themajor and independent bunker suppliers in New York Harbor. We also providebunkering services in the port of Norfolk. Demand for bunkering services isdriven primarily by the number of ship arrivals. A ship’s time in portgenerally is limited, and the cost of delaying sailing due to bunkering orother activities can be significant. Therefore, we continually strive toimprove the level of service and on-time deliveries we provide to ourcustomers.

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 and fendering.

**Preventative Maintenance**

We have a computerizedpreventative maintenance program that tracks U.S. Coast Guard and AmericanBureau of Shipping inspection schedules and establishes a system for thereporting and handling of routine maintenance and repair.

Vessel captains submitmonthly inspection reports, which are used to note conditions that may requiremaintenance or repair. Vessel superintendents are responsible for reviewingthese reports, inspecting identified discrepancies, assigning a priority classificationand generating work orders. Work orders 

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establishjob type, assign personnel responsible for the task and record target start andcompletion dates. Vessel superintendents inspect repairs completed by the crew,supervise outside contractors as needed and conduct quarterly inspectionsfollowing the same criteria as the captains. Drills and training exercises areconducted in conjunction with these inspections, which are typically morecomprehensive in scope. In addition, an operations duty officer is available ona 24-hour basis to handle any operational issues. The operations dutyofficer is prepared to respond on scene whenever required and is trained intechnical repair issues, spill control and emergency 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 tooperating our vessels in a manner that protects the safety and health of ouremployees, the general public and the environment. Our primary goal is tominimize the number of safety- and health-related accidents on ourvessels and our property. Our primary concerns are to avoid personal injuriesand to reduce occupational health hazards. We want to prevent accidents thatmay cause damage to our personnel, equipment or the environment, such as fire,collisions, petroleum spills and groundings of our vessels. In addition, we arecommitted to reducing overall emissions and waste generation from each of ourfacilities and vessels and to the safe management of associated cargo residuesand 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 health policieson their vessels.

***Tank BargeCharacteristics***

To protect theenvironment, today’s tank barge hulls are required not only to be leak-proofinto the body of water in which they float but also to be vapor-tight toprevent the release of any fumes or vapors into the atmosphere. Our tank bargesthat carry light products such as gasoline or naphtha have alarms that indicatewhen the tank is full (95% of capacity) and when it is overfull (98% ofcapacity). Each tank barge also has a vapor recovery system that connects thecargo tanks to the shore terminal via pipe and hose to return to the plant thevapors 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 communication and fendering.

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***Safety ManagementSystems***

We belong to and adhere tothe recommendations of the American Waterways Operators (“AWO”) ResponsibleCarrier Program. The program is designed as a framework for continuouslyimproving the industry’s and member companies’ safety performance. The programcomplements and builds upon existing government regulations, requiring companysafety and training standards that in many instances exceed those required byfederal law or regulation.

Developedby the AWO, the Responsible Carrier Program incorporates best industrypractices in three 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. Weare periodically audited by an AWO-certified auditor to verify compliance. Wewere last audited in early 2004, and our Responsible Carrier Programcertificate remains in effect until March 2007.

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 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 June 30, 2006, weemployed 690 persons, comprising 114 shore staff and 576 fleet personnel. Ourtug and tanker captains are non-union management supervisors. EffectiveJuly 1, 2004, we entered into a new four-year collective bargainingagreement with our maritime union covering certain of our seagoing personnel comprising51% of our workforce. The collective bargaining agreement provides for wageincreases totaling 15% over its term, and requires us to make contributions tocertain pension and other welfare programs. No unfunded pension liabilityexists under any of these programs. Our vessel employees are paid on a daily orhourly basis and 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 or at our facility in Staten Island, New York. Webelieve that our relations with our employees 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.

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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, approximately 10% of ourfleet is inspected annually by independent consultants. All of the vessels thatare on bareboat charters to third parties are managed and operated by thecustomer.

**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. All of our tugs participate in the U.S. Coast Guard’s un-inspectedtowing vessel inspection program.

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 

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value to us. However, weevaluate the need for such coverage on an ongoing basis taking into accountinsurance market 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 in the past and may be brought in the future. Our predecessorcompany, EW Transportation LLC, has contractually agreed to retain any suchliabilities that occurred prior to our initial public offering in January 2004,will indemnify us for up to $10 million of such liabilities until January 2014,and will make available to us the benefit of certain indemnities it received inconnection with the purchase of certain vessels. If, notwithstanding theforegoing, we are ultimately obligated to pay any asbestos-related orsimilar claims for any reason, we believe we or EW Transportation LLC wouldhave adequate insurance coverage for periods after March 1986 to pay suchclaims. However, EW Transportation LLC and its predecessors may not haveinsurance coverage prior to March 1986. If we were subject to claimsrelated to that period, including claims from current or former employees, EWTransportation LLC may not have insurance to pay the liabilities, if any, thatcould be imposed on us. If we had to pay claims solely out of our own funds, itcould have a material adverse effect on our financial condition. Furthermore,any claims covered by insurance would be subject to deductibles, and because itis possible that a large number of claims could be brought, the aggregateamount of these deductibles could be material. Please read “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 considerto be commercially reasonable. In addition, as more single-hull vessels areretired from active service, insurers may be less willing to insure, andcustomers less willing to hire, single-hull vessels.

**Competition**

The Jones Act restricts U.S. point-to-point maritimeshipping to vessels built in the United States, owned and operated by U.S.citizens and manned by U.S. crews. In our market areas, our primary directcompetitors are the operators of U.S.-flag ocean-going tank barges andU.S.-flag refined petroleum product tankers, including the captive fleets ofmajor oil companies. The domestic tank vessel industry is highly competitive.

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. 

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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 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 couldrequire us to incur substantial costs or temporarily suspend operation of oneor more of 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 frompotential discharges of pollutants through the use of well-maintained andwell-managed facilities, well maintained and well equipped vessels and safetyand environmental 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. 

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As a result, there can beno assurance that any new regulations or requirements or any discharge ofpollutants by us will not have a material adverse effect on us.

*The OilPollution Act of 1990.**  *TheOil Pollution Act of 1990, or OPA 90, affects all vessels trading in U.S.waters including the exclusive economic zone extending 200 miles seaward. OPA90 sets forth various technical and operating requirements for tank vesselsoperating in U.S. waters. Existing single-hull, double-sided and double-bottomedtank vessels are to be phased out of service at varying times based on theirtonnage and age, with all such vessels being phased out by January 2015. Underthe phase-out schedule, 31 of our single-hull tank vessels (except one 75,000-barrelvessel which phases out in January 2009) will be precluded fromtransporting petroleum products as of January 1, 2015.

Under OPA 90,owners or operators of tankers operating in U.S. waters must file vessel spillresponse plans with the U.S. Coast Guard and operate in compliance with theplans. These vessel response plans must, 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.

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 ourtank vessels 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 from tank vessels, OPA 90 and otherenvironmental laws may impose criminal liability on personnel and/or thecorporate entity.

OPA 90 limits theliability of each responsible party for a tank vessel, per discharge, to thegreater of (1) $1,200 per gross registered ton or (2) $10 millionfor vessels over 3,000 gross tons or $2 million for smaller vessels. This limitdoes not apply where, among other things, the spill is caused by grossnegligence or willful misconduct of, or a violation of an applicable federalsafety, construction or operating regulation by, a responsible party or itsagent or employee or any person acting in a contractual relationship with aresponsible party. In addition to removal costs, OPA 90 provides for recoveryof damages, including:

·       naturalresource damages and related assessment costs;

·       realand personal property damages;

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·       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 expanded the pre-existing financialresponsibility requirements for tank vessels operating in U.S. waters andrequires owners and operators of tank vessels to establish and maintain withthe U.S. Coast Guard evidence of their financial responsibility sufficientto meet their potential liabilities imposed by OPA 90. Under the regulations,we may provide evidence of insurance, a surety bond, a guarantee, letter ofcredit, qualification as a self-insurer or other evidence of financialresponsibility. We have qualified as a self-insurer under the regulations andhave received Certificates of Financial Responsibility from the U.S. CoastGuard for all of our tank vessels subject to this requirement.

OPA 90 expressly provides that individual states areentitled to enforce their own pollution liability laws, even if inconsistentwith or imposing greater liability than OPA 90. There is no uniform liabilityscheme among the states. Some states have OPA 90-like schemes forlimiting liability to various amounts, some rely on common law fault-basedremedies and others impose strict and/or unlimited liability on an owner oroperator. Virtually all coastal states have enacted their own pollutionprevention, liability and response laws, whether statutory or through courtdecisions, with many providing for some form of unlimited liability. We believethat the liability provisions of OPA 90 and similar state laws have greatlyexpanded potential liability in the event of an oil spill, even where we arenot at fault. Some states have also established their own requirements forfinancial responsibility. However, at least twostates 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 because ofthe 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 contribution from the fund for costsincurred that exceed the liability limits of OPA 90. In order to obtaincontribution, the responsible party would need to establish that it is entitledto both a statutory defense against liability and to a statutory limitation ofliability to obtain contribution from the fund. If we are deemed a responsibleparty for an oil pollution incident and are ineligible for contribution fromthe fund, the costs of responding to an oil pollution incident could have amaterial adverse effect on our results of operations, financial condition andcash flows. We presently maintain oil pollution liability insurance in anamount in excess of that required by OPA 90. Through West of England, ourcurrent coverage for oil pollution is $1 billion per incident. It is possible,however, that our liability for an oil pollution incident may be in excess ofthe insurance coverage we maintain.

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 million per incident unless attributable to willful misconduct orneglect, a violation of applicable standards or rules, or upon failure toprovide reasonable cooperation and assistance. CERCLA liability for releasesfrom facilities other than vessels is generally unlimited.

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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 FinancialResponsibility for each of our tank vessels. OPA 90 and CERCLA each preservethe right to recover damages under other existing laws, including maritime tortlaw.

*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.

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 beresolved, we cannot estimate its potential financial impact at this time. However,we believe 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) has received a notice that it is a potentiallyresponsible party, or PRP, in a proceeding for the cleanup of hazardoussubstances at the “Palmer Barge” site in Port Arthur, Texas, where cleaning wasperformed on two of our barges in 1996 and 1997. In September 2005, EPARegion 6 published a Record of Decision (“ROD”) detailing findings andrecommendations resulting from a remedial investigation/feasibility studyconducted on the Palmer Barge site. According to the ROD, the estimated cost ofthe remedy is approximately $428,180. This proceeding involves numerous wastegenerators and waste transportation and disposal companies and seeks toallocate or recover costs associated with site investigation and 

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cleanup. We believe ourshare of liability, if any, will be immaterial to our financial position,results of operations and cash flows given our limited dealings with the site. Estimatesof the degree of remediation of a particular site and the method and ultimatecost of remediation require a number of assumptions and are inherentlydifficult to make. It is also possible that technological, regulatory orenforcement developments, the results of environmental studies and theinability of other PRPs to contribute to settlements of such liability couldrequire us to incur some costs, the amount of which is not possible toestimate. These costs, if any, would be subject to insurance and certainindemnifications. For more information, please read “Certain Relationships andRelated Transactions—Omnibus Agreement—Indemnification” in Item 13 of thisreport.

*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 marinediesel engines. While these rules are currently limited to new enginesbeginning with the 2004 model year, the EPA has noted that it may revisit theapplication of emissions standards to rebuilt or remanufactured engines if theindustry does not take steps to introduce new pollution control technologies.Adoption of such standards could require modifications to some existing marinediesel engines 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 loading and degassing operations by requiring the installation of vaporcontrol equipment. As stated above, our tank barges are already equipped withvapor control systems that satisfy these requirements. Although a risk existsthat new regulations could require significant capital expenditures andotherwise increase our costs, we believe, based upon the regulations that havebeen proposed to date, that no material capital expenditures beyond thosecurrently contemplated and no material increase in costs are likely to berequired.

***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 president or other chief executive officer and the chairman of its boardof 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 75.0% 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.

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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 25.0% of our outstanding interests, our limited partnershipagreement restricts foreign ownership and control of our common andsubordinated units to not more than 15.0% 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 Service and the U.S. Maritime Administration, as wellas subject to rules of private industry organizations such as the AmericanBureau of Shipping. These agencies and organizations establish safety standardsand are authorized to investigate vessels and accidents and to recommendimproved maritime safety standards. Moreover, to ensure compliance withapplicable safety regulations, the U.S. Coast Guard is authorized to inspectvessels 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 duties. Our vesseloperations are also subject to occupational safety and health regulationsissued by the U.S. Coast Guard and, to an extent, OSHA. These regulationscurrently require us to perform monitoring, medical testing and recordkeepingwith respect to mariners engaged in the handling of the various cargoestransported 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 

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services.A decline in demand for, and level of consumption of, refined petroleumproducts could cause demand for tank vessel capacity and charter rates todecline, which would decrease our revenues and profitability. The acquisitionof Sea Coast provides seasonal diversity primarily relating to its Alaskanmarkets, which experience the greatest demand for petroleum products in thesummer months, due to weather conditions.

**Properties**

We lease pier facilitiesand approximately 7,000 square feet of office space in Staten Island, New York.The lease expires in April 2009; however, we have the option to renew itfor two additional ten-year periods. We own and use a 2,100 square-foot modularfacility for additional office space on the premises. We lease pier facilities,a water treatment facility and approximately 10,500 square feet of office spacein Norfolk, Virginia. This lease expires in January 2010 and we have anoption to purchase the facility. We lease approximately 9,500 square feet ofoffice space for our principal executive office in East Brunswick, New Jersey,for which the lease expires in December 2013. We also lease pierfacilities and approximately 16,000 square feet of office space in Seattle,Washington. This lease expires in October 2008 with a renewal option forone additional five-year term.

**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 theSEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. Youmay obtain information regarding the Public Reference Room by calling theSEC at 1-800-SEC-0330. In addition, the SEC maintains awebsite at *www.sec.gov* thatcontains reports, proxy and information statements, and other informationregarding issuers 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.Information on our website or any other website is not incorporated byreference into this report 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.

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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. Although the final amount has not been determined,we believe much of the oil escaped into the ocean.

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 approximately $47,000 and are pursuingsettlement of the other case. We may be subject to litigation in the futureinvolving these plaintiffs and others alleging exposure to asbestos due toalleged failure to properly encapsulate friable asbestos or remove friableasbestos on our vessels, as well as for exposure to second-hand smoke and othermatters.

***A decline in demand for, and level of consumption of,refined petroleum products could cause demand for tank vessel capacity andcharter rates to decline, which would decrease our revenues 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.

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***Our business would be adversely affected if we failedto comply with the Jones Act provisions on coastwise trade, or if thoseprovisions 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.

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 nationaldefense. In response to the effects of Hurricane Katrina, 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 addition,the Secretary of the Department of Homeland Security has waived without aspecific termination date the coastwise laws generally for the transportationof petroleum released from the Strategic Petroleum Reserve undertaken inresponse to circumstances arising from Hurricane Katrina. Any waiver of thecoastwise laws, whether in response to natural disasters or otherwise, couldresult in increased competition from foreign tank vessel operators, which couldreduce our revenues and cash available for distribution.

***We may not be able to grow or effectively manage ourgrowth.***

A principal focusof our strategy is to continue to grow by expanding our business in the East,West and Gulf Coast regions and to expand into other geographic markets. Ourfuture growth will depend upon a number of factors, some of which we cancontrol and some of which 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.

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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.

***Increased competition in the domestic tank vesselindustry could result in reduced profitability 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 productpipelines, could adversely affect our ability to compete in particularlocations.

***We rely on a limited number of customers for asignificant portion of our revenues. The loss of any of these customers couldadversely affect our business and operating results.***

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 thecustomer’s needs and other factors, many of which are beyond our control. Twocustomers accounted for 20% and 15%, respectively, of our consolidated revenuesfor fiscal 2006. If we were to lose either of these customers or if either ofthese customers significantly reduced its use of our services, our business andoperating results could be adversely affected.

***Voyage charters may not be available at rates thatwill allow us to operate our vessels profitably.***

During fiscal 2006, 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 lower utilization of ourvessels and decreased profitability. Future voyage charters may not beavailable at rates that will allow us to operate our vessels profitably.

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***We may not be able to renew time charters, consecutivevoyage charters, contracts of affreightment and bareboat charters when theyexpire.***

We received approximately79% of our revenue from time charters, consecutive voyage charters, contractsof affreightment and bareboat charters during fiscal 2006. 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 make substantial expenditures to maintain theoperating capacity of our fleet, which will reduce our cash available fordistribution.***

Tank vessels are subject to the requirements of theOil Pollution Act of 1990, or OPA 90. OPA 90 mandates that all single-hull tankvessels 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 June 30, 2006, approximately 67% of thebarrel-carrying capacity of our tank vessel fleet was double-hulled incompliance with OPA 90. The remaining 33% (except for one 75,000-barrelvessel which will phase out in January 2009) will be in compliance withOPA 90 until January 2015. The capacity of certain of our single-hullvessels has already been effectively replaced by double-hull vessels placedinto service in the past two years. We estimate that the current cost toreplace our remaining single hull capacity with newbuildings or by retrofittingcertain of our existing vessels ranges from $88.0 million to $92.0 million.This capacity can also be replaced by acquiring existing double-hull tankvessels as opportunities arise. At the time we make these expenditures, theactual cost could 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 $15.3 millionper year to drydock and maintain our tank vessels’ operating capacity.Periodically, we will also make expenditures to acquire or construct additionaltank vessel capacity and to upgrade our overall 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.

***Capital expenditures and other costs necessary tooperate and maintain a vessel vary depending on the age of the vessel andchanges 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-regulatory organizationsand customer requirements or competition, may require us to make additionalexpenditures. For example, we may be required to make significant expendituresfor alterations or the addition of new equipment to satisfy requirements of theU.S. Coast Guard and the American Bureau of Shipping. In addition, we may berequired to take our vessels out of service for extended periods of time, withcorresponding losses of revenues, in order to make such alterations or to addsuch equipment. In the future, market conditions may not justify theseexpenditures or enable us to operate our older vessels profitably during theremainder of their economic lives.

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 

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limitedby our financial condition at the time as well as by adverse market conditionsresulting from, among other things, general economic conditions and contingenciesand uncertainties that are beyond our control. Our failure to obtain the fundsfor necessary future capital expenditures would limit our ability to continueto operate some of our vessels and could have a material adverse effect on ourbusiness and on our ability to make distributions to unitholders.

***Our purchase of existing vessels carries risksassociated 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 donot carry warranties with respect to their condition. While we generallyinspect any existing vessel prior to purchase, such an inspection wouldnormally not provide us with as much knowledge of its condition as we wouldpossess if the vessel had been built for us and operated by us during its life.Repairs and maintenance costs for existing vessels are difficult to predict andmay be more substantial than for vessels we have operated since they werebuilt. These costs could decrease our profits and reduce our liquidity.

***We are subject to complex laws and regulations,including environmental regulations, that can adversely affect the cost, manneror 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 Service, and to regulation by private industry organizations such asthe American Bureau of Shipping. The U.S. Coast Guard and the NationalTransportation Safety Board set safety standards and are authorized toinvestigate vessel accidents and recommend improved safety standards. 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 200-mileexclusive economic zone around the United States. Additionally, an oil spillcould result in significant liability, including fines, penalties, criminalliability and costs for natural resource damages. The potential for thesereleases could increase as we increase our fleet capacity. Most statesbordering on a navigable waterway have enacted legislation providing forpotentially unlimited liability for the discharge of pollutants within theirwaters.

***Our insurance may not 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 

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insurance would be subjectto deductibles, and since it is possible that a large number of claims could bebrought, the aggregate amount of these deductibles could be material.

We may not be able toprocure adequate insurance coverage at commercially reasonable rates in thefuture, and some claims may not be paid. In the past, stricter environmentalregulations have led to higher costs for insurance covering environmentaldamage or pollution, and new regulations could lead to similar increases oreven make this type of insurance unavailable. In addition, our insurance may bevoidable by the insurers as a result of certain actions of ours.

***Because we obtain some of our insurance throughprotection and indemnity associations, we also may be subject to calls, orpremiums, in amounts based not only on our own claim records, but also theclaim records of all other members of the protection and indemnityassociations.***

We may be subject tocalls, or premiums, in amounts based not only on our own claim records but alsothe claim records of all other members of the protection and indemnityassociations through which we receive insurance coverage for tort liability,including pollution-related liability. Our payment of these calls could resultin significant expenses to us, which could reduce our profits or cause losses. Moreover,the protection and indemnity clubs and other insurance providers reserve theright to make changes in insurance coverage with little or no advance notice.

***Terrorist attacks have resulted in increased costs andhave disrupted our business. Continued hostilities in the Middle East or othersustained military campaigns may adversely impact our results of operations.***

After the terrorist attacksof September 11, 2001, New York Harbor was shut down temporarily,resulting in the suspension of our local operations in the New York City areafor four days and the loss of revenue related to these operations. Thelong-term impact that terrorist attacks and the threat of terrorist attacks mayhave on the petroleum industry in general, and on us in particular, is notknown at this time. Uncertainty surrounding continued hostilities in the MiddleEast or other sustained military campaigns may affect our operations inunpredictable ways, including disruptions of petroleum supplies and markets,and the possibility that infrastructure facilities could be direct targets of,or indirect casualties of, 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 51% 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.

***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 the 

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limitsimposed by state workers’ compensation statutes, we may have greater exposurefor 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 to Our 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 maynot have sufficient available cash each quarter to pay the minimum quarterlydistribution. The amount of cash we can distribute on our common units principallydepends upon the amount of cash we generate from our operations, which willfluctuate from 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;

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

·       prevailingeconomic conditions.

Additionally,the actual 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;

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·       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-SeaGeneral Partner L.P. and its affiliates have conflicts of interest and limitedfiduciary duties, which may permit them to favor their own interests to thedetriment of our unitholders.***

Affiliates of our generalpartner indirectly own the 2% general partner interest and a 41.1% limitedpartner interest in us and own and control the general partner of our generalpartner. Conflicts of interest may arise between K-Sea General Partner L.P. andits affiliates, on the one hand, and us and our unitholders, on the other hand.As a 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;

·       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.

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***Even if unitholders are dissatisfied, they cannotremove 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 actual expenditures,which could reduce the amount of available cash for distribution.

***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 agreementrequires us to deduct estimated maintenance capital expenditures from operatingsurplus each quarter, as opposed to actual maintenance capital expenditures, inorder to reduce disparities in operating surplus caused by the fluctuatinglevel of maintenance capital expenditures, such as drydocking. Because of thesubstantial capital expenditures we intend to make by January 1, 2015 toreplace the operating capacity of our single-hull vessels, our annual estimatedmaintenance capital 

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expendituresfor purposes of calculating operating surplus also includes $2.5 million toreduce the fluctuation in operating surplus that would otherwise be caused bythe required expenditures.

The amount of estimatedmaintenance capital expenditures we deduct from operating surplus is subject toreview and change by the board of directors of K-Sea General Partner GP LLC,with the concurrence of the conflicts committee of such board. In years whenestimated maintenance capital expenditures are higher than actual maintenancecapital expenditures, as we expect will be the case in some years until weactually make expenditures for the OPA 90 replacements and retrofitting, theamount of cash available for distribution to unitholders will be lower than ifactual maintenance capital expenditures 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.***

Duringthe subordination period, without the approval of our unitholders, our generalpartner may cause us to issue up to 2,082,500 additional common units. Ourgeneral partner may also cause us to issue an unlimited number of additionalcommon units or other equity securities of equal rank with the common units,without unitholder approval, 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;

·       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.

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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 ofthe general partner of our general partner has adopted a requirement that atleast 85% of our partnership interests must be held by U.S. citizens. Thisrequirement may have an adverse impact on the liquidity or market value of ourcommon units, because unitholders will be unable to sell units to non-U.S.citizens. Any purported transfer of common units in violation of theseprovisions will be ineffective to transfer the common units or any voting,dividend or other rights in respect of 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 selltheir common units at an undesirable time or price and may not receive anyreturn on their investment. Unitholders may also incur a tax liability upon asale of their units. Our general partner is not obligated to obtain a fairnessopinion regarding the value of the common units to be repurchased by it uponexercise of the limited call right. There is no restriction in our partnershipagreement that prevents our general partner from issuing additional commonunits and exercising its call right. If our general partner exercised itslimited call right, the effect would be to take us private and, if the unitswere subsequently 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 partnershipagreement also contains provisions limiting the ability of unitholders to callmeetings or to acquire information about our operations, as well as otherprovisions limiting the unitholders’ ability to influence the manner ordirection of management.

***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 sole discretion. These expenses will include allcosts incurred by the general partner and its affiliates in managing andoperating us, including costs for rendering corporate staff and supportservices to us. In addition, our general partner and its affiliates may provideus with other services for which the general partner or its affiliates maycharge us fees. The reimbursement of expenses and payment of fees, if any, toour general partner and its affiliates could adversely affect our ability topay cash distributions to unitholders.

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***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.***

As of June 30,2006, we had outstanding debt of $193.4 million. Our payment of principal andinterest on the debt will reduce cash available for distribution on our units. Ourcredit agreement prohibits the payment of distributions after the occurrence ofthe following events, among others, and receipt of notice from 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, occurs relatingto us or our business; and

·       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.

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***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 from transferringtheir respective partnership interests in our general partner to a third partythat satisfies the citizenship requirements of the Jones Act. The new partnersof our general partner would then be in a position to replace the board ofdirectors and officers of the general partner of our general partner with theirown choices and to control the decisions taken by the board of directors andofficers.

***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**

***The IRS could treat us as a corporation for taxpurposes, which would substantially reduce cash available for distribution tounitholders.***

The federal income tax benefit of an investment in usdepends largely on our being treated as a partnership for federal income taxpurposes. If less than 90% of our gross income for any taxable year is “qualifyingincome” from transportation or processing of crude oil, natural gas or productsthereof, interest, dividends or similar sources, we will be a “publicly tradedpartnership” under Section 7704 of the Internal Revenue Code and taxableas a corporation for federal income tax purposes for that taxable year and allsubsequent years. The IRS has not provided any ruling on this matter. If wewere treated as a corporation for federal income tax purposes, we would pay taxon our income at corporate rates, currently 35%, distributions would generallybe taxed again to unitholders as corporate distributions and no income, gains,losses, or deductions would flow through to unitholders. Because a tax would beimposed upon us as an entity, cash available for distribution to unitholderswould be substantially reduced. Treatment of us as a corporation would resultin a material 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 andcause us to be treated as a corporation for federal income tax purposes orotherwise subject us to entity-level taxation. Our partnership agreementprovides that, if a law is enacted or an existing law is modified orinterpreted in a manner that subjects us to taxation as a corporation orotherwise subjects us to entity-level taxation for federal, state, or localincome tax purposes, the minimum quarterly distribution amount and the targetdistribution amounts will be decreased to reflect the impact of that law on us.Finally, because of widespread state budget deficits, several states areevaluating ways to subject partnerships to entity level taxation through theimposition of state income, franchise and other forms of taxation. If any ofthese states were to impose a tax on us, the cash available for distribution tounitholders would be reduced.

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***A successful IRS contest of the federal income taxpositions we take may adversely impact the market for our common units, and thecosts of any contest will be borne by us and, therefore, indirectly by ourunitholders and our general partner.***

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 our counsel’s conclusions expressed in this prospectus. It may benecessary to resort to administrative or court proceedings to sustain some orall of our counsel’s conclusions or the positions we take. A court may notagree with all of our counsel’s conclusions or the positions we take. Anycontest with the IRS may materially and adversely impact the market for ourcommon units and the prices at which common units trade. In addition, our costsof any contest with the IRS will be borne indirectly by our unitholders and ourgeneral partner.

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

Unitholders will berequired to pay federal income taxes and, in some cases, state, local, andforeign income taxes on their share of our taxable income, whether or not theyreceive cash distributions from us. Unitholders may not receive cashdistributions equal to their share of our taxable income or even the taxliability that results from that income.

***Tax gain or loss on the disposition of our common unitscould be different than expected.***

If a unitholder sells hiscommon units, that unitholder will recognize gain or loss equal to thedifference between the amount realized and the unitholder’s tax basis in thosecommon units. 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 non-U.S. 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 non-U.S. persons, raises issues unique to them. For example, virtually allof our income allocated to organizations exempt from federal income tax,including individual retirement accounts and other retirement plans, will beunrelated 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.

***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 

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Creation Act of 2004repealed the tax shelter registration requirement and replaced it with a regimethat requires reporting, and will likely require registration, of certain “reportabletransactions.” We do not expect to engage in any reportable transactions.Nevertheless, our registration as a tax shelter under prior law, or our futureparticipation in a reportable transaction, might increase the likelihood thatwe 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. Ourunitholders’ would be responsible for the consequences of any  audits to their 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 wedo business or own property. Unitholders will likely be required to file stateand local income tax returns and pay state and local income taxes in some orall of the various jurisdictions in which we do business or own property andmay be subject to penalties for failure to comply with those requirements. Weown property and conduct business in Alaska, New York, New Jersey, Washingtonand Virginia, all of which impose a state income tax. We currently conductcertain operations in Puerto Rico, Canada and Venezuela in a manner that webelieve does not subject unitholders to direct liability to pay tax or filereturns in those countries, but there can be no assurance that we will conductour foreign operations in this manner in the future. Taxes we pay with respectto our foreign operations reduce the cash flow available for distribution toyou. We may do business or own property in other states or foreign countries inthe future. It is the responsibility of unitholders to file all federal, state,local, and foreign tax returns. Our counsel has not rendered an opinion on thestate, local or foreign tax consequences 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 you. If theIRS were to successfully assert that these corporate subsidiaries have more taxliability than we anticipate or legislation was enacted that increased thecorporate tax rate, our cash available for distribution to you would be furtherreduced.

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***The sale orexchange of 50% or more of our capital and profits interests during anytwelve-month period will result in the termination of our partnership forfederal 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.

**ITEM1B.**    UNRESOLVED STAFF COMMENTS.

None.

**ITEM3.**                LEGAL PROCEEDINGS.

We are a party to varioussuits in the ordinary course of business for monetary relief arisingprincipally from personal injuries, collision or other casualty and to claimsarising under vessel charters. All of these personal injury, collision andcasualty claims against us are fully covered by insurance, subject todeductibles ranging from $10,000 to $100,000 in amount. We reserve on a currentbasis for amounts we expect to pay. Although the outcome of any individualclaim or action cannot be predicted with certainty, we believe that any adverseoutcome, individually or in the aggregate, would be substantially mitigated byapplicable insurance or indemnification from previous owners of our assets, andwould not have a material adverse effect on our financial position, results ofoperations or cash flows.

EW Transportation LLC andits predecessors have been named, together with a large number of othercompanies, as co-defendants in 39 civil actions by various parties, includingformer employees, alleging unspecified damages from past exposure to asbestosand second-hand smoke aboard some of the vessels that it contributed to us inconnection with our initial public offering. EW Transportation LLC and itspredecessors have been dismissed from 38 of these lawsuits for an aggregate sumof approximately $47,000, and are seeking to settle the other case. We may besubject to litigation in the future from these plaintiffs and others allegingexposure to asbestos due to alleged failure to properly encapsulate or removefriable asbestos on our vessels, as well as for exposure to second-hand smokeand other matters. For a related discussion of insurance coverage, please read “Businessand Properties—Insurance Program” in Items 1 and 2 of this report.

In November 2005, oneof our tank barges struck submerged debris in the U.S. Gulf of Mexico, causingsignificant damage which resulted in the barge eventually capsizing. At thetime of the incident, the barge was carrying approximately 120,000 barrels of No. 6fuel oil, a heavy oil product. Although the final amount has not been determined,we believe much of the oil escaped into the ocean. However, according to theNational Oceanic and Atmospheric Administration, the likelihood of shorelineimpact from the incident is low. We maintain significant protection andindemnity insurance for pollution-related costs and claims, including clean-upcosts and environmental damages, and believe that such coverage will beadequate to cover the cost of the clean-up operations and any subsequentclaims, fines or penalties.

One of our predecessors hasalso received notice that it is a potentially responsible party in a proceedingfor the cleanup of hazardous substances at a site in Port Arthur, Texas. Formore information, please read “Business and Properties—Regulation—Environmental—SolidWaste” in Items 1 and 2 of this report.

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.

**ITEM4.**                SUBMISSION OFMATTERS TO A VOTE OF SECURITYHOLDERS.

No matters were submittedto a vote of security holders during the quarter ended June 30, 2006.

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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 have been listed on the New York Stock Exchange under the symbol “KSP”since January 9, 2004. Prior to January 9, 2004, our equitysecurities were not publicly traded. As of September 6, 2006, there were5,754,900 outstanding common units, representing an aggregate 56.9% limited partnerinterest in us, which were held by 37 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)** | ** ** |
| ***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 | ** ** |   |
| ***2005  Fiscal Year***                      | ** ** | ** **           | ** ** | ** ** | ** ** |   | ** ** | ** ** |   |
| Fourth Quarter  Ended June 30, 2005     |       | $                    | 37.00      |       | $          | 30.87 |   |   | $ | 0.56 | ** ** |   |
| Third Quarter  Ended March 31, 2005     |       | $                    | 37.88      |       | $          | 33.16 |   |   | $ | 0.54 | ** ** |   |
| Second Quarter  Ended December 31, 2004 |       | $                    | 35.21      |       | $          | 29.74 |   |   | $ | 0.54 | ** ** |   |
| First Quarter Ended  September 30, 2004 |       | $                    | 32.00      |       | $          | 25.55 |   |   | $ | 0.54 | ** ** |   |

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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 2006 and 2005 fiscal years on commonunits, the general partner interests, and subordinated units, totaled $24.4million and $18.8 million, respectively.

**Cash DistributionPolicy**

Within 45 daysafter the end of each quarter, we will distribute all of our available cashfrom operating surplus to unitholders of record on the applicable record date.Our available cash from operating surplus consists generally of all cash onhand at the end of the fiscal quarter, plus all cash on hand resulting fromworking capital 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 creditfacilities, which require us to maintain certain financial ratios and generallyprohibit distributions to unitholders if 

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thedistribution would cause an event of default, or an event of default isexisting, under our credit facilities. Please read “Management’s Discussion andAnalysis of Financial Condition and Results of Operations—Liquidity and CapitalResources—Amended Credit Agreement” in Item 7 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.

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However, the second earlyconversion of the subordinated units may not occur until at least one yearfollowing the first early conversion of the subordinated units.

**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 currently holdsthe 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 2% general partner interestand assume the general partner has not transferred the incentive distributionrights.

**Issuer Purchases ofEquity Securities**

We did not repurchase anyof our common units during the fourth quarter of fiscal 2006.

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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 are for EWTransportation LLC for all periods prior to January 14, 2004. Thefollowing table should be read in conjunction with the consolidated financialstatements, including the notes thereto, included elsewhere in this report, and“Management’s Discussion and Analysis of Financial Condition and Results ofOperations” in Item 7 of this report.

| ** **                                                       | ** ** | **Years Ended June 30,** | ** ** |
|------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                       | ** ** | **2006**                                | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| **Income Statement Data:**                                       |       |                                    |       |   |   |   |   |   |   |   |   |
| Voyage revenue                                                   |       | $                                       | 176,650    |   | $ | 118,811 |   | $ | 93,899 |   | $ | 83,942 |   | $ | 75,700 |   |
| Bareboat charter and other revenue                               |       | 6,118                                   |       | 2,583 |   | 1,900 |   | 3,753 |   | 3,387 |   |
| Total revenues                                                   |       | 182,768                                 |       | 121,394 |   | 95,799 |   | 87,695 |   | 79,087 |   |
| Voyage expenses                                                  |       | 37,973                                  |       | 24,220 |   | 16,339 |   | 14,151 |   | 11,395 |   |
| Vessel operating expenses                                        |       | 77,325                                  |       | 49,296 |   | 38,809 |   | 36,326 |   | 32,684 |   |
| General and administrative expenses                              |       | 17,309                                  |       | 11,163 |   | 8,149 |   | 7,047 |   | 6,384 |   |
| Depreciation and amortization                                    |       | 26,810                                  |       | 21,399 |   | 18,643 |   | 16,293 |   | 14,805 |   |
| Net (gain) loss on sale of vessels                               |       | (313                                    | )          | (264 | ) | 255 |   | (275 | ) | (422 | ) |
| Total operating expenses                                         |       | 159,104                                 |       | 105,814 |   | 82,195 |   | 73,542 |   | 64,846 |   |
| Operating income                                                 |       | 23,664                                  |       | 15,580 |   | 13,604 |   | 14,153 |   | 14,241 |   |
| Interest expense (income), net                                   |       | 10,118                                  |       | 5,949 |   | 6,370 |   | 8,808 |   | 7,519 |   |
| Net loss (gain) on reduction of debt(1)                          |       | 7,224                                   |       | 1,359 |   | 3,158 |   | 4 |   | (377 | ) |
| Other (income) expense, net                                      |       | (64                                     | )          | (27 | ) | (253 | ) | 29 |   | 76 |   |
| Income before provision (benefit) for income taxes               |       | 6,386                                   |       | 8,299 |   | 4,329 |   | 5,312 |   | 7,023 |   |
| Provision (benefit) for income taxes(2)                          |       | 484                                     |       | 163 |   | (16,845 | ) | 340 |   | 549 |   |
| Net income                                                       |       | $                                       | 5,902      |   | $ | 8,136 |   | $ | 21,174 |   | $ | 4,972 |   | $ | 6,474 |   |
| Net income per unit—basic                                   |       | $                                       | 0.60       |   | $ | 0.95 |   | $ | 2.26 |   | $ | 1.03 |   | $ | 1.34 |   |
| —diluted                                                    |       | $                                       | 0.60       |   | $ | 0.95 |   | $ | 2.25 |   | $ | 1.03 |   | $ | 1.34 |   |
| **Balance  Sheet Data (at year end):**                           |       |                                    |       |   |   |   |   |   |   |   |   |
| Vessels and equipment, net                                       |       | $                                       | 316,237    |   | $ | 235,490 |   | $ | 193,646 |   | $ | 145,520 |   | $ | 115,304 |   |
| Total assets                                                     |       | 383,028                                 |       | 273,262 |   | 228,144 |   | 178,328 |   | 184,730 |   |
| Total debt                                                       |       | 193,380                                 |       | 114,005 |   | 78,817 |   | 114,003 |   | 125,076 |   |
| Partners’ capital/members’ equity                      |       | 163,943                                 |       | 141,940 |   | 135,698 |   | 41,290 |   | 36,267 |   |
| **Cash  Flow Data:**                                             |       |                                    |       |   |   |   |   |   |   |   |   |
| Net cash provided by  (used in):                                 |       |                                    |       |   |   |   |   |   |   |   |   |
| Operating activities                                             |       | $                                       | 20,774     |   | $ | 24,163 |   | $ | 10,904 |   | $ | 13,235 |   | $ | 16,417 |   |
| Investing activities                                             |       | (105,398                                | )          | (55,901 | ) | (59,167 | ) | (240 | ) | (52,291 | ) |
| Financing activities                                             |       | 85,362                                  |       | 31,447 |   | 48,616 |   | (12,984 | ) | 34,689 |   |
| **Other  Financial Data:**                                       |       |                                    |       |   |   |   |   |   |   |   |   |
| Capital expenditures(3):                                         |       |                                    |       |   |   |   |   |   |   |   |   |
| Maintenance                                                      |       | $                                       | 13,753     |   | $ | 8,024 |   | $ | 7,957 |   | $ | 8,389 |   | $ | 7,405 |   |
| Expansion                                                        |       | 21,561                                  |       | 39,337 |   | 52,747 |   | 7,814 |   | 6,682 |   |
| Total                                                            |       | $                                       | 35,314     |   | $ | 47,361 |   | $ | 60,704 |   | $ | 16,203 |   | $ | 14,087 |   |
| Construction of tank vessels                                     |       | $                                       | 20,702     |   | $ | 16,816 |   | $ | 16,512 |   | $ | 18,703 |   | $ | 12,994 |   |
| Distributions  declared per common unit in respect of the period |       | $                                       | 2.380      |   | $ | 2.180 |   | $ | 0.955 |   |   |   |   |   |

 

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| ** **                                                   | ** ** | **Years Ended June 30,** | ** ** |
|--------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                   | ** ** | **2006**                                | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| **Operating Data:**                                          |       |                                    |       |   |   |   |   |   |   |   |   |
| Number of tank barges (at period end)                        |       | 61                                      |       | 44 |   | 34 |   | 35 |   | 34 |   |
| Number of tankers (at period end)                            |       | 2                                       |       | 2 |   | 2 |   | 3 |   | 3 |   |
| Number of tugboats (at period end)                           |       | 41                                      |       | 25 |   | 19 |   | 18 |   | 17 |   |
| Total barrel-carrying capacity (in thousands at  period end) |       | 3,357                                   |       | 2,561 |   | 2,410 |   | 2,309 |   | 2,079 |   |
| Net utilization(4)                                           |       | 83                                      | %          | 85 | % | 86 | % | 87 | % | 81 | % |
| Average daily  rate(5)                                       |       | $                                       | 9,245      |   | $ | 8,734 |   | $ | 8,095 |   | $ | 7,468 |   | $ | 7,482 |   |
|                                                              |            |                                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

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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. Fiscal 2002 includes a $0.6 million gain onreduction of subordinated debt (and related accrued interest) owed to theseller of a vessel we purchased in 1999. This reduction resulted from acustomer’s exercise of an option to purchase the vessel, which was provided forin the 1999 purchase contract. Fiscal 2002 also includes $0.2 million inprepayment fees resulting from repayment of debt related to certain vesselsthat were sold during the year.

(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 consideredmaintenance capital expenditures as they were made to replace capacityscheduled to phase out under OPA 90; however, because they were non-routine innature they are included separately in the above table under “Construction oftank vessels.” Generally, expenditures for construction of tank vessels inprogress are not included as capital expenditures until such vessels arecompleted. Capital expenditures associated with retrofitting an existingvessel, or acquiring a new vessel, which increase the operating capacity of ourfleet 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, prior to our January 14,2004 initial public offering, of our predecessor company, EW TransportationLLC, and should be read in conjunction with our historical consolidatedfinancial statements and notes thereto 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 61tank barges, 2 tankers and 41 tugboats that serves a wide range of customers,including major oil companies, oil traders and refiners. With approximately3.4 million barrels of capacity, we believe we currently operate thelargest coastwise tank barge fleet in the United States, as measured by barrel-carryingcapacity.

Demand for ourservices is driven primarily by demand for refined petroleum products in theEast, West and Gulf Coast regions of the United States. We generate revenue bycharging customers for the transportation and distribution of their products utilizingour tank vessels and tugboats. These services are generally provided under thefollowing four basic 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)          Undera consecutive voyage charter, the customer pays for idle time.

(2)          See“Definitions” below.

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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 recognized over the transit time of individual voyages,which are generally less than ten days in duration. For time charters andbareboat charters, revenue is recognized ratably over the contract period, withexpenses 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.

**SIGNIFICANT FISCAL2006 EVENTS**

***Acquisition of Sea Coast Transportation***

On October 18, 2005, we completed theacquisition, through a wholly owned subsidiary, of all of the membershipinterests in Sea Coast Transportation LLC (“Sea Coast”) from Marine ResourcesGroup, Inc. (“MRG”) pursuant to the terms and conditions of a MembershipInterest Purchase Agreement dated August 23, 2005 among us, MRG andSaltchuk Resources, Inc. Also on October 18, 2005, Sea Coast acquiredfour tugboats from MRG. Sea Coast is a provider of marine transportation andlogistics services to major oil companies, oil traders and refiners along theWest Coast of the United States and Alaska. The aggregate purchase price forSea Coast and the four tugboats comprised $77.0 million in cash and 125,000common units representing limited partner interests in us. The common unitswere valued at $4.4 million, as of the closing date. We financed the cashportion of the purchase price through additional borrowings under our amendedcredit agreement. A registration statement on Form S-3 with respectto the resale of the common units issued to MRG was declared effective by theSecurities and Exchange Commission in February 2006.

Under the purchase methodof accounting, we recorded an aggregate purchase price of $82.4 million,comprising $77.0 million of cash, $4.4 million in common units, and $1.0million of direct expenses. We allocated the purchase price to the tangibleassets, intangible assets, and liabilities acquired based on their fair values,which for the fixed assets and intangibles were based on consideration of independentappraisals. The purchased identifiable intangible assets are being amortized ona straight-line basis over their respective estimated useful lives. The excessof the purchase price over the fair value of the acquired net assets has beenrecorded as goodwill, which is not amortized but which will be reviewedannually for impairment.

***Barge Incident***

On November 11, 2005, one of our tank barges, theDBL 152, struck a submerged service platform in the U.S. Gulf of Mexico thathad collapsed during Hurricane Rita in September 2005. To ensure thesafety of all people involved and to mitigate environmental damage, weinitiated, and completed in January 2006, a detailed response plan incoordination with the United States Coast Guard, other federal and stateagencies, our own personnel and response contractors. At the time of theincident, the barge was carrying approximately 120,000 barrels of No. 6fuel oil, a heavy oil product. Although the final amount has not 

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been determined, webelieve much of the oil escaped into the ocean. However, according to theNational Oceanic and Atmospheric Administration, the likelihood of shorelineimpact from the incident is low.

The barge was declared a constructive total loss, andwe have received the total $11.0 million insured value from our hull andmachinery insurers. The excess of this insurance recovery over the net bookvalue of the barge, totaling $0.4 million, is included as a net gain ondisposal of vessel in our consolidated statements of operations for the yearended June 30, 2006.

We maintain significant protection and indemnityinsurance for pollution-related costs and claims, including cleanup costs andenvironmental damages, with the West of England Ship Owners InsuranceAssociation, a member of the International Group of Protection and Indemnityclubs, and we believe that such coverage will be adequate to cover the cost ofthe clean-up operations and any subsequent claims, fines or penalties. We do notmaintain “loss of hire” insurance.

The cause of the incidentis under investigation by the United States Coast Guard, and by us and ourinsurers. We, along with our insurers, are considering the appropriate legalaction, including insurance and other recovery claims.

**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 

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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.

·       *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, as used generally for Jones Act purposes, would includeour 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,** | ** **  |
|---------------------------------------------------------|------------|-----------------------------------------------------------|-------------|
| ** **                                              | ** ** | **2006**                                                  | ** **  | **2005** | ** ** | **2004** | ** ** |
| Voyage revenue                                          |       | $                                                         | 176,650     |   | $ | 118,811 |   | $ | 93,899 |   |
| Bareboat charter and  other revenue                     |       | 6,118                                                     |        | 2,583 |   | 1,900 |   |
| **Total  revenues**                                     | ** ** | **182,768**                                               | ** **  | **121,394** | ** ** | **95,799** | ** ** |
| Voyage expenses                                         |       | 37,973                                                    |        | 24,220 |   | 16,339 |   |
| Vessel operating  expenses                              |       | 77,325                                                    |        | 49,296 |   | 38,809 |   |
| *% of  net voyage revenue*(a)                           | * *   | *55.8*                                                    | *%*         | *52.1* | *%* | *50.0* | *%* |
| General and  administrative expenses                    |       | 17,309                                                    |        | 11,163 |   | 8,149 |   |
| *% of  net voyage revenue*(a)                           | * *   | *12.5*                                                    | *%*         | *11.8* | *%* | *10.5* | *%* |
| Depreciation and  amortization                          |       | 26,810                                                    |        | 21,399 |   | 18,643 |   |
| Net (gain) loss on sale  of vessels                     |       | (313                                                      | )           | (264 | ) | 255 |   |
| **Operating  income**                                   | ** ** | **23,664**                                                | ** **  | **15,580** | ** ** | **13,604** | ** ** |
| *% of  net voyage revenue*(a)                           | * *   | *17.1*                                                    | *%*         | *16.5* | *%* | *17.5* | *%* |
| Interest expense, net                                   |       | 10,118                                                    |        | 5,949 |   | 6,370 |   |
| Net loss on reduction of  debt                          |       | 7,224                                                     |        | 1,359 |   | 3,158 |   |
| Other (income) expense,  net                            |       | (64                                                       | )           | (27 | ) | (253 | ) |
| **Income  before provision (benefit) for income taxes** | ** ** | **6,386**                                                 | ** **  | **8,299** | ** ** | **4,329** | ** ** |
| Provision (benefit) for  income taxes                   |       | 484                                                       |        | 163 |   | (16,845 | ) |
| **Net  income**                                         | ** ** | **$**                                                     | **5,902**   | ** ** | **$** | **8,136** | ** ** | **$** | **21,174** | ** ** |
| **Net voyage revenue by trade**                         |       |                                                      |        |   |   |   |   |
| **Coastwise**                                           |       |                                                      |        |   |   |   |   |
| Total tank vessel days                                  |       | 9,430                                                     |        | 6,691 |   | 6,055 |   |
| Days worked                                             |       | 8,467                                                     |        | 6,035 |   | 5,346 |   |
| Scheduled drydocking  days                              |       | 403                                                       |        | 142 |   | 338 |   |
| Net utilization                                         |       | 90                                                        | %           | 90 | % | 88 | % |
| Average daily rate                                      |       | $                                                         | 11,967      |   | $ | 11,369 |   | $ | 10,230 |   |
| **Total  coastwise net voyage revenue**                 | ** ** | **$**                                                     | **101,324** | ** ** | **$** | **68,610** | ** ** | **$** | **54,689** | ** ** |
| **Local**                                               |       |                                                      |        |   |   |   |   |
| Total tank vessel days                                  |       | 8,537                                                     |        | 6,084 |   | 5,032 |   |
| Days worked                                             |       | 6,534                                                     |        | 4,795 |   | 4,235 |   |
| Scheduled drydocking  days                              |       | 317                                                       |        | 263 |   | 267 |   |
| Net utilization                                         |       | 77                                                        | %           | 79 | % | 84 | % |
| Average daily rate                                      |       | 5,717                                                     |        | 5,418 |   | $ | 5,400 |   |
| **Total local net voyage revenue**                      | ** ** | **$**                                                     | **37,353**  | ** ** | **$** | **25,981** | ** ** | **$** | **22,871** | ** ** |
| **Tank vessel fleet**                                   |       |                                                      |        |   |   |   |   |
| Total tank vessel days                                  |       | 17,967                                                    |        | 12,775 |   | 11,087 |   |
| Days worked                                             |       | 15,001                                                    |        | 10,830 |   | 9,581 |   |
| Scheduled drydocking  days                              |       | 720                                                       |        | 405 |   | 605 |   |
| Net utilization                                         |       | 83                                                        | %           | 85 | % | 86 | % |
| Average daily rate                                      |       | $                                                         | 9,245       |   | $ | 8,734 |   | $ | 8,095 |   |
| **Total fleet net voyage revenue**                      | ** ** | **$**                                                     | **138,677** | ** ** | **$** | **94,591** | ** ** | **$** | **77,560** | ** ** |

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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 “VoyageRevenue and Voyage Expenses” in the period-to-period comparisons below.

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**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 coastwisetrade remained constant at 90% for each fiscal year. The acquisition of SeaCoast in October 2005 resulted in increased coastwise net voyage revenueof $23.0 million in fiscal 2006, compared to fiscal 2005. Other increasesfor the year ended June 30, 2006 included $14.0 million in coastwise netvoyage revenue resulting from an increase in days worked by the followingvessels:  (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 as discussed above under “Significant Fiscal 2006 Events—Barge Incident”.Coastwise net voyage revenue also benefited from a 5% increase in average dailyrates to $11,967 for the year ended June 30, 2006 from $11,369 for theyear ended June 30, 2005, which accounted for approximately $3.6 millionof increased net voyage revenue. Coastwise average daily rates were positivelyimpacted by the continuing strong demand for petroleum products and increasingoil 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, 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 byoutside chartering of tank barges by Sea Coast.

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***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 net voyage revenue increasedto 55.8% for the fiscal year ended June 30, 2006 from 52.1% for the fiscalyear ended June 30, 2005,  resultingmainly from a higher such percentage for the Sea Coast vessels acquired in October 2005.Four of the Sea Coast barges are chartered in, and we pay a charter fee that isincluded in vessel operating expenses. The charter fee increases the percentageof vessel operating expenses to net voyage revenue; however, there is noassociated depreciation or interest expense. Vessel labor and related costsincreased as a result of contractual labor rate increases and a higher averagenumber of employees due to the operation of the additional barges describedunder “—Net Voyage 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 net voyage revenue, general and administrative expenses increasedto 12.5% for the fiscal year ended June 30, 2006 from 11.8% for the fiscalyear ended June 30, 2005. The $6.1 million increase reflected $4.7 millionof increased 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.

***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 the redemption of the Title XIbonds, as described under “Title XI Bonds” below, we made a make-whole paymentof $4.0 million. After writing off $2.7 million in unamortized deferredfinancing costs relating to these bonds, and after costs and expenses relatingto the 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.

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 

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$1.1 millionin deferred financing costs related to the repaid debt that were written off,and $0.3 million of prepayment costs.

***Provision (Benefit) 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.

**Fiscal Year Ended June 30,2005 Compared to the Fiscal Year Ended June 30, 2004**

***Voyage Revenue and Voyage Expenses***

Voyage revenue was $118.8million for the fiscal year ended June 30, 2005, an increase of$24.9 million, or 27%, as compared to voyage revenue of $93.9 millionfor the fiscal year ended June 30, 2004. Voyage expenses were$24.2 million for the fiscal year ended June 30, 2005, an increase of$7.9 million, or 48%, as compared to voyage expenses of $16.3 millionfor the fiscal year ended June 30, 2004.

***Net Voyage Revenue***

Net voyage revenue was $94.6 million for thefiscal year ended June 30, 2005, an increase of $17.0 million, or 22%,as compared to net voyage revenue of $77.6 million for the fiscal yearended June 30, 2004. In our coastwise trade, net voyage revenue was $68.6million for the fiscal year ended June 30, 2005, an increase of $13.9million, or 25%, as compared to $54.7 million for the fiscal year ended June 30,2004.  Net utilization in our coastwisetrade increased to 90% for the fiscal year ended June 30, 2005 compared to88% for the fiscal year ended June 30, 2004, due mainly to a decrease inscheduled drydocking days.  Increasestotaling $13.2 million in coastwise net voyage revenue in fiscal 2005 resultedfrom an increase in days worked by the following vessels during fiscal 2005 ascompared to fiscal 2004: (1) the DBL 102, which was placed in service in January 2004,(2)  the DBL 140, which was purchased in January 2004,  (3) the DBL 105, which completed itsmodification for petroleum transportation and was placed in service in May 2004,(4) the DBL 155, which completed its double-hull retrofitting in September 2004,and (5) the return of the KTC 80 from bareboat charter in November 2003.These increases were partially offset by an aggregate $4.2 million decrease innet voyage revenue during fiscal 2005 resulting from the sale of the KTC 135 inApril 2004 in anticipation of its OPA 90 phase-out, and the OPA 90phase-out of the KTC 90 and KTC 96 in December 2004. Coastwise net voyagerevenue also benefited from a 11% increase in average daily rates to $11,369for the fiscal year ended June 30, 2005 from $10,230 for the fiscal yearended June 30, 2004, which accounted for approximately $6.1 million ofincreased net voyage revenue. Average daily rates were positively impacted bythe continuing strong demand for petroleum products, increasing oil prices, andthe addition of the several larger vessels described above, which generatehigher average daily rates.

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Net voyage revenue in ourlocal trade for the fiscal year ended June 30, 2005 was $26.0 million, anincrease of $3.1 million, or 14%, as compared to $22.9 million for the fiscalyear ended June 30, 2004. The increase was mainly attributable to thebarges acquired as part of our December 2004 vessel acquisition, whichaccounted for $2.4 million of the increase. Net utilization in our local tradewas 79% for the fiscal year ended June 30, 2005 compared to 84% for thefiscal year ended June 30, 2004. Net utilization in fiscal 2005 wasadversely impacted by higher unscheduled repair days for one of our smalltankers and by low utilization on certain tank barges acquired in the December 2004vessel acquisition. Average daily rates in our local trade improved slightly to$5,418 for the fiscal year ended June 30, 2005 from $5,400 for the fiscalyear ended June 30, 2004.

***Bareboat Charter and Other Revenue***

Bareboat charter and otherrevenue was $2.6 million for the fiscal year ended June 30, 2005, comparedto $1.9 million for the fiscal year ended June 30, 2004. Amounts for thefiscal 2005 period increased by $0.5 million due to revenue generated fromchartering out of a chartered-in barge.

***Vessel Operating Expenses***

Vessel operating expenseswere $49.3 million for the fiscal year ended June 30, 2005, an increase of$10.5 million, or 27%, as compared to $38.8 million for the fiscal year ended June 30,2004. Vessel operating expenses as a percentage of net voyage revenue increasedto 52.1% for the fiscal year ended June 30, 2005 from 50.0% for the fiscalyear ended June 30, 2004. 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 January 2004,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$2.5 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. Fiscal 2005 vessel operating expenses alsoincreased by $0.4 million for charter costs in connection with the bareboatcharter revenue discussed above in “—Bareboat Charter and Other Revenue.”

***Depreciation and Amortization***

Depreciation andamortization was $21.4 million for the fiscal year ended June 30, 2005, anincrease of $2.8 million, or 15%, as compared to $18.6 million for the fiscalyear ended June 30, 2004. The increase resulted from additionaldepreciation on our newbuild and purchased vessels described above, plusadditional depreciation recorded in the first quarter of fiscal 2005 to reducethe salvage value for the two single-hull vessels which phased out on December 31,2004.

***General and Administrative Expenses***

General and administrativeexpenses were $11.2 million for the fiscal year ended June 30, 2005, anincrease of $3.1 million, or 38%, as compared to general and administrativeexpenses of $8.1 million for the fiscal year ended June 30, 2004. As apercentage of net voyage revenue, general and administrative expenses increasedto 11.8% for the fiscal year ended June 30, 2005 from 10.5% for the fiscalyear ended June 30, 2004. The fiscal year ended June 30, 2005included $1.9 million of additional professional fees and other costs incurredin connection with being a public company. These increased professional feesincluded $0.6 million in costs for compliance with the Sarbanes-Oxley Act of2002, and $0.4 million of costs incurred in fiscal 2005 to provide income taxcompliance information to our unitholders, neither of which were incurred inthe prior year’s period.

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***Interest Expense, Net***

Net interest expense was$5.9 million for the fiscal year ended June 30, 2005, $0.5 million lowerthan the fiscal year ended June 30, 2004. The decrease resulted from thesignificant reduction of higher cost borrowings in connection with therepayment of debt using the proceeds of our initial public offering in January 2004.

***Loss on Reduction of Debt***

In connection with the refinancing of our revolvingcredit facility and repayment of certain term loans in March 2005 asdescribed below in “Liquidity and Capital Resources—Amended Credit Agreement”and “—Other Term Loans,” we incurred $1.4 million in loss on reduction ofdebt. Included in this amount was $1.1 million in deferred financing costsrelated to the repaid debt that were written off, and $0.3 million ofprepayment costs.

In connection with ourinitial public offering in fiscal 2004, $73.9 million in predecessorcompany debt was repaid. Included in this amount was $6.3 million inprepayment and make-whole amounts, of which $3.3 million had previouslybeen accrued by our predecessor as supplemental interest that would have beenpayable upon maturity of certain of these loans, resulting in a loss onprepayment of $3.0 million. In addition, $0.2 million in deferredfinancing costs related to the debt was also written off.

***Provision (Benefit) For Income Taxes***

For fiscal 2005, our effective tax rate was 2.0%, ascompared to 16.5% (exclusive of the benefit discussed in the followingparagraph) in fiscal 2004. The periods prior to our initial public offering on January 14,2004 relate to our predecessor. Our effective tax rate comprises the New YorkCity Unincorporated Business Tax and foreign taxes on our operatingpartnership, plus federal, state, and local corporate income taxes on thetaxable income of the operating partnership’s corporate subsidiaries. Oureffective tax rate for the fiscal year ended June 30, 2005 was lower thanthe rate for the fiscal year ended June 30, 2004 because a smaller portionof our pretax income was provided by our operating partnership’s corporatesubsidiaries.

Certain net assetscontributed to us in connection with our January 2004 initial publicoffering were transferred by our predecessor’s corporate subsidiaries. Thesenet assets had tax bases that were lower than their carrying value forfinancial reporting purposes, which resulted in deferred tax liabilitiesrelating to these temporary differences. Upon transfer to us, the futurereversal of these differences will be subject to our effective tax rate, whichis significantly lower than the effective tax rate of our predecessor’scorporate subsidiaries. The effect of the change in tax rates applicable tothese differences is reflected as a one-time deferred tax benefit of $17.6million for the fiscal year ended June 30, 2004.

***Net Income***

Net income was $8.1million for the fiscal year ended June 30, 2005, a decrease of $13.1million compared to net income of $21.2 million for the fiscal year ended June 30,2004.   The decrease resulted primarilyfrom recognition in the 2004 period of the $17.6 million deferred tax benefitdescribed in the preceding paragraph, partially offset by a $0.5 milliondecrease in interest expense, net, a $1.8 million decrease in loss on reductionof debt, and a $2.0 million increase in operating income.

**LIQUIDITY ANDCAPITAL RESOURCES**

*OperatingCash Flows.**  *Netcash provided by operating activities was $20.8 million in fiscal 2006, $24.2 millionin fiscal 2005 and $10.9 million in fiscal 2004. The decrease of $3.4 millionin fiscal 2006, compared to fiscal 2005, resulted primarily from a$4.9 million increase in drydocking expenditures and a 

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$3.8 million negativeimpact from changes in operating working capital, partially offset by theimproved operating income, after adjusting for non-cash expenses such asdepreciation and amortization. The increase of $13.3 million in fiscal 2005,compared to fiscal 2004, also resulted primarily from improved operatingincome, after adjusting for non-cash expenses such as depreciation andamortization, and a $3.1 million positive impact from changes in operatingworking capital. The positive impact from working capital resulted mainly fromincreased accounts payable due to increased operating costs of a larger fleet,partially offset by increases in prepaid expenses such as fuel supplies andinsurance premiums.

*InvestingCash Flows.**  *Netcash used in investing activities totaled $105.4 million in fiscal 2006,$55.9 million in fiscal 2005 and $59.2 million in fiscal 2004. Theprimary elements of these activities were acquisitions of vessels andcompanies, construction of new vessels and retrofitting of existing ones. Wespent $76.5 million in cash, net, to acquire Sea Coast Transportation LLC (seebelow) in October 2005. Additionally, we spent $13.1 million,$30.7 million and $34.1 million on acquisitions of existing vesselsin fiscal 2006, 2005 and 2004, respectively. During fiscal 2006, we acquired an85,000-barrel integrated tug-barge unit for approximately $13.1 million,including transaction costs. During fiscal 2005, we acquired ten tank bargesand seven tugboats from Bay Gulf Trading Company, Ltd. of Norfolk, Virginia andits affiliates. The purchase price of $20.9 million (excludingacquisition-related costs), included a water treatment facility in Norfolk. Thefiscal 2005 acquisitions included the Norfolk vessels and also the DBL 78,which was acquired in June 2005. Construction expenditures for our tankvessel newbuilding program and rebuilding projects totaled $20.7 millionin fiscal 2006, $16.8 million in fiscal 2005 and $26.5 million infiscal 2004. Such construction expenditures in fiscal 2004 were funded by $10.7million of withdrawals from our Title XI reserve account, which had beenestablished with the proceeds of our original Title XI borrowings in 2002. Othercapital expenditures of $9.1 million in fiscal 2006, $9.0 million infiscal 2005 and $9.5 million in fiscal 2004 related primarily torepowering of, and installation of coupling systems on, certain tugboats, andexpenditures related to upgrading the vessels acquired in December 2004. Capitalexpenditures made in the normal course of business are generally financed bycash from operations and, where necessary, borrowings under our revolvingcredit agreement.

*FinancingCash Flows.**  *Netcash provided by financing activities was $85.4 million in fiscal 2006, $31.4 millionin fiscal 2005, and $48.6 million in fiscal 2004. In fiscal 2006, ourprimary financing activities were the issuance of $109.4 million in new termloans and $34.0 million in gross proceeds from the sale of 950,000 common unitsin October 2005. These proceeds were used to finance the Sea Coastacquisition and other investing activities described above. Additionally, wepaid $36.8 million to redeem the principal balance of the Title XI bonds, andmade $23.0 million of distributions to partners. We also amended our revolvingcredit facility (see “—Amended Credit Agreement” below) and increased ourcredit 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 as principalpayments to Title XI reserve funds, were $0.7 million, $1.6 million and $0.7million for fiscal 2006, 2005 and 2004, respectively. When we redeemed theTitle XI bonds in November 2005, the balance of the Title XI reservefunds, totaling $2.9 million which are reflected as proceeds from Title XIreserve funds in Investing Cash Flows, 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.

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During fiscal 2004, we completed our initial publicoffering and used the gross proceeds to pay down term loans and credit lineborrowings (including prepayment costs) that had been contributed to us by ourpredecessor, to pay underwriting fees, professional fees and other offeringexpenses, and to redeem the 665,000 common units received by our predecessor inconnection with the transfer of net assets to us concurrent with the initialpublic offering. Also in fiscal 2004, we entered into $36.0 million of newterm loans to finance the purchase of the DBL 140/Lincoln Sea and the DBL 105rebuilding project. Finally, we paid $3.7 million in distributions topartners in fiscal 2004.

*OilPollution Act of 1990.**  *Tankvessels are subject to the requirements of OPA 90. OPA 90 mandates that allsingle-hull tank vessels operating in U.S. waters be removed from petroleum andpetroleum product transportation services at various times through January 1,2015, and provides a schedule for the phase-out of the single-hull vesselsbased on their age and size. At June 30, 2006, approximately 67% of thebarrel-carrying capacity of our tank vessel fleet was double-hulledin compliance with OPA 90, and the remainder (except one 75,000-barrelvessel which phases out in January 2009) will be in compliance with OPA 90until 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 $14.5 million per year to drydock andmaintain our tank vessels’ operating capacity. We expect such expenditures toapproximate $14.4 million in fiscal 2007. In addition, we anticipate thatwe will spend $0.8 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 readfootnote 3 to the table in “Selected Financial Data” in Item 6 of this report.The following table summarizes total maintenance capital expenditures,including drydocking expenditures, and expansion capital expenditures for theperiods presented (in thousands):

| ** **                                                      | ** ** | **Years Ended June 30,** | ** ** |
|-----------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                      | ** ** | **2006**                                | ** ** | **2005** | ** ** | **2004** | ** ** |
| Maintenance  capital expenditures                               |       | $                                       | 13,753     |   | $ | 8,024 |   | $ | 7,957 |   |
| Expansion capital  expenditures (including vessel acquisitions) |       | 21,561                                  |       | 39,337 |   | 52,747 |   |
| **Total capital expenditures**                                  | ** ** | **$**                                   | **35,314** | ** ** | **$** | **47,361** | ** ** | **$** | **60,704** | ** ** |
| Construction of tank  vessels                                   | ** ** | **$**                                   | **20,702** | ** ** | **$** | **16,816** | ** ** | **$** | **16,512** | ** ** |

 

In August 2005, we signed an agreement toconstruct two additional 28,000-barrel tank barges. One was delivered in August 2006while the other is expected to be delivered in the second quarter of fiscal2007. In November 2005, we signed an agreement to construct a new 100,000-barreltank barge that is expected to be delivered in the third quarter of fiscal 2007.These three vessels are expected to cost, in the aggregate and after theaddition of certain special equipment, approximately $24 million. In June 2006,we signed an agreement to construct an additional four new 28,000-barreltank barges that are expected to be delivered in the first and second quartersof fiscal 2008. Also in August 2006, we signed an agreement to constructtwo 80,000-barrel tank barges that are expected to be delivered in thesecond and third quarters of fiscal 2008. These six vessels are expected tocost, in the aggregate and after addition of certain special equipment,approximately $50 million. We expect to finance these newbuildings fromborrowings and cash from operations.

Additionally, we intend to retire, retrofit or replace31 (including three chartered-in) single-hull tank vessels by December 2014,which at June 30, 2006 represented approximately 33% 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 toreplace 

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the remaining capacitywith newbuildings and by retrofitting certain of our existing vessels wouldrange from $88.0 million to $92.0 million. This capacity can also be replacedby acquiring existing double-hulled tank vessels as opportunities arise. We arecurrently evaluating the most cost-effective means to replace this capacity.

*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 facility, 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 “—Amended CreditAgreement” below, will be sufficient to meet our liquidity needs for the next12 months.

*AmendedCredit Agreement.*   In March 2005, we enteredinto a new five-year $80.0 million revolving credit agreement with a syndicateof banks. The new credit agreement replaced our then-existing $47.0 millionrevolving credit agreement, which was repaid and terminated. On October 18,2005, to partially finance the acquisition of Sea Coast (see “—SignificantFiscal 2006 Events” above), we amended our revolving credit agreement toincrease the available borrowings to $120.0 million, of which $77.0 million wasdrawn down to pay the cash portion of the purchase price. On November 29,2005, to fund the redemption of its Title XI bonds (see “Title XI Bonds”below), we further amended the revolving credit agreement to increase themaximum borrowings to $155.0 million. On April 3, 2006, we used the netproceeds from the issuance of $80.0 million in new term loans to repayoutstanding borrowings under the revolving credit agreement, and furtheramended it to reduce the available borrowings, to release certain vessels fromthe collateral pool, and to reduce certain covenant requirements.

Theamended credit agreement provides for available borrowings of $75.0 million,contains a $20.0 million sublimit for letters of credit and allows us torequest an increase in the total borrowing availability by up to $25.0 million,up to a maximum of $100.0 million, so long as no default or event of defaulthas occurred and is continuing. Obligations under the amended credit agreementare collateralized by a first priority security interest, subject to permittedliens, on certain of our vessels having an orderly liquidation value equal toat least 1.25 times the amount of the obligations (including letters of credit)outstanding. Borrowings under the amended credit agreement bear interest, atour option, at a rate per annum equal to (a) the greater of the prime rateand the federal funds rate plus 0.5% (a “base rate loan”), or (b) 30-dayLondon Interbank Offered Rate (“LIBOR”) plus a margin based upon the ratio ofTotal Funded Debt to EBITDA, as defined in the agreement. We also incurcommitment fees, payable quarterly, on the unused amount of the facility. Thefollowing table summarizes the rates of interest and commitment fees under theamended credit agreement:

| **Ratio of Total Funded Debt to EBITDA** | ** ** | ** ** | ** ** | **LIBOR  Margin** | ** ** | **Base Rate  Margin** | ** ** | **Commitment  Fee** | ** ** |
|------------------------------------------------------------------------|------------|------------|------------|-------------------|------------|----------------------------|------------|---------------------|------------|
| Less than 2.00 :  1.00                                                 |       |       | 0.825      | %                 |       |                       | 0.00       | %                   |       |   | 0.150 | % |   |
| Greater than or equal to 2.00 : 1.00 and less than  2.50 : 1.00        |       |       | 1.075      | %                 |       |                       | 0.00       | %                   |       |   | 0.150 | % |   |
| Greater than or equal to 2.50 : 1.00 and less than  3.00 : 1.00        |       |       | 1.325      | %                 |       |                       | 0.00       | %                   |       |   | 0.200 | % |   |
| Greater than or equal to 3.00 : 1.00 and less than  3.50 : 1.00        |       |       | 1.575      | %                 |       |                       | 0.00       | %                   |       |   | 0.200 | % |   |
| Greater than or  equal to 3.50 : 1.00                                  |       |       | 1.825      | %                 |       |                       | 0.25       | %                   |       |   | 0.300 | % |   |

 

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Interest on a base rate loan is payable monthly overthe five-year term of the agreement. Interest on a LIBOR-based loan is due, atour election, one, two, three or six months after such loan is made. Outstandingprincipal amounts are due upon termination of the agreement.

Loan proceeds under the amended credit agreement maybe used for 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 amended 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,

·        totalfunded debt to tangible capitalization of no greater than 0.65 to 1.00, and

·        totalfunded debt to EBITDA of no greater than (1)  4.00 to 1.00 for the periodto and including December 31, 2006 and (2) 3.75 to 1.00 for theperiod from January 1, 2007 and thereafter;

·       restrictionson creating liens on or disposing of the vessels securing the amended 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 amended credit agreement contains customary eventsof default. If a default occurs and is continuing, we must repay all amountsoutstanding under the agreement. As of June 30, 2006, outstandingborrowings under the amended credit agreement totaled $54.0 million, none ofwhich was related to borrowings for working capital purposes.

*OtherTerm Loans.  *OnApril 3, 2006, we entered into an agreement with a lending institution toborrow $80.0 million, for which we pledged six tugboats and six tank barges ascollateral. Borrowings are represented by six notes which have been assigned toother lending institutions. These loans bear interest at a rate equal to LIBORon one-month Eurodollar deposits plus 1.40%, and are repayable in 84 monthlyinstallments with the remaining principal payable at maturity. The agreement containscertain prepayment premiums. Borrowings outstanding on these loans totaled$79.7 million as of June 30, 2006. Also on April 3, 2006, we enteredinto an agreement with the lending institution to swap the one-month, LIBORbased, variable interest payments on the $80.0 million of loans for a fixedpayment at a rate of 5.2275%, over the same terms as the loans. This swap willresult in a fixed interest rate on the Notes of 6.6275% for their seven-yearterm. This swap contract has been designated as a cash flow hedge. Therefore,the unrealized gain of $1.1 million related to the change in fair value of theswap contract as of June 30, 2006 has been reflected in othercomprehensive income. We used the proceeds of these loans to repayindebtedness under our amended credit agreement.

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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 related tug-bargeunit and one other tank barge. Borrowings outstanding on this loan total $13.3million as of June 30, 2006.

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. During the construction period, theloan bears interest at 30-day LIBOR plus 1.40%; interest only is payablemonthly through the earlier of May 12, 2007 or delivery of the final tankbarge. Thereafter, monthly payments of principal, plus accrued interest, arepayable over seven years, with the remaining principal amount payable atmaturity. The loan is collateralized by the related tank barges and (during theconstruction period only) 13 other tank vessels. Borrowings outstanding on thisloan total $5.4 million at June 30, 2006.

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 $10.7 million at June 30,2006.

In March 2005, we entered into a three-year termloan in the amount of $11.7 million to refinance an existing loan. Ourobligations under this agreement are secured by a first priority securityinterest in three vessels. The loan is repayable in monthly principalinstallments of $69,578, with the remaining principal amount repayable atmaturity, plus accrued interest at an annual fixed rate of 6.25%. The loanagreement contains events of default and covenants that are customary forfacilities of this type. Borrowings outstanding on this loan total $10.7million at June 30, 2006.

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 loan bears interest at 30-day LIBOR plus 1.71%, and isrepayable in monthly principal installments of $107,143 with the remainingprincipal amount payable at maturity. The loan is collateralized by the relatedtank barges. Borrowings outstanding on this loan were $17.9 million at June 30,2006.

To finance the January 2004 acquisition of a140,000-barrel capacity double-hull tank barge and related tugboat, weentered into a seven-year, $25.0 million term loan. To finance therebuilding of the DBL 105 and the retrofitting of the DBL 155, we entered intoan agreement with a financial institution in May 2004 to provide$20.0 million of term loans to permanently finance these vessels uponcompletion of the respective projects. These term loans were repaid in March 2005upon closing of the new revolving credit agreement, and a net loss of $1.4million, representing prepayment fees and writeoff of the related deferredfinancing costs, was recorded in connection with this restructuring.

*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 

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improved our borrowingflexibility, and eliminated certain restrictive covenants, collateralrequirements, and working capital constraints.

*RestrictiveCovenants.****  ******The agreements governing ouramended credit facility and 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 us to adhere to certainfinancial covenants, including defined ratios of fixed charge coverage andfunded debt to EBITDA (earnings before interest, taxes, depreciation andamortization and loss on reduction 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 amended credit agreement. On October 18,2005, we issued 125,000 units to the seller in connection with our acquisitionof Sea Coast (see“—Significant Fiscal 2006 Events” above). On June 1,2005, we issued and sold 500,000 common units in a private placement forproceeds of $16.0 million, before expenses associated with the offering. Ashelf registration statement with respect to the Sea Coast issuance and the June 2005private placement was declared effective by the Securities and ExchangeCommission in February 2006.

*Contractual Obligationsand Contingencies.**  *Ourcontractual obligations at June 30, 2006 consisted of the following (inthousands):

**PaymentsDue by Period**

| ** **                                    | ** ** | **Total** | ** **  | **Less than  1 Year** | ** ** | **2-3 Years** | ** ** | **4-5 Years** | ** ** | **After  5 Years** | ** ** |
|-----------------------------------------------|------------|-----------|-------------|---------------------------------|------------|--------------------|------------|--------------------|------------|--------------------|------------|
| Long-term  debt and capital lease obligations |       | $         | 193,380     |                            |       | $                  | 7,745      |               |       | $                  | 25,152     |   | $ | 70,453 |   | $ | 90,030 |   |
| Operating lease  obligations                  |       | 10,375    |        |                            | 3,948      |               |       | 5,089              |       | 702                |       | 636 |   |
| Purchase  obligations(1)                      |       | 57,055    |        |                            | 34,370     |               |       | 22,685             |       | —             |       | — |   |
|                                          | ** ** | **$**     | **260,810** | ** **                      | ** ** | **$**              | **46,063** |               | ** ** | **$**              | **52,926** | ** ** | **$** | **71,155** | ** ** | **$** | **90,666** | ** ** |

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(1)          Capital expendituresrelating to shipyard payments for the construction of one new 100,000-barreldouble-hull tank barge, two new 80,000-barrel double-hull tank barges,and six new 28,000-barrel double-hull tank barges.

Certain executive officers of K-Sea General Partner GPLLC have entered into employment agreements with K-SeaTransportation Inc., our indirect wholly owned corporate subsidiary. Eachof these 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 an aggregate base annual salary of $850,000. In addition,each employee is eligible to receive an annual bonus award based upon ourconsolidated financial performance. If the employee’s employment is terminatedwithout cause or if the employee resigns for good reason, the employee will beentitled to severance in an amount equal to the greater of (a) the productof 1.3125 (1.75 multiplied by .75) multiplied by the employee’s base salary atthe time of termination or resignation and (b) the product of 1.75multiplied by the remaining term of the employee’s non-competition provisionsmultiplied by the employee’s base salary at the time of termination orresignation.

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 

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deductibles ranging from$25,000 to $100,000. We accrue on a current basis for estimated deductibles weexpect to pay.

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 and areseeking to settle the other case. We may be subject to litigation in the futureinvolving these plaintiffs and others alleging exposure to asbestos due toalleged failure to properly encapsulate friable asbestos or remove friableasbestos on our vessels, as well as for exposure to second-hand smoke and othermatters.

EW Transportation Corp., apredecessor to our 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 weand EW Transportation Corp. participate is working towards an agreement inprinciple with the New York taxing authority on a calculation methodology forthe PBT. We have accrued our estimated liability using the calculationmethodology under discussion. In accordance with the agreements entered into inconnection with our initial public offering, any liability resulting from thePBT prior to January 14, 2004 (the effective date of the initial publicoffering) is a retained liability of our predecessor.

**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 have historically exhibited seasonal variations indemand and, as a result, in charter rates. For example, movements of clean oilproducts, such as motor fuels, generally increase during the summer drivingseason. In certain regions, movements of black oil products and distillates,such as heating oil, generally increase during the winter months, whilemovements of asphalt products generally increase in the spring through fallmonths. Unseasonably cold winters result in significantly higher demand forheating oil in the northeastern United States. Meanwhile, our operations alongthe 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. A declinein demand for, and level of consumption of, refined petroleum products couldcause demand for tank vessel capacity and charter rates to decline, which woulddecrease our revenues and profitability. The 

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acquisitionof Sea Coast provides seasonal diversity primarily relating to its Alaskanmarkets, which experience the greatest demand for petroleum products in thesummer months, due to weather conditions.

**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 on historicalexperience and known facts that we believe to be reasonable under thecircumstances. Actual results may differ from these estimates under differentassumptions and conditions. We believe that, of our significant accountingpolicies discussed in note 3 to our audited consolidated financialstatements, 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 arecapitalized and depreciated over the remaining useful lives of the assets.Maintenance and repairs that do not improve or extend the useful lives of theassets are expensed. To date, our experience confirms that these policies arereasonable, although there may be events or changes in circumstances in thefuture that indicate the recovery of the carrying amount of a vessel might notbe possible. Examples of events or changes in circumstances that could indicatethat the recoverability of a vessel’s carrying amount should be assessed mightinclude a change in regulations such as OPA 90, or continued operating losses,or projections thereof, associated with a vessel or vessels. If events orchanges in circumstances as set forth above indicate that a vessel’s carryingamount may not be recoverable, we would then be required to estimate theundiscounted future cash flows expected to result from the use of the vesseland its eventual disposition. If the sum of the undiscounted expected futurecash flows is less than the carrying amount of the vessel, we would recognizean impairment 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.

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**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 otherparts of the vessel. Amortization of drydocking expenditures is included indepreciation and 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 December 16, 2004, the Financial AccountingStandards Board (“FASB”) issued FASB Statement No. 123(R), “Share-BasedPayment” (“FAS 123(R)”). FAS 123(R) revises FASB Statement No. 123, “Accountingfor Stock-Based Compensation” (“FAS 123”) and requires companies to expense thefair value of employee stock options and other forms of stock-basedcompensation. In addition to revising FAS 123, FAS 123(R) supersedesAccounting Principles Board (“APB”) Opinion No. 25, “Accounting for StockIssued to Employees”, and amends FASB Statement No. 95, “Statement of CashFlows.” We adopted FASB 123(R) as of July 1, 2005, and account forour restricted unit awards under the new standard. To date, no unit optionshave been granted. The adoption did not have a material impact on our financialposition, results of operations or cash flows.

On April 4, 2005, the FASB issued Interpretation No. 47,“Accounting for Conditional Asset Retirement Obligations, an interpretation ofFASB Statement No. 143” (“FIN 47”). This interpretation clarifies that anentity is required to recognize a liability for the fair value of a conditionalasset retirement obligation when incurred if the liability’s fair value can bereasonably estimated. It also clarifies when an entity would have sufficientinformation to reasonably estimate the fair value of an asset retirementobligation. We adopted FIN 47 as of June 30, 2006, and such adoption didnot have a significant impact on our financial position, results of operationsor cash flows.

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” (“FAS 3”) and changes the requirementsfor the accounting for and reporting of a change in accounting principle. ThisStatement applies to all voluntary changes in accounting principle. It alsoapplies to changes required by an accounting pronouncement in the unusualinstance that the pronouncement does not include specific transition provisions.When a pronouncement 

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includes specifictransition provisions, those provisions should be followed. We are required toadopt FAS 154 as of July 1, 2006, and we do not expect that such adoptionwill 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, 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 fiscal years beginning after December 15, 2006. We are currentlyanalyzing FIN 48 and believe the adoption of FIN 48 will not have a materialimpact on our financial condition, results of operations or liquidity.

**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, 2006approximately $105.4 million of our long-term debt bears interest at fixedinterest rates ranging from 6.25% to 6.63%. Borrowings under our amended creditagreement and certain other term loans, totaling $88.0 million at June 30,2006, 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 30,2006, 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 $0.9 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, 2006,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 $79.7 million, we are paying a fixed rate of 6.63%,and we are receiving a variable interest rate of 6.75%.

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

Thefinancial statements set forth on pages F-1 to F-26 of thisreport are incorporated herein by reference.

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

None.

**ITEM 9A.**        CONTROLSAND PROCEDURES.

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

In accordance withExchange Act Rules 13a-15 and 15d-15, we carried out anevaluation, under the supervision and with the participation of management,including our Chief Executive Officer and Chief Financial Officer, of theeffectiveness of our disclosure controls and procedures as of the end of theperiod covered by this report. Based on that evaluation, our Chief ExecutiveOfficer and Chief Financial Officer concluded that our disclosure controls andprocedures were effective as of June 30, 2006 to provide reasonableassurance that information required to be disclosed in the reports that we fileor submit under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in the Securities and ExchangeCommission’s rules and forms.

***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, 2006 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 AND EXECUTIVE OFFICERS OF THEREGISTRANT.**

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 6, 2006. Executive officersand directors are elected for one-year terms.

| **Name**               | ** ** | ** ** | ** ** | **Age** | ** ** | **Position with K-Sea General Partner GP LLC** | ** ** |
|------------------------|------------|------------|------------|---------|------------|------------------------------------------------------------------------------|------------|
| James J. Dowling       |       |       | 60         |    |       | Chairman  of the Board                                                       |       |
| Timothy J. Casey       |       |       | 45         |    |       | President,  Chief Executive Officer and Director                             |       |
| Anthony S. Abbate      |       |       | 66         |    |       | Director                                                                     |       |
| Barry J. Alperin       |       |       | 66         |    |       | Director                                                                     |       |
| Brian P. Friedman      |       |       | 50         |    |       | Director                                                                     |       |
| Frank Salerno          |       |       | 47         |    |       | Director                                                                     |       |
| John J. Nicola         |       |       | 52         |    |       | Chief  Financial Officer                                                     |       |
| Thomas M.  Sullivan    |       |       | 47         |    |       | Vice  President, Operations                                                  |       |
| Richard P.  Falcinelli |       |       | 45         |    |       | Vice  President, Administration and Secretary                                |       |
| Gregory Haslinsky      |       |       | 43         |    |       | Vice  President, Sales                                                       |       |
| Charles Kauffman       |       |       | 55         |    |       | 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 has been President and Chief Executive Officer of InterchangeFinancial Services Corporation, a bank holding company, since 1984 andPresident and Chief Executive Officer of its principal subsidiary, InterchangeBank, since 1981. Mr. Abbate also serves as Chairman of the ExecutiveCommittee of both Interchange Financial Services Corporation and InterchangeBank.

*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.Mr. Friedman has been a managing member of Jefferies Capital Partners, aprivate investment firm, and affiliated entities since 1997. Mr. Friedmanalso serves as Chairman of the Executive Committee of Jefferies &Company, Inc. Mr. Friedman serves as a director of Jefferies Group, Inc.,an investment banking firm, Telex 

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Communications, Inc.,a manufacturer of audio and wireless communications equipment, and variousprivate companies in which Jefferies Capital Partners or its affiliates have aninterest.

*FrankSalerno*has served as a Director since February 2004.From mid-1999 until his retirement in February 2004, Mr. Salernowas Managing Director and Chief Operating Officer of Merrill Lynch InvestmentAdvisors—Americas Institutional 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 of Operationssince July 2003. Mr. Sullivan served as Vice President of Operationsfor EW Transportation LLC since April 1999. Mr. Sullivan also servedas 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.

*GregoryHaslinsky*has served as our Vice President, Salessince October 2005 and has been employed by K-Sea Transportation since December 1999in various sales capacities. Mr. Haslinsky was employed from November 1988to November 1999 by Maritrans, a marine transportation company, holdingvarious sales and marketing positions within the organization.

*Charles Kauffman*hasserved as our Vice President, Corporate Development since the acquisition ofSea 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 2006. During fiscal2006, 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.The board 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 registered public accounting firm’s qualifications, independence,and performance, (3) the effectiveness of our internal controls andprocedures and our internal audit function, and (4) our compliance withlegal 

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and regulatoryrequirements. The audit committee has the sole authority to appoint, retain andterminate our independent registered public accounting firm, which reportsdirectly to the audit 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-employeedirectors.

***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 mayinvolve conflicts of interest and takes such other action as may be requiredunder the terms of our partnership agreement.

**DirectorIndependence**

The board of directors of K-Sea General Partner GP LLChas determined that Messrs. Abbate, Alperin and Salerno are independentwithin the meaning of the listing standards for general independence of the NewYork Stock Exchange. Under the listing standards, the audit committee isrequired to be composed solely of directors who are independent. The standardsfor audit committee membership include additional requirements under rules ofthe SEC.

The listingstandards relating to general independence consist of both a requirement for aboard determination that the director has no material relationship with thelisted company and a listing of several specific relationships that precludeindependence. To assist it in making determinations of independence, the boardhas adopted categorical standards as permitted under the listing standards.Although the board considers all relevant facts and circumstances in assessingwhether a director is independent, relationships falling within the categoricalstandards are not required to be disclosed or separately discussed in thisreport 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

·        therules of the SEC requiring proxy statement disclosure of relationships andtransactions, or

·        the provisions of the NewYork Stock Exchange Listed Company Manual listing relationships that preclude adetermination of independence,

but under those rules neitherrequires disclosure nor 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 independent directors had relationships relevantto an independence determination that were outside the scope of the board’scategorical standards.

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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.

**Code of BusinessConduct and Ethics**

The board of directors ofK-Sea General Partner GP LLC has adopted a code of business conduct and ethics for all employees,including our principal executive officer and principal financial andaccounting officer. If any amendments are made to the code or if K-Sea GeneralPartner GP LLC grants any waiver, including any implicit waiver, from aprovision of the code that the SEC or the New York Stock Exchange (“NYSE”)requires us to disclose, we will disclose the nature of such amendment orwaiver 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 also adopted corporate governance guidelinesin accordance with the rules of the New York Stock Exchange.

**Availability ofCorporate Governance Documents**

Copies of the boardcommittee charters, code of business conduct and ethics and corporate governanceguidelines 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, East Brunswick, New Jersey 08816.

**Annual Certification**

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 2005, we submitted to theNYSE the CEO certification required by Section 303A.12(a) of the NYSE’sListed Company Manual. For fiscal 2006, 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 of K-Sea General Partner GPLLC, meet at regularly scheduled executive sessions without management. Thesemeetings are chaired on a rotating basis by the chairmen of the audit committeeand compensation committee. Persons wishing to communicate with ournon-management directors may do so by writing to them at K-Sea General PartnerGP 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-Sea GeneralPartner GP LLC, meet at least annually in executive sessions without managementand the other directors. Mr. Abbate serves as the presiding director atthose 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.

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**Payments to our General 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 $7,290 and $0 duringfiscal 2006 and fiscal 2005, 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 PartnerGP LLC.

**Section 16(a) Beneficial Ownership ReportingCompliance**

Section 16(a) ofthe Securities Exchange Act of 1934 requires our officers and directors, andpersons who own more than 10% of a registered class of our equity securities,to file reports of beneficial ownership and changes in beneficial ownershipwith the SEC. Officers, directors and greater than 10% unitholders are requiredby SEC regulations to furnish us with 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, 2006, 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 1934, except that a Form 3 for Mr. Haslinskyand one Form 4 for Mr. Salerno were filed late.

**ITEM 11.   EXECUTIVECOMPENSATION.**

The following table setsforth the annual salary, bonus and all other compensation awards and payoutsmade to our President and Chief Executive Officer, and our four other mosthighly compensated executive officers, in respect of fiscal 2006, 2005 and2004:

**Summary Compensation Table(1)**

|                                                | ** ** | ** ** | ** ** | ** **                   | ** ** | **Long-Term**    | ** ** | ** **         | ** ** |
|------------------------------------------------|------------|------------|------------|------------------------------|------------|------------------|------------|--------------------|------------|
| ** **                                     | ** ** | ** ** | ** ** | ** **                   | ** ** | **Compensation** | ** ** | ** **         | ** ** |
| ** **                                     | ** ** | ** ** | ** ** | ** **                   | ** ** | **Restricted**   | ** ** | ** **         | ** ** |
| ** **                                     | ** ** | ** ** | ** ** | **Annual Compensation** | ** ** | **Unit**         | ** ** | **All Other** | ** ** |
| **Name and Principal Position** | ** ** | ** ** | ** ** | **Fiscal Year**         | ** ** | **Salary($)**    | ** ** | **Bonus($)(2)**    | ** ** | ** Awards($)(3) ** | ** ** | **Compensation($)(4)** | ** ** |
| Timothy J. Casey                               |       |       | 2006       |                         |       | 239,038          |       |               | —     |   |   |   | 487,650 |   |   |   | 14,069 |   |   |
| President and Chief                            |       |       | 2005       |                         |       | 242,308          |       |               | 180,000    |   |   |   | 468,750 |   |   |   | 17,546 |   |   |
| Executive Officer                              |       |       | 2004       |                         |       | 233,077          |       |               | 161,500    |   |   |   | — |   |   |   | 16,495 |   |   |
| John J. Nicola                                 |       |       | 2006       |                         |       | 180,192          |       |               | —     |   |   |   | 162,550 |   |   |   | 13,940 |   |   |
| Chief Financial Officer                        |       |       | 2005       |                         |       | 153,654          |       |               | 70,000     |   |   |   | 156,250 |   |   |   | 14,073 |   |   |
|                                           |       |       | 2004       |                         |       | 149,038          |       |               | 66,500     |   |   |   | — |   |   |   | 13,652 |   |   |
| Thomas M. Sullivan                             |       |       | 2006       |                         |       | 180,192          |       |               | —     |   |   |   | 162,550 |   |   |   | 13,940 |   |   |
| Vice President,                                |       |       | 2005       |                         |       | 153,654          |       |               | 70,000     |   |   |   | 156,250 |   |   |   | 14,073 |   |   |
| Operations                                     |       |       | 2004       |                         |       | 149,038          |       |               | 65,000     |   |   |   | — |   |   |   | 13,784 |   |   |
| Richard P. Falcinelli                          |       |       | 2006       |                         |       | 180,192          |       |               | —     |   |   |   | 162,550 |   |   |   | 13,940 |   |   |
| Vice President, Admin                          |       |       | 2005       |                         |       | 153,654          |       |               | 70,000     |   |   |   | 156,250 |   |   |   | 14,073 |   |   |
| and Secretary                                  |       |       | 2004       |                         |       | 149,038          |       |               | 65,000     |   |   |   | — |   |   |   | 14,015 |   |   |
| Gregory Haslinsky                              |       |       | 2006       |                         |       | 134,808          |       |               | —     |   |   |   | 162,550 |   |   |   | 9,956 |   |   |
| Vice President, Sales                          |       |       | 2005       |                         |       | 115,000          |       |               | 50,000     |   |   |   | 78,125 |   |   |   | 9,719 |   |   |
|                                                |       |       | 2004       |                         |       | 107,885          |       |               | 32,500     |   |   |   | — |   |   |   | 7,754 |   |   |
|                                                |            |            |            |                              |            |                  |            |                    |            |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          K-SeaTransportation Partners L.P. and K-Sea General Partner GP LLC, the generalpartner of our general partner, were formed in July 2003; however, neitherpaid compensation to its directors or 

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officers prior to January 14,2004, the closing date of our initial public offering. The data in the table abovefor fiscal 2004 reflects payments to our executive officers by us and by ourpredecessor companies in respect of fiscal 2004.

(2)          Bonusesare earned based on the results of operations for each fiscal year and arereported above for the fiscal year in which they were earned. Bonuses for thefiscal year ended June 30, 2006 have not yet been awarded.

(3)          Representsthe value of the executive officer’s restricted unit awards under the K-SeaTransportation Partners L.P. Long-Term Incentive Plan (calculated bymultiplying the closing market price of our common units on the date of grantby the number of restricted units awarded). Restricted units, as part of thecompany’s long-term compensation plan, are awarded periodically by theCompensation Committee to directors, officers and certain other employees as ameans to reward achievement of performance objectives. Restricted unit awardswere made on October 1, 2004 and April 4, 2006; however, there is nopreset timetable for future awards. As of June 30, 2006, Mr. Caseyhad 27,000 restricted units with a value of $868,050, each of Messrs. Nicola,Sullivan and Falcinelli had 9,000 restricted units with a value of $289,350,and Mr. Haslinsky had 7,000 restricted units with a value of $225,050. Theserestricted units will vest in four equal installments beginning in October 2006.Each restricted unit includes an associated distribution equivalent right,which entitles the recipient to receive an amount in cash equal to, and at thesame time as, the cash distributions made by us with respect to a common unitduring the period such restricted unit is outstanding.

(4)          Consistsof contributions to our 401(k) and money purchase defined contributionplans.

**Unit Option Awards**

No unit options have beenawarded to date.

**EmploymentAgreements**

Timothy J. Casey, John J. Nicola, Thomas M. Sullivanand Richard P. Falcinelli have entered into employment agreements with K-SeaTransportation Inc., our indirect wholly owned corporate subsidiary. Thefollowing is a summary of the material provisions of those employmentagreements, copies of which have been previously filed as exhibits. All ofthese employment agreements are substantially similar, with certain exceptionsas set forth below.

The employment agreements contemplate that eachemployee will serve as an officer of K-Sea General Partner GP LLCand other affiliates. Each of the employment agreements had an initial term ofone year. The term of each employment agreement is automatically extended forsuccessive one-year terms unless either party gives 30-days writtennotice prior to the end of the term that such party desires not to renew theemployment agreement.

Mr. Casey receives a base annual salary of$250,000 and each of Messrs. Nicola, Falcinelli and Sullivan receive abase annual salary of $200,000. Under the employment agreement, each employeeis eligible to receive an annual bonus award based upon the financialperformance of us and our subsidiaries. The board of directors of K-Sea GeneralPartner GP LLC will determine the amount of any bonus award and may issueadditional awards to each employee in the amounts and at the times it sodetermines. Further, each employee is entitled to an automobile and certainother benefits.

If the employee’s employment is terminated without cause(as defined in the employment agreement) or if the employee resigns for goodreason (as defined in the employment agreement), the employee will be entitledto severance in an amount equal to the greater of (a) the product of1.3125 (1.75 multiplied by .75) multiplied by the employee’s base salaryat the time of termination or resignation and (b) the product of 1.75multiplied by the remaining term of the employee’s non-competition provisionsmultiplied 

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by the employee’s basesalary at the time of termination or resignation. In addition, K-SeaTransportation Inc. will pay on behalf of each employee the premiumsnecessary to provide coverage continuation rights under certain insurancepolicies for a one-year period after termination or resignation.

The employment agreements also provide for anon-competition period that will continue for two years after the terminationof the employee’s employment, except that the non-competition period mayterminate earlier as determined by the board of directors of K-Sea GeneralPartner GP LLC if (a) the employee is terminated other than for cause and (b) suchtermination does not occur within 30 days after a “change in control,” asdefined therein. During the non-competition period, the employee is generallyprohibited from engaging in any business that competes with us or ouraffiliates in areas in which we conduct business as of the date of terminationand from soliciting or inducing any of our employees to terminate theiremployment with us or accept employment with anyone else or interfere in asimilar manner with our business.

Mr. Haslinsky, ourother named executive officer, does not have an employment agreement and ispaid an annual base salary of $150,000.

**Long-Term IncentivePlan**

K-Sea General Partner GP LLC has adopted the K-SeaTransportation Partners L.P. Long-Term Incentive Plan for directors andemployees of K-Sea General Partner GP LLC and its affiliates, including K-SeaOperating Partnership L.P. and K-Sea Transportation Inc. The long-termincentive plan permits the grant of awards covering an aggregate of 440,000common units in the form of unit options and restricted units. The plan isadministered by the compensation committee of the board of directors of K-SeaGeneral Partner GP LLC, and will continue in effect until the earlier of thedate determined by the board of directors of K-Sea General Partner GP LLC orthe date common units are no longer available for the payment of awards underthe plan.

K-Sea General Partner GP LLC’s board of directors orits compensation committee at its discretion are able to terminate, suspend ordiscontinue the long-term incentive plan at any time with respect to any unitsfor which a grant has not yet been made. K-Sea General Partner GP LLC’s boardof directors or its compensation committee also have the right to alter oramend the long-term incentive plan or any part thereof from time to time,including increasing the number of units that may be granted subject tounitholder approval as required by the exchange upon which the common units arelisted at that time. However, no change in any outstanding grant may be madethat would materially impair the rights of the participant without the consentof the participant.

*RestrictedUnits.**  *Arestricted unit is a “phantom” unit that entitles the grantee to receive acommon unit upon the vesting of the phantom unit or, in the discretion of thecompensation committee, cash equivalent to the fair market value of a commonunit. The compensation committee may determine to make grants under the plan toemployees and directors containing such terms as the compensation committeeshall determine under the plan, including the period over which restrictedunits granted to employees and directors will vest. The compensation committeewill be able to base its vesting determination upon the achievement ofspecified performance objectives. In addition, subject to additional orcontrary provisions in a unit award agreement, the restricted units will vestupon a change in control of K-Sea Transportation Partners L.P. or our generalpartner.

If a grantee’s employment or membership on the boardof directors terminates for any reason, the grantee’s restricted units will beautomatically forfeited unless, and to the extent, the compensation committeeprovides otherwise or unless otherwise provided in a written employmentagreement between the grantee and K-Sea General Partner GP LLC or itsaffiliates. Common units to be delivered upon the vesting of restricted unitsmay be common units acquired by the general partner of our general partner inthe open market, common units already owned by the general partner of ourgeneral partner, common 

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units acquired by thegeneral partner of our general partner directly from us or any other person orany combination of the foregoing, as determined by the compensation committeeat its discretion. K-Sea General Partner GP LLC will be entitled toreimbursement by us for the cost incurred in acquiring common units. Thus, thecost of the restricted units will be borne by us. If we issue new common unitsupon vesting of the restricted units, the total number of common unitsoutstanding will increase. The compensation committee, in its discretion, maygrant tandem distribution equivalent units (“DERs”) with respect to restrictedunits, which entitle the recipient to receive an amount in cash equal to, andat the same time as, the cash distributions made by us with respect to a commonunit during the period such restricted unit is outstanding.

*UnitOptions.**  *Thelong-term incentive plan will permit the grant of options covering commonunits. The compensation committee will be able to make grants under the plan toemployees and directors containing such terms as the committee determines. Unitoptions will not have an exercise price that is less than the fair market valueof the units on the date of grant. In general, unit options granted will becomeexercisable over a period determined by the compensation committee. Inaddition, the unit options will become exercisable upon a change in control ofK-Sea Transportation Partners L.P. or K-Sea Operating Partnership L.P. or uponthe achievement of specified performance objectives. Unless otherwise providedin an award agreement, unit options may be exercised only by the participantduring his lifetime or by the person to whom the participant’s right will passby will or the laws of descent and distribution.

If a grantee’s employmentor membership on the board of directors terminates for any reason, the grantee’sunvested options will be automatically forfeited unless, and to the extent, thecompensation committee provides otherwise or unless otherwise provided in awritten employment agreement between the grantee and K-Sea General Partner GPLLC or its affiliates. Upon exercise of a unit option, K-Sea General Partner GPLLC will acquire common units in the open market or directly from us or anyother person or use common units that it already owns, or any combination ofthe foregoing, as determined by the compensation committee in its discretion.K-Sea General Partner GP LLC will be entitled to reimbursement by us for thedifference between the cost incurred in acquiring these common units and theproceeds received from an optionee at the time of exercise. Thus, the cost ofthe unit options will be borne by us. If we issue new common units uponexercise of the unit options, the total number of common units outstanding willincrease, and the general partner of our general partner will pay us theproceeds it receives from the optionee upon exercise of the unit option. Theunit option plan has been designed to furnish additional compensation toemployees and directors and to align their economic interests with those ofcommon unitholders.

**Unit Purchase Plan**

We have a unit purchaseplan for employees of our general partner and its affiliates. The number ofcommon units initially available for purchase under this plan was 200,000. Theunit purchase plan is intended to serve as a means of encouraging participantsto invest in common units and to encourage participants to devote their bestefforts to the business of the partnership. Our general partner pays thebrokerage commissions, transfer taxes and other costs and expenses of the plan.All common units acquired under the plan will be subject to a one-year holdingperiod from the date of purchase. If a participant sells or otherwise disposesof his common units during this one-year holding period, the participant willthereafter be precluded from participating in the unit purchase plan until thefirst unit purchase period following the first anniversary of the date of thepledge, transfer, sale or other distribution of common units. The plan isadministered by the compensation committee of the board of directors of K-SeaGeneral Partner GP LLC. The plan may be terminated at any time by thecompensation committee and will automatically terminate when all of theavailable common units under the plan have been purchased. The plan may beamended from time to time by the compensation committee.

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**DirectorCompensation**

K-SeaGeneral Partner GP LLC pays no additional remuneration to its employees forserving as directors. The following table provides information on compensationand reimbursement practices for independent directors of K-Sea General PartnerGP LLC (Messrs. Abbate, Alperin and Salerno):

| ** **                                                            | ** ** | **Fiscal 2006(1)**  | ** ** |
|-----------------------------------------------------------------------|------------|--------------------------|------------|
| Annual retainer  (payable quarterly)                                  |       | $5,000                   |       |
| Additional fee  for attendance at each board meeting                  |       | $1,000                   |       |
| Additional fee  for attendance at each audit committee meeting(2)     |       | $1,000                   |       |
| Additional fee  for chairman at each audit committee meeting          |       | $1,000                   |       |
| Additional fee  for attendance at each compensation committee meeting |       | $1,000                   |       |
| Equity-based  compensation                                            |       | 250  restricted units(3) |       |
| Reimbursement of  expenses attendant to Board membership              |       | Yes                      |       |

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(1)          Theboard of directors of K-Sea General Partner GP LLC established compensation andreimbursement policies for fiscal 2006 at its regularly scheduled meeting on September 8,2005. These policies will apply to subsequent fiscal years unless changed bythe board of directors of K-Sea General Partner GP LLC or thecompensation committee thereof.

(2)          Additionalfee is only $500 if the audit committee meeting occurs on the same day as aboard meeting.

(3)          Restrictedunits vest on the first anniversary of the date of grant, subject to earliervesting in the event of a change in control, death, disability or retirementand to such other terms as are set forth in the award agreement, a form ofwhich has been filed as an exhibit to this report. The date of grant for fiscal2006 is September 8, 2005; the date of grant for subsequent fiscal yearswill be the date of the first regularly scheduled board meeting during suchfiscal year. Grants of restricted units include associated DERs.

Neither Mr. Dowling nor Mr. Friedman hasreceived any remuneration for serving as a director. We reimburse Mr. Dowlingand Mr. Friedman for expenses attendant 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.

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**K-Sea TransportationPartners L.P.**

Thefollowing table sets forth the beneficial ownership of units of K-SeaTransportation Partners L.P. as of September 6, 2006 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)                                                 |       | —     |       |                 | —     |                              |       |                    | 4,165,000  |                                    |       |                                                            | 100.0      | % |   |   | 42.0 | % |   |
| EW Holding Corp.(4)                                                      |       | —     |       |                 | —     |                              |       |                    | 1,181,818  |                                    |       |                                                            | 28.4       | % |   |   | 11.9 | % |   |
| EW Transportation Corp.                                                  |       | —     |       |                 | —     |                              |       |                    | 454,545    |                                    |       |                                                            | 10.9       | % |   |   | 4.6 | % |   |
| Tortoise Energy  Infrastructure Corporation(5)                           |       | 571,300    |       |                 | 9.9        | %                                 |       |                    | —     |                                    |       |                                                            | —     |   |   |   | 5.8 | % |   |
| Tortoise Capital  Advisors, L.L.C.(5)                                    |       | 956,346    |       |                 | 16.6       | %                                 |       |                    | —     |                                    |       |                                                            | —     |   |   |   | 9.6 | % |   |
| Neuberger Berman Inc.(6)                                                 |       | 295,570    |       |                 | 5.1        | %                                 |       |                    | —     |                                    |       |                                                            | —     |   |   |   | 3.0 | % |   |
| ***Directors  and Executive Officers***                                  |       |       |       |                 |       |                              |       |                    |       |                                    |       |                                                            |       |   |   |   |   |   |   |
| James J. Dowling                                                         |       | 9,000      |       |                 | *          |                              |       |                    | —     |                                    |       |                                                            | —     |   |   |   | * |   |   |
| Timothy J. Casey                                                         |       | 10,000     |       |                 | *          |                              |       |                    | —     |                                    |       |                                                            | —     |   |   |   | * |   |   |
| Anthony S. Abbate                                                        |       | 3,750      |       |                 | *          |                              |       |                    | —     |                                    |       |                                                            | —     |   |   |   | * |   |   |
| Barry J. Alperin                                                         |       | 4,750      |       |                 | *          |                              |       |                    | —     |                                    |       |                                                            | —     |   |   |   | * |   |   |
| Brian P. Friedman(7)                                                     |       | 10,800     |       |                 | *          |                              |       |                    | 4,165,000  |                                    |       |                                                            | 100.0      | % |   |   | 42.1 | % |   |
| Frank Salerno                                                            |       | 3,050      |       |                 | *          |                              |       |                    | —     |                                    |       |                                                            | —     |   |   |   | * |   |   |
| John J. Nicola                                                           |       | 10,500     |       |                 | *          |                              |       |                    | —     |                                    |       |                                                            | —     |   |   |   | * |   |   |
| Thomas M. Sullivan                                                       |       | 3,600      |       |                 | *          |                              |       |                    | —     |                                    |       |                                                            | —     |   |   |   | * |   |   |
| Richard P. Falcinelli                                                    |       | 4,200      |       |                 | *          |                              |       |                    | —     |                                    |       |                                                            | —     |   |   |   | * |   |   |
| Gregory Haslinsky                                                        |       | 2,275      |       |                 | *          |                              |       |                    | —     |                                    |       |                                                            | —     |   |   |   | * |   |   |
| All directors and named executive officers as a  group (10 persons) |       | 61,925     |       |                 | 1.1        | %                                 |       |                    | 4,165,000  |                                    |       |                                                            | 100.0      | % |   |   | 42.6 | % |   |

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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. Haslinsky—1,500.

(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 10,2006 by Tortoise Energy Infrastructure Corporation (“TYG”) and Tortoise CapitalAdvisors, L.L.C., an investment advisor to TYG and certain managed accounts (“TCA”).TCA, by virtue of an investment advisory agreement with TYG, has all investmentand voting power over common units owned of record by TYG. TCA and TYG havereported that they share voting power and dispositive power over the commonunits owned of record by TYG. TCA also acts as an investment advisor toTortoise Energy Capital Corporation (“TYY”) and certain managed accounts. Includingshares owned of record by TYG and certain managed accounts, TCA has sharedvoting power with respect to 416,222 common units and shared dispositive powerwith respect to 956,346 common units. TYG has shared voting and dispositivepower with respect to 571,300 common units. TCA is not the record owner of anycommon units and disclaims any beneficial interest in such common units. Theaddress of each entity is 10801 Mastin Boulevard, Suite 222, OverlandPark, Kansas 66210.

(6)          Based solely on aSchedule 13G filed with the Securities and Exchange Commission on February 14,2006 by Neuberger Berman Inc. (“Neuberger Inc.”). Such filing indicates thatNeuberger Inc. has sole voting power with respect to 225,680 common units andshared voting power with respect to 295,750 common units. Neuberger Berman, LLC(“Neuberger LLC”) is deemed to be a beneficial owner since it has shared powerto make decisions whether to retain or dispose, and in some cases the solepower to vote, the securities of many unrelated clients. Neuberger Berman, LLCdoes not, however, have any economic interest in the securities of thoseclients. Neuberger LLC and Neuberger Berman Management Inc. are deemed to bebeneficial owners for since they both have shared power to make decisionswhether to retain or dispose and vote the securities. Neuberger LLC andNeuberger Inc. serve as a sub-adviser and investment manager, respectively, ofNeuberger Berman’s various mutual funds which hold such shares in the ordinarycourse of their business and not with the purpose nor with the effect ofchanging or influencing the control of the issuer.

(7)          Mr. Friedman owns51% of Park Avenue Transportation Inc., the general partner of each KSP Entityand, therefore, may be deemed to beneficially own the subordinated units heldby EW Transportation LLC. The address of each KSP Entity and Park Avenue TransportationInc. is 520 Madison Avenue, 12th Floor, 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 6,2006:

| **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        | %                      |       |                 | *          |   |   |
| Gregory Haslinsky                                                                                              |       |       | *          |                   |       |                 | *          |   |   |
| All directors and named  executive officers of K-Sea General Partner GP LLC as a group (10  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.

(2)          Mr. Dowling is alimited partner in KSP Investors C L.P. and has an effective 1.38% economicinterest 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 6, 2006:

| **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        | %                                                 |       |
| Gregory Haslinsky                                                                                   |       |       | *          |                                              |       |
| All directors and named executive officers of K-Sea  General Partner GP LLC as a group (10 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. Friedmanowns 51% of the outstanding shares of capital stock of the general partner ofeach KSP Entity.

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

**Equity Compensation Plan Information**

The following table setsforth in tabular format a summary of our equity plan information as of September 6,2006:

| ** **                                                 | ** ** | **(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)  |       |       | —     |                                                                                                                                         |       |                                                                                                | —     |   |   |   | 329,750 | (2) |   |
| Equity compensation plans not approved by  securityholders |       |       | —     |                                                                                                                                         |       |                                                                                                | —     |   |   |   | — |   |   |
| Total                                                      |       |       | —     |                                                                                                                                         |       |                                                                                                | —     |   |   |   | 329,750 |   |   |
|                                                            |            |            |            |                                                                                                                                              |            |                                                                                                     |            |  |  |  |  |  |  |  |  |

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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. For a descriptionof the material 

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features of this plan,please read “Executive Compensation—Long-Term Incentive Plan” in Item 11 ofthis report.

(2)          Anaggregate of 110,250 restricted units have been issued under the K-SeaTransportation Partners L.P. Long-Term Incentive Plan.

**ITEM 13.**         CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS.

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

We generally distribute 98% of our available cash toour unitholders, including EW Transportation LLC, EW Holding Corp. and EWTransportation Corp. in their capacity as holders of an aggregate of 4,165,000subordinated units, and the remaining 2% of our available cash to our generalpartner. If distributions exceed the $0.50 per unit minimum quarterlydistribution and other higher target levels, our general partner is entitled toincreasing percentages of the distributions, up to 50% of the distributionsabove the highest target level. We refer to the rights to the increasingdistributions as “incentive distribution rights.” Please read “Market ForRegistrant’s Common Equity, Related Securityholder Matters and Issuer Purchasesof Equity Securities—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 2% general partner interest, and affiliates of our general partnerreceive an annual distribution of approximately $8,330,000 on theirsubordinated units. In August 2006, the board of directors of the generalpartner of our general partner increased the quarterly cash distribution to$0.62 per common unit. If distributions continue at that level on all of ouroutstanding units, our general partner would receive an annual distribution of$935,544 on its 2% general partner interest and incentive distribution rights,and affiliates of our general partner would receive an annual distribution ofapproximately $10,329,200 on their subordinated units. No assurances can bemade, 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 $7,290 and $0 in fiscal 2006 andfiscal 2005, 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 Transportation LLC, EW Acquisition Corp., EW HoldingCorp., EW Transportation Corp., K-Sea General Partner LP (ourgeneral partner), K-Sea General Partner GP LLC (the general partner of ourgeneral partner), K-Sea OLP GP LLC (the general partner of our operatingpartnership) and K-Sea Operating Partnership L.P. (our operatingpartnership).

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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 EW Transportation 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.

**Properties**

We lease our StatenIsland, New York office and pier facilities from, and charter certain vesselsto, affiliates of an employee. Additionally, we utilize one of these affiliatesfor tank cleaning services. Please read note 8 to our audited consolidatedfinancial statements included elsewhere in this report.

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**ITEM 14.**         PRINCIPALACCOUNTANT FEES AND SERVICES.

The following tablepresents fees for services rendered by PricewaterhouseCoopers LLP during fiscal2006 and fiscal 2005.

| ** **             | ** ** | **Year Ended  June 30, 2006** | ** ** | **Year Ended  June 30, 2005** | ** ** |
|------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| Audit fees(1)          |       |                                         | $          | 1,200,350                                    |       |   |   | $ | 348,235 |   |   |
| Audit-related  fees(2) |       |                                         | 264,060    |                                         |       |   | 162,923 |   |   |
| Tax fees(3)            |       |                                         | 701,387    |                                         |       |   | 492,691 |   |   |
| All other fees         |       |                                         | —     |                                         |       |   | — |   |   |
| Total                  |       |                                         | $          | 2,165,797                                    |       |   |   | $ | 1,003,849 |   |   |

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(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.

(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 SEC policies regarding auditorindependence, the audit committee is responsible for pre-approving all auditand non-audit services performed by the independent registered public accountingfirm. In addition to its approval of the audit engagement, the audit committeetakes action at least annually to authorize the performance by the independentregistered public accounting firm of several specific types of services withinthe categories of audit-related services and tax services. Audit-relatedservices include assurance and related services that are reasonably related tothe performance of the audit or review of the financial statements. Authorizedtax services include compliance-related services such as servicesinvolving tax filings, as well as consulting services such as tax planning,transaction analysis and opinions. Services are subject to pre-approval of thespecific engagement if they are outside the specific types of services includedin the periodic approvals covering service categories or if they are in excessof specified fee limitations. The audit committee may delegate pre-approvalauthority to subcommittees. During 2006, no pre-approval requirements werewaived.

79

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**PART IV**

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

**(a)(1)   FinancialStatements.**

See “Index to FinancialStatements” set forth on page F-1.

**(a)(2)   FinancialStatement Schedules.**

None.

**(a)(3)   Exhibits.**
| Exhibit   Number | ** ** | ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | ** ** | **Description** |
|------------------|------------|------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|
| 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).                                                                                                                                                                                                                                                                                                                                               |
| 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).                                                                                                                                                                                                                            |
| 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). |

80

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| 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).                                                                                                                                                                                                                                                           |
| 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)                                                                                                                                                                                                                                                                                                                                                       |
| 10.10.1*    |   | — |   | Loan and Security  Agreement dated as of March 24, 2005 by and among K-Sea Operating  Partnership L.P., as Borrower, the Lenders party thereto, LaSalle Bank  National Association, as Syndication Agent, and KeyBank National Association,  as Administrative Agent and Collateral Trustee for the Lenders (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  March 30, 2005).                                                 |
| 10.10.2*    |   | — |   | Amendment No. 1  dated October 18, 2005 to Loan and Security Agreement dated  March 24, 2005 by and among K-Sea Operating Partnership L.P., as  Borrower, the Lenders party thereto, LaSalle Bank National Association, as  Syndication Agent, and KeyBank National Association, as Administrative Agent  and Collateral Trustee for the Lenders (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 24, 2005). |

81

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| 10.10.3* |   |   |   | Amendment No. 2 dated November 29, 2005 to  Loan and Security Agreement dated March 24, 2005 by and among K-Sea  Operating Partnership L.P., as Borrower, the Lenders party thereto, LaSalle  Bank National Association, as Syndication Agent, and KeyBank National  Association, as Administrative Agent and Collateral Trustee for the Lenders  (incorporated by reference to Exhibit 10.2 to the Partnership’s  Quarterly Report on Form 10-Q for the period ended  December 31, 2005).                      |
|----------|--------|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.10.4* |   |   |   | Amendment No. 3  dated April 3, 2006 to Loan and Security Agreement dated March 24,  2005 by and among K-Sea Operating Partnership L.P., as Borrower, the Lenders  party thereto, LaSalle Bank National Association, as Syndication Agent, and  KeyBank National Association, as Administrative Agent and Collateral Trustee  for the Lenders (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 April 7, 2006). |
| 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).                                                                   |
| 21.1     |   | — |   | List of subsidiaries.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 23.1     |   | — |   | 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.                                                                                                                                                                                                                                                                                                                                                                                     |
| 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).                                                                                                                                                                                                                         |

82

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| 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.                                    |

----

*                    Incorporatedby reference, as indicated.

†                    Managementcontract, compensatory plan or arrangement.

83

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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 6,  2006 | 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 6, 2006 |
| Timothy J. Casey      |          | Officer and  Director (Principal    |       |                   |
|                  |          | Executive  Officer)                 |       |                   |
| /s/ JOHN J. NICOLA    |          | Chief Financial  Officer (Principal |       | September 6, 2006 |
| John J. Nicola        |          | Financial and  Accounting Officer)  |       |                   |
| /s/ JAMES J. DOWLING  |          | Chairman of the  Board and Director |       | September 6, 2006 |
| James J. Dowling      |          |                                |       |                   |
| /s/ ANTHONY S. ABBATE |          | Director                            |       | September 6, 2006 |
| Anthony S. Abbate     |          |                                |       |                   |
| /s/ BARRY J. ALPERIN  |          | Director                            |       | September 6, 2006 |
| Barry J. Alperin      |          |                                |       |                   |
| /s/ BRIAN P. FRIEDMAN |          | Director                            |       | September 6, 2006 |
| Brian P. Friedman     |          |                                |       |                   |
| /s/ FRANK SALERNO     |          | Director                            |       | September 6, 2006 |
| /s/ Frank Salerno     |          |                                |       |                   |

 

84

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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, 2006 and 2005                                                                        |       | F-5        |
| Consolidated Statements of  Operations for the fiscal years ended June 30, 2006, 2005 and 2004                                   |       | F-6        |
| Consolidated Statements of  Partners’ Capital/Members’ Equity for the fiscal years ended June 30,  2006, 2005 and 2004 |       | F-7        |
| Consolidated Statements of  Cash Flows for the fiscal years ended June 30, 2006, 2005 and 2004                                   |       | F-8        |
| Notes  to Consolidated Financial Statements                                                                                           |       | F-9        |

 

 

F-1

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**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, 2006 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, 2006, basedon those criteria.

Management excluded Sea Coast Transportation LLC fromits assessment of internal control over financial reporting as of June 30,2006 because it was acquired in a purchase business combination during fiscal2006. Sea Coast Transportation LLC is a wholly-owned subsidiary whose totalassets and total revenues represent $90.2 million and $39.3 million,respectively, of the related consolidated financial statement amounts as of andfor the year ended June 30, 2006.

Management’s assessment of the effectiveness of ourinternal control over financial reporting as of June 30, 2006 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.

We have completedintegrated audits of K-Sea Transportation Partners L.P.’s 2006 and 2005consolidated financial statements and of its internal control over financialreporting as of June 30, 2006, and an audit of its 2004 consolidatedfinancial statements in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

*Consolidated financial statements*

In our opinion, the consolidated financial statements listed inthe index appearing under Item 15(a)(1) present fairly, in all materialrespects, the financial position of K-Sea Transportation Partners L.P. and itssubsidiaries at June 30, 2006 and 2005, and the results of theiroperations and their cash flows for each of the three years in the period endedJune 30, 2006 in conformity with accounting principles generally acceptedin the United States of America. These financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements****based on ouraudits. We conducted our audits of these statements in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit of financial statements includes 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.We believe that our audits provide a reasonable basis for our opinion.

*Internal controlover financial reporting*

Also, in our opinion,management’s assessment, included in Management’s Report on Internal ControlOver Financial Reporting appearing on page F-2, that the Companymaintained effective internal control over financial reporting as of June 30,2006 based on criteria established in *Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO), is fairly stated, in all material respects, based on those criteria. Furthermore,in our opinion, the Company maintained, in all material respects, effectiveinternal control over financial reporting as of June 30, 2006 based oncriteria established in *Internal Control—IntegratedFramework* issued by the COSO. The Company’s management isresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting. Our responsibility is to express opinions on management’s assessmentand on the effectiveness of the Company’s internal control over financialreporting based on our audit. We conducted our audit of internal control overfinancial reporting in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained in allmaterial respects. An audit of internal control over financial reportingincludes obtaining an understanding of internal control over financialreporting, evaluating management’s assessment, testing and evaluating thedesign and operating effectiveness of internal control, and performing suchother procedures as we consider necessary in the circumstances. We believe thatour audit provides a reasonable basis 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 

F-3

----

of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (ii) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (iii) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

Asdescribed in Management’s Report on Internal Control over Financial Reporting,management has excluded Sea Coast Transportation LLC from its assessment ofinternal control over financial reporting as of June 30, 2006 because itwas acquired by the Company in a purchase business combination during fiscal2006. We have also excluded Sea Coast Transportation LLC from our audit ofinternal control over financial reporting. Sea Coast Transportation LLC is awholly-owned subsidiary whose total assets and total revenues represent $90.2million and $39.3 million, respectively, of the related consolidated financialstatement amounts as of and for the year ended June 30, 2006.
| /s/ PRICEWATERHOUSEcOOPERS Llp |
|--------------------------------|
| Florham Park, New  Jersey      |
| August 15,  2006          |

 

F-4

----

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

| ** **                                        | ** ** | **June 30,** | ** **  |
|---------------------------------------------------|------------|-------------------|-------------|
| ** **                                        | ** ** | **2006**          | ** **  | **2005** | ** ** |
| **Assets**                                        |       |              |        |   |   |
| **Current Assets**                                |       |              |        |   |   |
| Cash and cash equivalents                         |       | $                 | 826         |   | $ | 88 |   |
| Accounts receivable, net                          |       | 20,322            |        | 14,299 |   |
| Deferred taxes                                    |       | 497               |        | 43 |   |
| Prepaid expenses and other current assets         |       | 8,256             |        | 5,518 |   |
| **Total current assets**                          | ** ** | **29,901**        | ** **  | **19,948** | ** ** |
| Vessels and equipment, net                        |       | 316,237           |        | 235,490 |   |
| Construction in progress                          |       | 5,452             |        | 8,266 |   |
| Deferred financing costs, net                     |       | 1,007             |        | 3,489 |   |
| Goodwill                                          |       | 16,579            |        | — |   |
| Other assets                                      |       | 13,852            |        | 6,069 |   |
| **Total assets**                                  | ** ** | **$**             | **383,028** | ** ** | **$** | **273,262** | ** ** |
| **Liabilities  and Partners’ Capital**       |       |              |        |   |   |
| **Current Liabilities**                           |       |              |        |   |   |
| Current portion of long-term debt                 |       | $                 | 7,745       |   | $ | 2,897 |   |
| Accounts payable                                  |       | 13,949            |        | 9,077 |   |
| Accrued expenses and other current liabilities    |       | 8,677             |        | 5,646 |   |
| **Total current liabilities**                     | ** ** | **30,371**        | ** **  | **17,620** | ** ** |
| Title XI bonds                                    |       | —            |        | 35,791 |   |
| Term loans and capital lease obligation           |       | 131,620           |        | 28,205 |   |
| Credit line borrowings                            |       | 54,015            |        | 47,112 |   |
| Deferred taxes                                    |       | 3,079             |        | 2,594 |   |
| **Total liabilities**                             | ** ** | **219,085**       | ** **  | **131,322** | ** ** |
| Commitments and  contingencies                    |       |              |        |   |   |
| **Partners’  Capital**                       |       | 163,943           |        | 141,940 |   |
| **Total  liabilities and partners’ capital** | ** ** | **$**             | **383,028** | ** ** | **$** | **273,262** | ** ** |

 

See accompanying notes to consolidated financial statements.

F-5

----

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

| ** **                                                  | ** ** | **For the Years Ended June 30,** | ** ** |
|-------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                  | ** ** | **2006**                                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Voyage revenue                                              |       | $                                                         | 176,650    |   | $ | 118,811 |   | $ | 93,899 |   |
| Bareboat charter  and other revenue                         |       | 6,118                                                     |       | 2,583 |   | 1,900 |   |
| **Total revenues**                                          | ** ** | **182,768**                                               | ** ** | **121,394** | ** ** | **95,799** | ** ** |
| Voyage expenses                                             |       | 37,973                                                    |       | 24,220 |   | 16,339 |   |
| Vessel operating  expenses                                  |       | 77,325                                                    |       | 49,296 |   | 38,809 |   |
| General and  administrative expenses                        |       | 17,309                                                    |       | 11,163 |   | 8,149 |   |
| Depreciation and  amortization                              |       | 26,810                                                    |       | 21,399 |   | 18,643 |   |
| Net (gain) loss  on sale of vessels                         |       | (313                                                      | )          | (264 | ) | 255 |   |
| Total operating expenses                                    |       | 159,104                                                   |       | 105,814 |   | 82,195 |   |
| **Operating income**                                        | ** ** | **23,664**                                                | ** ** | **15,580** | ** ** | **13,604** | ** ** |
| Interest expense,  net                                      |       | 10,118                                                    |       | 5,949 |   | 6,370 |   |
| Net loss on  reduction of debt                              |       | 7,224                                                     |       | 1,359 |   | 3,158 |   |
| Other (income)  expense, net                                |       | (64                                                       | )          | (27 | ) | (253 | ) |
| **Income before provision (benefit) for income  taxes**     | ** ** | **6,386**                                                 | ** ** | **8,299** | ** ** | **4,329** | ** ** |
| Provision  (benefit) for income taxes                       |       | 484                                                       |       | 163 |   | (16,845 | ) |
| **Net income**                                              | ** ** | **$**                                                     | **5,902**  | ** ** | **$** | **8,136** | ** ** | **$** | **21,174** | ** ** |
| **Other comprehensive income:**                             | ** ** | ** **                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Fair market value  adjustment for interest rate swap        |       | 1,136                                                     |       | — |   | — |   |
| Foreign currency  translation adjustment                    |       | 85                                                        |       | — |   | — |   |
| **Comprehensive income**                                    | ** ** | **$**                                                     | **7,123**  | ** ** | **$** | **8,136** | ** ** | **$** | **21,174** | ** ** |
| **General partner’s interest in net income (note  3)** | ** ** | **$**                                                     | **118**    | ** ** | **$** | **163** | ** ** | **$** | **6,629** | ** ** |
| **Limited  partners’ interest:**                       |       |                                                      |       |   |   |   |   |
| **Net income**                                              | ** ** | **$**                                                     | **5,784**  | ** ** | **$** | **7,973** | ** ** | **$** | **14,545** | ** ** |
| **Net income per unit—basic**                          | ** ** | **$**                                                     | **0.60**   | ** ** | **$** | **0.95** | ** ** | **$** | **2.26** | ** ** |
| **—diluted**                                           | ** ** | **$**                                                     | **0.60**   | ** ** | **$** | **0.95** | ** ** | **$** | **2.25** | ** ** |
| **Weighted average units outstanding—basic**           | ** ** | **9,605**                                                 | ** ** | **8,372** | ** ** | **6,446** | ** ** |
| **—diluted**                                           | ** ** | **9,672**                                                 | ** ** | **8,419** | ** ** | **6,453** | ** ** |

 

See accompanying notes to consolidated financial statements.

F-6

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

| ** **                                                                               | ** ** | ** **        | ** ** | **PARTNERS’ CAPITAL** | ** ** | ** **       | ** ** |
|------------------------------------------------------------------------------------------|------------|-------------------|------------|---------------------------------|------------|------------------|------------|
| ** **                                                                               | ** ** | ** **        | ** ** | **Limited Partners**       | ** ** | ** **       | ** ** | ** ** | ** ** |
| ** **                                                                               | ** ** | **MEMBERS’** | ** ** | **Common**                      | ** ** | **Subordinated** | ** ** | **General** | ** ** | ** ** | ** ** |
| ** **                                                                               | ** ** | **EQUITY**        | ** ** | **Units**                       | ** ** | **$**            | ** ** | **Units** | ** ** | **$** | ** ** | **Partner** | ** ** | **TOTAL** | ** ** |
| ** **                                                                               | ** ** | **(Predecessor)** | ** ** | ** **                      | ** ** | ** **       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Balance of  Members’ Equity at June 30, 2003                                   |       |              | $          | 41,290                          |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | $ | 41,290 |   |
| Collection on  notes receivable from members, net of interest accrued               |       |              | 46         |                            |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 46 |   |
| Net income for the  period July 1, 2003 to January 13, 2004                    |       |              | 1,776      |                            |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 1,776 |   |
| Balance of  Members’ Equity at January 13, 2004                                |       |              | 43,112     |                            |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 43,112 |   |
| Adjustment to  reflect net liabilities not contributed to the Partnership           |       |              | 5,334      |                            |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 5,334 |   |
| Book value of net  assets contributed to the Partnership                                 |       |              | (48,446    | )                               |       |             | 665        |   |   | $ | 6,537 |   |   | 4,165 |   |   | $ | 40,941 |   |   | $ | 968 |   |   | — |   |
| Proceeds from  initial public offering of common units, net of offering costs of $11,776 |       |              |       |                            |       |             | 4,165      |   |   | 86,101 |   |   |   |   |   |   |   |   |   |   |   | 86,101 |   |
| Redemption of  common units, net of offering costs of $1,035                        |       |              |       |                            |       |             | (665       | ) |   | (14,592 | ) |   |   |   |   |   |   |   |   |   |   | (14,592 | ) |
| Distributions to  partners                                                               |       |              |       |                            |       |             |       |   |   | (1,791 | ) |   |   |   |   | (1,791 | ) |   | (73 | ) |   | (3,655 | ) |
| Net income for the  period January 14, 2004 to June 30, 2004                   |       |              |       |                            |       |             |       |   |   | 9,505 |   |   |   |   |   | 9,505 |   |   | 388 |   |   | 19,398 |   |
| 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                                |       |              |       |                            |       |             |       |   |   | 630 |   |   |   |   |   | 483 |   |   | 23 |   |   | 1,136 |   |
| Foreign currency  translation adjustment                                                 |       |              |       |                            |       |             |       |   |   | 47 |   |   |   |   |   | 36 |   |   | 2 |   |   | 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 |   |   | $ | 125,187 |   |   | 4,165 |   |   | $ | 37,052 |   |   | $ | 1,704 |   |   | $ | 163,943 |   |

 

See accompanying notes to consolidated financial statements.

F-7

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

| ** **                                                                         | ** ** | **For the Years Ended June 30** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2006**                                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Cash flows from operating activities:**                                          | ** ** | ** **                                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                                                         |       | $                                                        | 5,902      |   | $ | 8,136 |   | $ | 21,174 |   |
| Adjustments to reconcile  net income to net cash provided by operating activities: |       |                                                     |       |   |   |   |   |
| Depreciation and  amortization                                                     |       | 27,144                                                   |       | 21,945 |   | 19,256 |   |
| Payment of  drydocking expenditures                                                |       | (12,506                                                  | )          | (7,654 | ) | (7,011 | ) |
| Provision for  doubtful accounts                                                   |       | 232                                                      |       | 213 |   | 100 |   |
| Deferred income  taxes                                                             |       | 172                                                      |       | (86 | ) | (16,845 | ) |
| Net (gain) loss on  sale of vessels                                                |       | (313                                                     | )          | (264 | ) | 255 |   |
| Unit compensation  costs                                                           |       | 499                                                      |       | 310 |   | 19 |   |
| Net loss on  reduction of debt                                                     |       | 7,224                                                    |       | 1,359 |   | 3,158 |   |
| Prepayment costs  on long-term debt                                                |       | (4,196                                                   | )          | (293 | ) | (6,192 | ) |
| Other                                                                              |       | 71                                                       |       | 136 |   | (277 | ) |
| Changes in operating  working capital:                                             |       |                                                     |       |   |   |   |   |
| Accounts  receivable                                                               |       | (2,301                                                   | )          | (2,702 | ) | (3,338 | ) |
| Prepaid expenses  and other current assets                                         |       | (2,362                                                   | )          | (1,930 | ) | (376 | ) |
| Accounts payable                                                                   |       | 2,600                                                    |       | 3,966 |   | 36 |   |
| Accrued expenses  and other current liabilities                                    |       | (1,677                                                   | )          | 1,260 |   | 534 |   |
| Other assets                                                                       |       | 285                                                      |       | (233 | ) | 411 |   |
| **Net cash  provided by operating activities**                                     | ** ** | **20,774**                                               | ** ** | **24,163** | ** ** | **10,904** | ** ** |
| **Cash flows from investing activities:**                                          | ** ** | ** **                                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Vessel  acquisitions                                                               |       | (13,105                                                  | )          | (30,684 | ) | (34,120 | ) |
| Acquisition of Sea  Coast, net of cash acquired                                    |       | (76,512                                                  | )          | — |   | — |   |
| Construction of  tank vessels                                                      |       | (20,702                                                  | )          | (16,816 | ) | (26,543 | ) |
| Other capital  expenditures                                                        |       | (9,050                                                   | )          | (9,023 | ) | (9,542 | ) |
| Proceeds from  Title XI reserve funds                                              |       | 2,876                                                    |       | — |   | 10,737 |   |
| Net proceeds on  disposal of vessels                                               |       | 11,095                                                   |       | 622 |   | 301 |   |
| **Net cash  used in investing activities**                                         | ** ** | **(105,398**                                             | **)**      | **(55,901** | **)** | **(59,167** | **)** |
| **Cash flows from financing activities:**                                          | ** ** | ** **                                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net increase  (decrease) in credit line borrowings                                 |       | 6,903                                                    |       | 42,712 |   | (4,125 | ) |
| Gross proceeds  from issuance of common units                                      |       | 34,010                                                   |       | 16,000 |   | 97,877 |   |
| Redemption of  common units held by predecessor                                    |       | —                                                   |       | — |   | (14,592 | ) |
| Principal payments  to Title XI reserve funds                                      |       | (674                                                     | )          | (1,618 | ) | (674 | ) |
| Proceeds from issuance  of long-term debt                                          |       | 109,437                                                  |       | 38,794 |   | 43,248 |   |
| Redemption of  Title XI bonds                                                      |       | (36,788                                                  | )          | — |   | — |   |
| Payment of term  loans                                                             |       | (2,059                                                   | )          | (44,699 | ) | (58,257 | ) |
| Financing costs  paid—equity offerings                                        |       | (1,645                                                   | )          | (54 | ) | (10,516 | ) |
| Financing costs  paid—debt issuance                                           |       | (869                                                     | )          | (930 | ) | (1,637 | ) |
| Capital  contribution from general partner                                         |       | 792                                                      |       | 328 |   | — |   |
| Distributions to  partners                                                         |       | (23,043                                                  | )          | (18,233 | ) | (3,655 | ) |
| Other                                                                              |       | (702                                                     | )          | (853 | ) | 947 |   |
| **Net cash  provided by financing activities**                                     | ** ** | **85,362**                                               | ** ** | **31,447** | ** ** | **48,616** | ** ** |
| **Cash and cash equivalents:**                                                     | ** ** | ** **                                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net increase  (decrease)                                                           | ** ** | **738**                                                  | ** ** | **(291** | **)** | **353** | ** ** |
| Balance at  beginning of year                                                      |       | 88                                                       |       | 379 |   | 26 |   |
| **Balance  at end of year**                                                        | ** ** | **$**                                                    | **826**    | ** ** | **$** | **88** | ** ** | **$** | **379** | ** ** |
| **Supplemental disclosure of cash flow  information:**                             |       |                                                     |       |   |   |   |   |
| Cash paid during the year  for:                                                    |       |                                                     |       |   |   |   |   |
| Interest, net of  amounts capitalized                                              |       | $                                                        | 9,767      |   | $ | 5,323 |   | $ | 5,263 |   |
| Income taxes                                                                       |       | $                                                        | 322        |   | $ | 55 |   | $ | 7 |   |
| **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                                                     |       | $                                                        | 78,006     |   |   |   |   |   |
| Less: Cash  acquired                                                               |       | (1,494                                                   | )          |   |   |   |   |
| Net cash paid for  the transaction                                                 |       | $                                                        | 76,512     |   |   |   |   |   |

 

See accompanying notes to consolidated financial statements.

F-8

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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:**   Basis of Presentation

On July 8, 2003,K-Sea Transportation Partners L.P. (the “Partnership”) was formed to own andoperate the refined petroleum product marine transportation, distribution andlogistics business conducted by K-Sea Transportation LLC (since renamed EWTransportation LLC, or “EW LLC”) and its subsidiaries K-Sea Acquisition Corp.,EW Holding Corp. and K-Sea Transportation Corp. (since renamed EWTransportation Corp.) (collectively, the “Predecessor”). The Partnership andits predecessor companies have since 1959 engaged in the transportation ofrefined petroleum products in the northeastern United States and Gulf of Mexicoand reports as one operating segment. On January 14, 2004, the Predecessorcontributed assets and liabilities constituting the business of the Predecessorto the Partnership in connection with the initial public offering of commonunits representing limited partner interests in the Partnership (the “commonunits”). In exchange for these assets and liabilities, the Predecessor received665,000 common units and 4,165,000 subordinated units representing limitedpartner interests in the Partnership. The transfer to the Partnership of theassets and liabilities constituting the business of the Predecessor representeda reorganization of entities under common control and was recorded athistorical cost. The net assets transferred were $5,334 greater than the netassets of the Predecessor due to the retention by the Predecessor of certainnet liabilities. The consolidated financial statements included herein are forthe Predecessor for all periods prior to January 14, 2004.

**Note 2:   InitialPublic Offering**

On January 14, 2004, the Partnership completedits initial public offering of 3,625,000 common units at a price of $23.50 perunit. On January 21, 2004, the Partnership sold an additional 540,000common units to the underwriters in connection with the exercise of theirover-allotment option. Total gross proceeds from these sales were $97,877,before offering costs and underwriting fees of $11,776. Concurrent with thesesales, the Partnership redeemed the 665,000 common units held by EW LLC (seenote 1) at a cost of $14,592. The proceeds retained by the Partnershiprelating to the sale of the common units in the initial public offering,totaling $83,285, were used to repay $73,941 in outstanding term and revolvingcredit debt, including prepayment fees and make-whole amounts, and to pay$5,939 in underwriting fees and $3,405 in professional fees and other offeringexpenses.

After the initial public offering and relatedredemption, there were 4,165,000 common units and 4,165,000 subordinated unitsoutstanding. As described in the Partnership’s partnership agreement, duringthe subordination period the subordinated units are not entitled to receive anydistributions until the common units have received their minimum quarterlydistribution plus any arrearages from prior quarters. The subordination periodwill end once the Partnership meets certain financial tests described in thepartnership agreement, but it generally cannot end before December 31,2008. When the subordination period ends, all subordinated units will convertinto common units on a one-for-one basis, and the common units will no longerbe entitled to arrearages. If the Partnership meets certain financial testsdescribed in the partnership agreement, 25% of the subordinated units canconvert into common units on or after December 31, 2006, and an additional25% can convert into common units on or after December 31, 2007.

The Partnership’s generalpartner, K-Sea General Partner L.P., holds 202,447 general partner units(representing a 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 

F-9

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distributionlevels have been achieved. The target distribution levels entitle the generalpartner to receive 15% of quarterly cash distributions in excess of $0.55 perunit until all unitholders have received $0.625 per unit, 25% of quarterly cashdistributions in excess of $0.625 per unit until all unitholders have received$0.75 per unit, and 50% of quarterly cash distributions in excess of $0.75 perunit. The Partnership is required to distribute all of its available cash fromoperating surplus, as defined in the partnership agreement. On May 1,2006, the Partnership’s general partner amended and restated the partnershipagreement of the Partnership to, among other things, provide that additionalcontributions by the general partner to the Partnership upon the issuance ofadditional limited partner interests are not mandatory. Previously the generalpartner was required to make a capital contribution to the Partnership upon theissuance of new limited partner interests to maintain its 2% interest. If thegeneral partner does not make additional capital contributions upon theissuance of new common units, the general partner’s percentage interest in thePartnership will decrease accordingly.

**Note 3:   Summaryof Significant Accounting Policies**

*Basisof Consolidation.**  *Theseconsolidated financial statements are for the Partnership and its wholly ownedsubsidiaries. For all periods prior to January 14, 2004, the business wasoperated by the Predecessor, and therefore the consolidated financialstatements are for the Predecessor (see note 1) for those periods. Allmaterial inter-company transactions and balances have been eliminated inconsolidation.

*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 individual assets as follows: tank vessels—ten totwenty-five years; tugboats—ten to twenty years; and pier and office equipment—fiveyears. For single-hull tank vessels, such useful lives are limited to theremaining period of operation prior to mandatory retirement as required by theOil Pollution Act of 1990 (“OPA 90”). OPA 90 requires that the 31(includingthree chartered-in) single-hull vessels currently operated by the Partnership,representing approximately 33% of total barrel-carrying capacity as of June 30,2006, be retired or retrofitted to double-hull by December 31, 2014.

Included in vessels and equipment are drydockingexpenditures that are capitalized and amortized over three years. Drydocking ofvessels is required 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 and theundiscounted cash flows estimated to be generated by those assets are less thanthe assets’ carrying amounts. An impairment loss would be recognized to theextent 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.

F-10

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*FuelSupplies.**  *Fuelused to operate the Partnership’s vessels, and on hand at the end of theperiod, is recorded at cost. Such amounts totaled $3,158 and $2,473 as of June 30,2006 and 2005, 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, 2006 and 2005, amountedto $187 and $815, 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. Intangible assets are stated net of accumulatedamortization, which at June 30, 2006 and 2005 amounted to $2,690 and$1,154, respectively.

*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 becomeevident.

*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 ofcontingent assets and liabilities at the date of the financial statements, andrevenues and expenses during the reporting period. The most significantestimates relate to depreciation of the vessels, liabilities incurred fromworkers’ compensation, commercial and other claims, the allowance for doubtfulaccounts and deferred income taxes. Actual results could differ from theseestimates.

*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 $690 and $667 at June 30,2006 and 2005, 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 

F-11

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ended June 30, 2006,2005 and 2004, the Partnership’s allowance for doubtful amounts was impacted byadditional charges of $232, $213, and $100, and write-offs of $209, $117 and$5, 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 taxable income of theoperating partnership’s corporate subsidiaries. Prior to the initial publicoffering, EW LLC was a limited liability company and treated as a partnershipfor income tax purposes. Accordingly, it was not responsible for federal, stateand local income taxes, as its profits and losses were passed directly to itsmembers for inclusion in their income tax returns. EW LLC was subject to theNew York City Unincorporated Business Tax, and its subsidiaries were Ccorporations that were subject to federal, state and local income taxes.

Deferred taxes represent the tax effects ofdifferences between the financial reporting and tax bases of the Partnership’sand Predecessor’s assets and liabilities, as applicable, at enacted tax ratesin effect for the years in which the differences are expected to reverse. Therecoverability of deferred tax assets is evaluated and a valuation allowanceestablished when it is more likely than not that some portion or all of thedeferred 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 four 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 from itsissuance date of January 14, 2004, as described below, by the weightedaverage number of units outstanding during the period. For periods prior to January 14,2004, such units are equal to the common and subordinated units received by thePredecessor in exchange for the net assets contributed to the Partnership, or4,830,000 units. Diluted net income per unit is calculated in the same manneras basic net income per unit, except that the weighted average number of outstandingunits is increased to include the dilutive effect of outstanding unit optionsor restricted units granted under the Partnership’s long-term incentive plan. Fordiluted net income per unit, the weighted average units outstanding wereincreased by 67, 47 and 7 for the fiscal years ended June 30, 2006, 2005and 2004, respectively, due to the dilutive effect of restricted units.

As required by Emerging Issues Task Force Issue No. 03-6,“Participating Securities and the Two-Class Method under FASB StatementNo. 128, Earnings per Share” (“EITF 03-6”), which is effective 

F-12

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for periods beginningafter March 31, 2004, the general partner’s interest in net income iscalculated as if all net income for the year was distributed according to the termsof the partnership agreement, regardless of whether those earnings would orcould be distributed. The partnership agreement does not provide for thedistribution of net income; rather, it provides for the distribution ofavailable cash, which is a contractually defined term that generally means allcash on hand at the end of each quarter after establishment of cash reserves.Unlike available cash, net income is affected by non-cash items, such asdeferred tax benefits.

As described in note 2 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 treat net income as if itwere distributable. Therefore, since net income exceeded $0.55 per unit in thethird quarter of fiscal 2004 due to recognition in that quarter of a deferredtax benefit of $17,561, the assumed distribution of all net income, pursuant toEITF 03-6, results in use of the increasing percentages to calculate thegeneral partner’s interest in net income for the quarter ended March 31,2004. Notwithstanding the foregoing, the deferred tax benefit is not includedin the calculation of available cash under the partnership agreement and, therefore,the general partner did not and will not receive any incentive distributions ofavailable cash as a result of such deferred tax benefit.

*Distributionsper Unit.**  *Distributionsto limited partners were $2.32 and $2.145 per unit for the years ended June 30,2006 and 2005, respectively.

*Reclassifications.  *In 2006, thePartnership classified prepayment costs paid for the reduction of debt as acomponent of operating activities and has reclassified prior periods to conformto this presentation. For the years ended June 30, 2005 and 2004,prepayment costs of $293 and $6,192, respectively, were reclassified from financingactivities to operating activities.

**Note 4:   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 amended credit agreement, as describedin note 6 below. A registration statement on Form S-3 with respectto the resale of the common units issued to MRG was declared effective by theSecurities and Exchange Commission in February 2006.

F-13

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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 purchase price was $82,382,comprising $77,000 of cash, $4,376 in common units (based on the market valueof the 125,000 common units at the acquisition date), and $1,006 of directexpenses. The Partnership allocated the purchase price to the tangible assets,intangible assets, and liabilities acquired based on their fair values, whichfor the fixed assets and intangibles were based on consideration of independentappraisals. The purchased identifiable intangible assets are being amortized ona straight-line basis over their respective estimated useful lives. The excessof the purchase price over the fair value of the acquired net assets has beenrecorded as goodwill, which is not amortized but which will be reviewedannually for impairment. The amount of goodwill that is deductible for taxpurposes 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 |   |

 

As of June 30,2006, the identifiable intangible assets purchased in the Sea Coast acquisitionincluded those in the table below. Amortization expense for the customerrelationships and the covenant not to compete for the year ended June 30,2006 were $647 and $75, respectively; the annual amortization expense is $970and $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 |   |   |

 

*Pro Forma FinancialInformation*

The unaudited financialinformation in the table below summarizes the combined results of operations ofthe Partnership and Sea Coast, on a pro forma basis, as though the acquisitionhad been completed as of the beginning of each period presented. This pro formafinancial data is presented for information purposes only and is notnecessarily indicative of the results of operations that would have beenachieved had the acquisition actually taken place at the beginning of eachperiod. The unaudited pro forma financial information for the year ended June 30,2006 combines the historical results of the Partnership with the historicalresults of Sea Coast for the fiscal 2006 period preceding the October 18,2005 acquisition. The unaudited pro forma financial information for the yearended June 30, 2005 combines the historical results of the Partnership andSea Coast for that period.

| ** **                                         | ** ** | **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 |   |

 

F-14

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**Note 5:   Vesselsand Equipment and Construction in Progress**

At June 30,2006 and 2005, vessels and equipment and construction in progress comprised thefollowing:

| ** **                                      | ** ** | **2006** | ** **  | **2005**   | ** ** |
|-------------------------------------------------|------------|----------|-------------|------------|------------|
| Vessels                                         |       | $        | 403,693     |       | $          | 305,752 |   |
| Pier and office  equipment                      |       | 4,967    |        | 3,945      |       |
|                                            |       | 408,660  |        | 309,697    |       |
| Less accumulated  depreciation and amortization |       | (92,423  | )           | (74,207    | )          |
| Vessels and  equipment, net                     | ** ** | **$**    | **316,237** | ** ** | **$**      | **235,490** | ** ** |
| Construction in progress                        | ** ** | **$**    | **5,452**   | ** ** | **$**      | **8,266** | ** ** |

 

Depreciation and amortization of vessels and equipmentfor the fiscal years ended June 30, 2006, 2005 and 2004 was $25,274,$20,584 and $18,256, respectively. Such depreciation and amortization includesamortization of drydocking expenditures for the fiscal years ended June 30,2006, 2005 and 2004 of $7,391, $6,823 and $7,421, respectively.

As described in note 4, 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.

On March 15,2006 and May 11, 2006, the Partnership took delivery of two new 28,000-barreltank barges, the DBL 28 and DBL 29. On December 30, 2005, the Partnershiptook delivery of a new 100,000-barrel tank barge, the DBL 103. The totalcost, after addition of certain special equipment and integration with existingtugboats, plus capitalized interest, was approximately $23,421. In addition, inthe Partnership has also entered into agreements with a shipyard for theconstruction of additional new tank barges as follows:

·       InAugust 2005, the Partnership signed an agreement to construct twoadditional 28,000-barrel tank barges; one was delivered in August 2006while the other is expected to be delivered in the second quarter of fiscal 2007.In November 2005, the Partnership signed an agreement to construct a new100,000-barrel tank barge that is expected to be delivered in the thirdquarter of fiscal 2007. These three vessels are expected to cost, after theaddition of certain special equipment, approximately $24,000.

·       InJune 2006, the Partnership signed an agreement to construct an additionalfour new 28,000-barrel tank barges that are expected to be delivered inthe first and second quarters of fiscal 2008. In August 2006, the Partnershipsigned an agreement to construct two 80,000-barrel tank barges that arealso expected to be delivered in the second and third quarters of fiscal 2008. Thesesix vessels are expected to cost, after addition of certain special equipment,approximately $50,000.

Construction in progress at June 30, 2006comprises expenditures on these new tank barges.

On December 8, 2004, the Partnership acquired tentank barges and seven tugboats. The purchase price of $21,184 (includingacquisition related costs) included a water treatment facility. The transactionwas financed using the Partnership’s available credit lines and the purchaseprice was allocated to the individual assets acquired based on consideration ofindependent appraisals. These assets are included in vessels and equipment,net, in the consolidated balance sheet.

On June 28, 2005, the Partnership acquired an80,000-barrel capacity double-hull tank barge for a purchase price of$10,000, excluding certain modifications made to the barge. The acquisition wasfinanced using borrowings under a new term loan. The vessel is included invessels and equipment, net, in the consolidated balance sheet.

F-15

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In September 2004, the Partnership completed thedouble-hulling of the KTC 155, now renamed the DBL 155, and accepted deliveryof the vessel. On January 29, 2004, the Partnership acquired a 140,000-barrelcapacity double-hull tank barge and an 8,000 horsepower tugboat, both built in2000. The purchase price of $34,120 was financed using available cash and$25,048 in borrowings under a new term loan. The Partnership also signed a newmulti-year contract with the sellers to transport petroleum products in thenortheastern United States. The portion of the purchase price in excess of thefair value of the vessels, as determined by appraisal, was allocated to therelated contract and is included in other assets. Such amount is beingamortized over the contract period.

During fiscal 2004, thePartnership also completed the rebuilding of the DBL 105 for petroleumtransportation. This vessel, along with a tugboat, was purchased in fiscal 2003for $3,539, funded by credit line borrowings.

*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 6:   Financing**

***Amended Credit Agreement***

On March 24, 2005, the Partnership entered into anew, five-year $80,000 revolving credit agreement with a syndicate of banks. Thenew credit agreement replaced the Partnership’s existing $47,000 revolvingcredit agreement, which was repaid and terminated. On October 18, 2005, topartially finance the acquisition of Sea Coast from MRG (see note 4), thePartnership amended the revolving credit agreement to increase the availableborrowings to $120,000, of which $77,000 was drawn down to pay the cash portionof the purchase price. On November 29, 2005, to fund the redemption of itsTitle XI bonds (see Title XI Bonds” below), the Partnership further amended therevolving credit agreement to increase the maximum borrowings to $155,000. On April 3,2006, the Partnership used the net proceeds from the issuance of $80,000 in newterm loans to repay outstanding borrowings under the amended credit agreement,and further amended it to reduce the available borrowings, to release certainvessels from the collateral pool, and to reduce certain covenant requirements.

The amended creditagreement provides for available borrowings of $75,000, contains a $20,000sublimit for letters of credit and allows the Partnership to request anincrease in the total borrowing availability by up to $25,000, up to a maximumof $100,000, so long as no default or event of default has occurred and iscontinuing. Obligations under the amended credit agreement are collateralizedby a first priority security interest, subject to permitted liens, on certainof the Partnership’s vessels having an orderly liquidation value equal to atleast 1.25 times the amount of the obligations (including letters of credit)outstanding. Borrowings under the amended credit agreement bear interest, atthe option of the Partnership, at a rate per annum equal to (a) thegreater of the prime rate (8.25% at June 30, 2006) and the federal fundsrate (5.25% at June 30, 2006) plus 0.5% (a “base rate loan”), or (b) the30-day London Interbank Offered Rate, or LIBOR (5.33% at June 30,2006), plus a margin of 0.825% to 1.825% based upon the ratio of Total FundedDebt to EBITDA, as defined in the agreement. The Partnership also incurscommitment fees, payable quarterly, on the unused amount of the facility at arate ranging from 0.15% to 0.30% based upon the ratio of Total Funded Debt toEBITDA, as defined in the agreement. As of June 30, 2006, outstandingborrowings under this facility totaled $54,015.

F-16

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***Term Loans andCapital Lease Obligation***

Termloans and capital lease obligations outstanding at June 30, 2006 and 2005were as follows. Descriptions of these borrowings are included below:

| ** **                                           | ** ** | **2006** | ** **  | **2005**   | ** ** |
|------------------------------------------------------|------------|----------|-------------|------------|------------|
| Term loans due:                                      |       |     |        |       |       |
| May 1, 2013                                     |       | $        | 79,696      |       | $          | — |   |
| January 1, 2013                                 |       | 13,345   |        | —     |       |
| Seven years after completion of construction project |       | 5,430    |        | —     |       |
| December 31, 2012                               |       | 10,675   |        | 6,435      |       |
| March 24, 2008                                  |       | 10,656   |        | 11,492     |       |
| April 30, 2013                                  |       | 17,893   |        | 11,557     |       |
| Capital lease obligation                             |       | 1,670    |        | —     |       |
|                                                 |       | 139,365  |        | 29,484     |       |
| Less current portion                                 |       | 7,745    |        | 1,279      |       |
|                                                 | ** ** | **$**    | **131,620** | ** ** | **$**      | **28,205** | ** ** |

 

OnApril 3, 2006, the Partnership entered into an agreement with a lendinginstitution under which the Partnership borrowed $80,000, for which it pledgedsix tugboats and six tank barges as collateral. Borrowings are represented bysix notes which have been assigned to other lending institutions. These loansbear interest at a rate equal to LIBOR on one-month Eurodollar deposits plus1.40%, and are repayable in 84 monthly installments with the remainingprincipal payable at maturity. The agreement contains certain prepayment premiums.Borrowings outstanding on these loans total $79,696 as of June 30, 2006. Alsoon April 3, 2006, the Partnership entered into an agreement with the lendinginstitution to swap the one-month, LIBOR based, variable interest payments onthe $80,000 of loans for a fixed payment at a rate of 5.2275%, over the sameterms as the loans. This swap will result in a fixed interest rate on the Notesof 6.6275% for their seven-year term. This swap contract has been designated asa cash flow hedge. Therefore, the unrealized gain of $1,136 related to thechange in fair value of the swap contract as of June 30, 2006 has beenreflected in other comprehensive income. The Partnership used the proceeds ofthese loans to repay indebtedness under its amended credit agreement.

On December 19, 2005,one of the Partnership’s subsidiaries entered into a seven year Canadian dollarterm loan to refinance purchase of an integrated tug-barge unit. The proceedsof $13,000 were used to repay borrowings under the amended credit agreement whichhad been used to finance purchase of the unit. The loan bears interest at afixed rate of 6.59%, is repayable in 84 monthly installments of CDN $136 withthe remaining principal amount payable at maturity, and is collateralized bythe related tug-barge unit and one other tank barge. Borrowings outstanding onthis loan total $13,345 as of June 30, 2006.

In May 2006, thePartnership entered into an agreement to borrow up to $23,000 to partiallyfinance construction of two 28,000-barrel and one 100,000-barreltank barges. During the construction period, the loan bears interest at 30-dayLIBOR plus 1.40%; interest only is payable monthly through the earlier ofMay 12, 2007 or delivery of the final tank barge. Thereafter, monthlypayments of principal, plus accrued interest, are payable over seven years,with the remaining principal amount payable at maturity. The loan iscollateralized by the related tank barges and (during the construction periodonly) 13 other tank vessels. Borrowings outstanding on this loan total $5,430at June 30, 2006.

In March 2005, the Partnership entered into anagreement to borrow up to $11,000 to partially finance construction of a100,000-barrel tank barge. The loan bears interest at 30-day LIBORplus 1.05%, and is repayable in monthly principal installments of $66 with theremaining principal amount payable at maturity. The loan is collateralized bythe related tank barge. Borrowings outstanding on this loan totaled $10,675 atJune 30, 2006.

F-17

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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 $10,656 at June 30,2006.

In June 2005, the Partnership entered into anagreement to borrow up to $18,000 to finance the purchase of an 80,000-barreldouble-hull tank barge and construction of two 28,000-barrel double-hulltank barges. The loan bears interest at 30-day LIBOR plus 1.71%, and isrepayable in monthly principal installments of $107 with the remainingprincipal amount payable at maturity. The loan is collateralized by the relatedtank barges. Borrowings outstanding on this loan were $17,893 at June 30,2006.

To partially finance the acquisition of an integratedtug-barge unit in January 2004, the Partnership entered into a seven-year,$25,048 term loan. In May 2004, the Partnership entered into an agreementwith a financial institution for $20,000 of loans to provide term financing fortwo vessel rebuilding and retrofitting projects. These term loans were repaidin March 2005 upon closing of the new credit agreement and three-year termloan described above, and a net loss of $1,359, representing prepayment feesand write-off of the related deferred financing costs, was recorded inconnection with these transactions

In connection with thePartnership’s initial public offering, all of the Predecessor’s debt, exclusiveof $12,950 in subordinated notes, was contributed to the Partnership. Thecontributed short-term and long-term debt (excluding the Title XI bonds, asdescribed below) aggregated $73,941, and was repaid using proceeds of theoffering. Such repayments included $6,041 in prepayment and make-whole amounts,of which $3,274 had previously been accrued by the Predecessor as supplementalinterest which would have been payable upon maturity of certain of these loans,resulting in a loss on prepayment of $2,767. In addition, $240 in deferredfinancing costs related to the contributed debt was also written off. In thefourth quarter of fiscal 2004, an additional $151 was paid as a finaladjustment to the make-whole payment.

***Title XI Bonds***

On June 7, 2002, the Predecessor issued bondsaggregating $40,441, in four series, through a private placement for thepurpose of providing long-term financing for the construction of four newdouble-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”).The guarantee agreements, including a restructuring thereof in connection withthe Partnership’s initial public offering in January 2004, required thatfunds be maintained in a restricted account (the “Title XI escrow account”) atthe U.S. Department of Treasury as additional collateral. As of June 30,2005, the Title XI escrow account had a balance of $2,760, of which $1,190 isincluded in the consolidated balance sheet under prepaid expenses and othercurrent assets, with the remaining $1,570 included in other assets.

On November 29, 2005, the Partnership redeemedthe outstanding $36,787 principal balance of Title XI bonds, paid $828 ofaccrued interest, and made a make-whole payment of $3,953 as required under theTrust Indenture. The Partnership funded the redemption using funds from itsamended credit agreement. After writing off $2,702 in unamortized deferredfinancing costs relating to the Title XI bonds, and after costs and expensesrelating to the transaction, the Partnership recorded a loss on reduction of debtof $6,898. Retirement of the Title XI bonds improved the Partnership’sborrowing flexibility, and eliminated certain restrictive covenants, collateralrequirements, and working capital constraints.

F-18

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At June 30,2006 and 2005, Title XI bonds outstanding comprised the following:

| ** **                                                                                                                               | ** ** | **2006** | ** ** | **2005**   | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|------------|------------|
| Bond payable in  semi-annual principal installments of $218 through July 2027, with  interest at 6.17%, prior to redemption         |       |     | $          | —     |       |   | $ | 9,815 |   |
| Bond payable in  semi-annual principal installments of $193 through February 2028,  with interest at 6.20%, prior to redemption     |       |     | —     |       |       | 8,861 |   |
| Bond payable in  semi-annual principal installments of $188 through June 2028, with  interest at 6.23%, prior to redemption         |       |     | —     |       |       | 8,626 |   |
| Bond payable in  semi-annual principal installments of $211 through January 2029,  with interest at 6.26%, prior to redemption |       |     | —     |       |       | 10,107 |   |
|                                                                                                                                     |       |     | —     |       |       | 37,409 |   |
| Less current portion                                                                                                                     |       |     | —     |       |       | 1,618 |   |
|                                                                                                                                     |       |     | **$**      | **—** |       | ** ** | **$** | **35,791** | ** ** |

 

***RestrictiveCovenants***

The agreements governingthe amended credit agreement and the term loans contain restrictive covenantsthat, among others, (a) prohibit distributions under defined events ofdefault, (b) restrict investments and sales of assets, and (c) requirethe Partnership to adhere to certain financial covenants, including definedratios of fixed charge coverage and funded debt to EBITDA (earnings beforeinterest, taxes, depreciation and amortization and loss on reduction of debt,as defined).

***Interest***

Interestexpense, net of amounts capitalized, and interest income, was as follows: 

| ** **                 | ** ** | **For the Years Ended June 30,** | ** ** |
|----------------------------|------------|-----------------------------------------------------------|------------|
| ** **                 | ** ** | **2006**                                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Interest costs  incurred   |       | $                                                         | 10,670     |   | $ | 6,611 |   | $ | 7,205 |   |
| Less interest  capitalized |       | 471                                                       |       | 570 |   | 672 |   |
| Interest expense           |       | 10,199                                                    |       | 6,041 |   | 6,533 |   |
| Interest income            |       | (81                                                       | )          | (92 | ) | (163 | ) |
| Interest expense, net      | ** ** | **$**                                                     | **10,118** | ** ** | **$** | **5,949** | ** ** | **$** | **6,370** | ** ** |

 

The weighted averageinterest rate on the Title XI bonds and term loans was 6.6% and 5.8% at June 30,2006 and 2005, respectively, which debt is subject to prepayment fees. Interestpayable totaled $1,124 and $1,125 as of June 30, 2006 and 2005,respectively, and is included in accrued expenses and other current liabilitiesin the consolidated balance sheets. At June 30, 2006 and 2005, accountspayable included book overdrafts of $1,555 and $853, respectively, representingoutstanding checks.

***Maturities ofLong-Term Debt***

As of June 30,2006, maturities of long-term debt for each of the next five years were asfollows:

| 2007 |   | $      | 7,745  |   |
|------|--------|--------|--------|--------|
| 2008 |   | 17,328 |   |
| 2009 |   | 7,824  |   |
| 2010 |   | 8,082  |   |
| 2011 |   | 62,371 |   |

 

F-19

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***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 revolving credit agreement. Inaddition, as described in note 4, the Partnership issued 125,000 common unitsto the sellers, valued at $4,376, in a transaction not involving a publicoffering.       On June 1, 2005, thePartnership issued and sold 500,000 common units in a private placement forproceeds of $16,000, before expenses associated with the offering. The proceedswere used to repay indebtedness incurred under the Partnership’s amended creditfacility in connection with its December 2004 vessel acquisition. Aregistration statement on Form S-3 with respect to this privateplacement and the issuance of units in connection with the Sea Coastacquisition (see note 4) was filed and declared effective by the Securities andExchange Commission in February 2006.

**Note 7:   IncomeTaxes**

Thecomponents of the provision (benefit) for income taxes for the fiscal yearsended June 30, 2006, 2005 and 2004 are as follows:

| ** **                            | ** ** | **2006** | ** ** | **2005**   | ** ** | **2004** | ** ** |
|---------------------------------------|------------|----------|------------|------------|------------|----------|------------|
| Current:                              |       |     |       |       |       |     |       |
| Federal                               |       | $        | —     |       | $          | —   |       | $ | — |   |
| State and local                       |       | —   |       | 159        |       | —   |       |
| Foreign                               |       | 312      |       | 90         |       | —   |       |
|                                  |       | 312      |       | 249        |       | —   |       |
| Deferred:                             |       |     |       |       |       |     |       |
| Federal                               |       | 59       |       | (267       | )          | (16,582  | )          |
| State and local                       |       | 79       |       | 181        |       | (263     | )          |
| Foreign                               |       | 34       |       | —     |       | —   |       |
|                                  |       | 172      |       | (86        | )          | (16,845  | )          |
| Provision (benefit) for  income taxes | ** ** | **$**    | **484**    | ** ** | **$**      | **163**  | ** ** | **$** | **(16,845** | **)** |

 

Certain net assets contributed to the Partnership atthe time of the initial public offering in January 2004 were transferredby EW LLC’s corporate subsidiaries. These net assets had tax bases that werelower than their carrying values for financial reporting purposes, whichresulted in deferred tax liabilities relating to these temporary differences. Thefuture reversal of these differences will be subject to the Partnership’seffective tax rate, which is significantly lower than the effective tax rate ofEW LLC’s corporate subsidiaries. The effect of the change in tax ratesapplicable to these differences is reflected as a deferred tax benefit of$17,561 for the fiscal year ended June 30, 2004.

F-20

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A reconciliation of incometax expense, as computed using the federal statutory income tax rate of 34%, tothe Partnership and Predecessor provisions (benefits) for income taxes for thefiscal years ended June 30, 2006, 2005 and 2004 is as follows:

| ** **                                                                                                           | ** ** | **2006** | ** ** | **2005**   | ** ** | **2004** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|----------|------------|------------|------------|----------|------------|
| Tax at federal  statutory rate of 34%                                                                                |       | $        | 2,171      |       | $          | 2,822    |       | $ | 1,472 |   |
| Entities not  subject to federal income taxes                                                                        |       | (1,885   | )          | (3,080     | )          | (1,081   | )          |
| State and local  income taxes, net of federal benefit                                                                |       | 79       |       | 342        |       | 296      |       |
| Foreign taxes,  net of federal benefit                                                                               |       | 318      |       | 188        |       | —   |       |
| Reduction in  deferred taxes resulting from change in tax rates upon transfer of net  assets to the Partnership |       | —   |       | —     |       | (17,561  | )          |
| Valuation  allowance                                                                                                 |       | (201     | )          | 201        |       | —   |       |
| Other                                                                                                                |       | 2        |       | (310       | )          | 29       |       |
| Total                                                                                                                | ** ** | **$**    | **484**    | ** ** | **$**      | **163**  | ** ** | **$** | **(16,845** | **)** |

 

Significantcomponents of deferred income tax liabilities and assets as of June 30,2006 and 2005 are as follows:

| ** **                                                  | ** ** | **2006** | ** ** | **2005**   | ** ** |
|-------------------------------------------------------------|------------|----------|------------|------------|------------|
| Deferred tax  liabilities:                                  |       |     |       |       |       |
| Book basis of vessels and equipment in excess of tax  basis |       | $        | 3,786      |       | $          | 3,364 |   |
| Total deferred tax liabilities                              | ** ** | **$**    | **3,786**  | ** ** | **$**      | **3,364** | ** ** |
| Deferred tax  assets:                                       |       |     |       |       |       |
| Allowance for doubtful accounts                             |       | $        | 30         |       | $          | 33 |   |
| Accrued expenses                                            |       | 467      |       | 350        |       |
| Net operating loss carry-forwards                           |       | 679      |       | 746        |       |
| Valuation allowance                                         |       | —   |       | (316       | )          |
| Other                                                       |       | 28       |       | —     |       |
| Total deferred  tax assets                                  | ** ** | **$**    | **1,204**  | ** ** | **$**      | **813** | ** ** |

 

The Partnership had temporary differences at June 30,2006 primarily related to the excess of the book basis of vessels and equipmentover the related tax basis in the amount of $101,012. 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.

A valuation allowance was established in fiscal 2005due primarily to the uncertainty of realizing certain net operating losscarry-forwards of the Partnership’s corporate subsidiaries. This valuationallowance was reversed during fiscal 2006 due to elimination of thisuncertainty.

At June 30, 2006, thePartnership had New York City Unincorporated Business Tax net operating lossesof $6,618 and its corporate subsidiaries had federal net operating losses of$745 which begin to expire in 2024, state net operating losses of $708 whichbegin to expire in 2011, and foreign net operating losses of $766 which beginto expire in 2016.

**Note 8:   Commitmentsand Contingencies**

The Partnership leases its New York office and pier facilitiesfrom an affiliate of an employee under an agreement which extends through April 2009.Terms of the agreement provide for annual rental payments of $400 annuallythrough April 2009, which increased as of May 1, 2004 from $352annually. Rent expense was $400, $400 and $360 for the fiscal years ended June 30,2006, 2005 and 2004, respectively. In addition, a subsidiary of the Partnershipleases office and pier facilities and a water 

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treatment facility inVirginia under an agreement with a third party that extends through January 2010.The Virginia lease agreement requires annual rental payments of $250 through January 8,2010. The subsidiary receives $84 from sublease of a portion of the Virginiaproperty which extends to December 31, 2009. The subsidiary has an optionto buy the Virginia premises for an aggregate purchase price of $4,200. Rentexpense, net of the sublease, for the fiscal years ended June 30, 2006 and2005 was $166 and $97, respectively. The Partnership and subsidiary are alsoresponsible for real estate taxes, insurance and all other costs associatedwith occupying these properties. Effective July 1, 2006, the Partnershipalso leases office space in New Jersey under an agreement with a third partythat extends through December 2013. The New Jersey lease requires rentalpayments totaling $18 through December 2006, followed by annual rentalpayments of $234 through December 2008, $245 through December 2010and $254 through December 2013.

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 year ended June 30,2006 was $208. Additionally, the Partnership leases four barges undernon-cancelable operating leases which expire in February 2007 through August 2009.The future minimum lease payments for the four barge operating leases as of June 30,2006 are as follows:

| **Year ending June 30,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------|------------|------------|------------|------------|------------|
| 2007                                    |       | $          | 2,888      |       |
| 2008                                    |       | 1,734      |       |
| 2009                                    |       | 1,323      |       |
| 2010                                    |       | 83         |       |
| 2011 and thereafter                     |       | —     |       |
| Total                                   | ** ** | **$**      | **6,028**  | ** ** |

 

Charter expenses were $2,092 for the barge operatingleases for the year ended June 30, 2006.

Included in total revenues are time charter andbareboat charter revenues of $60,582, $21,747 and $9,751 for the fiscal years endedJune 30, 2006, 2005 and 2004, respectively. Such revenues include $513,$513, and $778 for the fiscal years ended June 30, 2006, 2005 and 2004,respectively, related to vessels chartered to an affiliate of an employee. ThePartnership also utilizes such affiliate for tank cleaning services at a costof $1,609, $2,318 and $2,916 for the years ended June 30, 2006, 2005 and2004, respectively. The Partnership’s time charters and bareboat chartersextend over various periods which expire between 2006 and 2009.

At June 30,2006, minimum contractually agreed future revenue under time and bareboatcharters was as follows:

| **Year ending June 30,** | ** ** | ** ** | ** **  | ** ** | ** ** |
|-----------------------------------------|------------|------------|-------------|------------|------------|
| 2007                                    |       | $          | 65,577      |       |
| 2008                                    |       | 27,329     |        |
| 2009                                    |       | 7,101      |        |
| 2010                                    |       | 5,840      |        |
| 2011 and  thereafter                    |       | 3,424      |        |
| Total                                   | ** ** | **$**      | **109,271** | ** ** |

 

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The Partnership has entered into employment agreementswith certain of its executive officers. Each of the employment agreements hadan initial term of one year, which is automatically extended for successiveone-year terms unless either party gives 30-days written notice prior tothe end of the term that such party desires not to renew the employmentagreement. The employment agreements currently provide for annual base salariesaggregating $850. In addition, each employee is eligible to receive an annualbonus award based upon the consolidated financial performance of thePartnership. If the employee’s employment is terminated without cause or if theemployee resigns for good reason, the employee will be entitled to severance inan amount equal to the greater of (a) the product of 1.3125 (1.75 multipliedby .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.

EW Transportation Corp., a predecessor to thePartnership, 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 EW TransportationCorp. and the Partnership participate is working towards an agreement inprinciple with the New York taxing authority on a calculation methodology forthe PBT. The Partnership accrued an estimated liability using the calculationmethodology under discussion. 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 5, one of the Partnership’s tankbarges struck submerged debris in the U.S. Gulf of Mexico, causing significantdamage which resulted in the barge eventually capsizing. At the time of theincident, the barge was carrying approximately 120,000 barrels of No. 6fuel oil, a heavy oil product. Although the final amount has not beendetermined, the Partnership believes much of the oil escaped into the ocean. ThePartnership maintains significant protection and indemnity insurance forpollution-related costs and claims, including clean-up costs and environmentaldamages, and believes that such coverage will be adequate to cover the cost ofthe clean-up operations and any subsequent claims, fines or penalties.

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 the Partnership’sassets, and would not have a material adverse effect on the Partnership’sfinancial position, results of operations or cash flows. The Partnership isalso subject to deductibles with respect to its insurance coverage that rangefrom $25 to $100 per incident and provides on a current basis for estimatedpayments thereunder.

**Note 9:   Long-termIncentive Plan**

In January 2004, K-Sea General Partner GP LLC,the general partner of the Partnership’s general partner, adopted the K-SeaTransportation Partners L.P. Long-term Incentive Plan (the “Plan”) fordirectors and employees of K-Sea General Partner GP LLC and its affiliates. ThePlan currently permits the grant of awards covering an aggregate of 440,000common units in the form of restricted units and unit options and isadministered by the Compensation Committee of the Board of Directors of K-SeaGeneral Partner GP LLC. The Board of Directors of K-Sea General Partner GP LLC,in its discretion, may terminate the Plan at any time with respect to anyrestricted units for which a grant has not yet been made, and also reserves theright to alter or amend the Plan from time to time, including increasing thenumber of common units with respect to which awards may be granted subject tounitholder approval as required by the New York Stock Exchange. No change inany outstanding grant may be made, however, which would materially impair therights of the participant without the consent of such participant. Subject to 

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certain exceptions,restricted units are subject to forfeiture if employment is terminated prior tovesting. As the restricted units vest, K-Sea General Partner GP LLC has theoption to either acquire common units in the open market for delivery to therecipient or distribute newly issued common units from the Partnership. In allcases, K-Sea General Partner GP LLC is reimbursed by the Partnership for suchexpenditures.

Unitcompensation expense amounted to $652, $413 and $23, for the years ended June 30,2006, 2005 and 2004, respectively. As of June 30, 2006, there was $2,642of unamortized compensation cost related to non-vested restricted units, whichis expected to be recognized over a remaining weighted-average vesting periodof 3.7 years. A summary of the status of the Partnership’s restricted unitawards as of June 30, 2006 and 2005, and of changes in restricted unitsoutstanding under the Partnership’s long-term incentive plan during the yearended June 30, 2006, is as follows:

| ** **                                                | ** ** | **Number of units** | ** ** | **Weighted-  Average Grant  Date Fair Value  per Unit** | ** ** |
|-----------------------------------------------------------|------------|-------------------------------|------------|-----------------------------------------------------------------------------|------------|
| Restricted unit  awards outstanding at June 30, 2005 |       |                          | 58,750     |                                                                        |       |   | $ | 30.96 |   |   |
| Units granted                                             |       |                          | 49,250     |                                                                        |       |   | $ | 32.93 |   |   |
| Units vested and  issued                                  |       |                          | (12,650    | )                                                                           |       |   | $ | 30.80 |   |   |
| Units forfeited                                           |       |                          | (1,000     | )                                                                           |       |   | $ | 34.10 |   |   |
| Restricted unit awards  outstanding at June 30, 2006 |       |                          | 94,350     |                                                                        |       |   | $ | 31.97 |   |   |

 

**Note 10:   RetirementPlans**

The Partnership has a money purchase pension plan, andalso a defined contribution plan that qualifies under Section 401(k) ofthe Internal Revenue Code. These plans cover all eligible employees. Under theterms of the money purchase pension plan, the Partnership contributes fivepercent of each eligible employee’s annual compensation, as defined in the plandocument. The 401(k) plan provides that eligible employees may makecontributions, subject to Internal Revenue Code limitations, and thePartnership will match the first two percent of employee compensationcontributed, subject to a maximum amount. For the money purchase plan, expensestotaled $1,127, $1,000 and $836 for the fiscal years ended June 30, 2006,2005 and 2004, respectively. For the 401(k) plan, expenses totaled $499,$443 and $402 for the fiscal years ended June 30, 2006, 2005 and 2004,respectively.

In connection with the purchase of Sea Coast, thePartnership acquired an additional defined contribution plan that qualifiesunder Section 401(k) of the Internal Revenue Code. The plan coversall eligible employees and provides that eligible employees may makecontributions, subject to Internal Revenue Code limitations, and thePartnership will match the first 25% of employee compensation contributed, upto a maximum of 4%. In addition, the plan allows 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 themoney purchase plan totaled $1,251 and $1,077 as of June 30, 2006 and2005, respectively, and are included in accrued expenses and other currentliabilities in the consolidated balance sheets. Additionally, accrued expensesfor payroll-related costs totaled $3,048 and $1,431 as of June 30, 2006and 2005, respectively, which are also included in accrued expenses and othercurrent liabilities in the consolidated balance sheets.

**Note 11:   MajorCustomers**

Two customers accountedfor 20% and 15% of consolidated revenues for the fiscal year ended June 30,2006, two customers accounted for 26% and 16% of consolidated revenues for thefiscal year 

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ended June 30,2005, and two customers accounted for 28% and 14% of consolidated revenues forthe fiscal year ended June 30, 2004.

**Note 12:   FairValue of Financial Instruments**

As of June 30, 2006,the fair value of long-term debt was approximately $193,353 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 13:   NewAccounting Pronouncements**

On December 16, 2004, the Financial AccountingStandards Board (“FASB”) issued FASB Statement No. 123(R), “Share-BasedPayment” (“FAS 123(R)”). FAS 123(R) revises FASB Statement No. 123, “Accountingfor Stock-Based Compensation” (“FAS 123”) and requires companies to expense thefair value of employee stock options and other forms of stock-basedcompensation. In addition to revising FAS 123, FAS 123(R) supersedesAccounting Principles Board (“APB”)Opinion No. 25, “Accounting for StockIssued to Employees”, and amends FASB Statement No. 95, “Statement of CashFlows.” The Partnership is required to adopt FASB 123(R) as of July 1,2005. The Partnership adopted FAS 123(R) as of July 1, 2005 andaccounts for its restricted unit awards under the new standard; to date, nounit options have been granted. The adoption did not have a material impact onthe Partnership’s financial position, results of operations or cash flows.

On April 4, 2005, the FASB issued Interpretation No. 47,“Accounting for Conditional Asset Retirement Obligations, an interpretation ofFASB Statement No. 143” (“FIN 47”). This interpretation clarifies that anentity is required to recognize a liability for the fair value of a conditionalasset retirement obligation when incurred if the liability’s fair value can bereasonably estimated. It also clarifies when an entity would have sufficientinformation to reasonably estimate the fair value of an asset retirementobligation. The Partnership adopted FIN 47 as of June 30, 2006, and suchadoption did not have a significant impact on its financial position, resultsof operations or cash flows.

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. ThisStatement applies to all voluntary changes in accounting principle. It alsoapplies to changes required by an accounting pronouncement in the unusualinstance that the pronouncement does not include specific transition provisions.When a pronouncement includes specific transition provisions, those provisionsshould be followed. The Partnership is required to adopt FAS 154 as of July 1,2006, and does not expect that such adoption will have a significant impact onits financial position, results of operations or 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”. ThePartnership is required to adopt FAS 155 as of July 1, 2007, and does notexpect that such adoption will have a significant impact on its financialposition, 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 

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FASB StatementNo. 109, “Accounting for Income Taxes”. FIN 48 prescribes a recognitionthreshold and measurement attribute for financial statement recognition andmeasurement of a tax position taken or expected to be taken in a tax return. FIN48 also provides guidance on derecognition, classification, interest andpenalties, accounting in interim periods, disclosure, and transition. FIN 48 iseffective for fiscal years beginning after December 15, 2006. ThePartnership is currently analyzing FIN 48 and believes the adoption of FIN 48will not have a material impact on the Partnership’s financial condition,results of operations or liquidity.

**Note 14:   QuarterlyResults of Operations (Unaudited)**

Thefollowing summarizes certain quarterly results of operations for each of thefiscal years ended June 30, 2006 and 2005:

| ** **                                            | ** ** | **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 | ** ** |   |   | $ | (0.26 | ) |   |   | $ | 0.12 | ** ** |   | $ | 0.30 |   |

 

| ** **                                     | ** ** | **Three Months Ended**                                     | ** ** |
|------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                     | ** ** | **September 30**                                                | ** ** | **December 31** | ** ** | **March 31** | ** ** | **June 30** | ** ** |
| ** **                                     | ** ** | **(in thousands, except per unit amounts)** | ** ** |
| **Fiscal 2005**                                |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total revenues                                 |       |                                                                 | $          | 29,053 |   |   |   | $ | 27,818 |   |   |   | $ | 30,837 |   |   | $ | 33,686 |   |
| Operating income                               |       |                                                                 | $          | 4,496 |   |   |   | $ | 2,932 |   |   |   | $ | 3,594 |   |   | $ | 4,558 |   |
| Net income                                     |       |                                                                 | $          | 3,137 |   |   |   | $ | 1,369 |   |   |   | $ | 584 |   |   | $ | 3,046 |   |
| General partners’  interest in net income |       |                                                                 | $          | 63 |   |   |   | $ | 27 |   |   |   | $ | 12 |   |   | $ | 61 |   |
| Limited partners’  interest in net income |       |                                                                 | $          | 3,074 |   |   |   | $ | 1,342 |   |   |   | $ | 572 |   |   | $ | 2,985 |   |
| Net income per limited  partner unit:          |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                          |       |                                                                 | $          | 0.37 |   |   |   | $ | 0.16 |   |   |   | $ | 0.07 |   |   | $ | 0.35 |   |
| Diluted                                        |       |                                                                 | $          | 0.37 |   |   |   | $ | 0.16 |   |   |   | $ | 0.07 |   |   | $ | 0.35 |   |

 

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