**Exhibit 99.5**

**Report ofIndependent Auditors**

To the General Partner of K-Sea General Partner L.P.

In our opinion, theaccompanying consolidated balance sheet presents fairly, in allmaterial respects, the financial position of K-Sea General Partner L.P. andsubsidiary at June 30, 2007 in conformity with accounting principlesgenerally accepted in the United States of America. This financial statement isthe responsibility of the Company’s management. Our responsibility is toexpress an opinion on this financial statement****basedon our audit. We conducted our audit of this statement in accordance withauditing standards generally accepted in the United States of America, whichrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statement is free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statement, assessing the accounting principlesused and significant estimates made by management, and evaluating the overallfinancial statement presentation. We believe that our audit provides areasonable basis for our opinion.

As discussed in note 2 tothis consolidated financial statement, the General Partner changed its methodof accounting for its equity investment in K-Sea Transportation Partners L.P.effective July 1, 2006.

/s/PRICEWATERHOUSECOOPERS LLP

FlorhamPark, New Jersey

September 10, 2007

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**K-SEAGENERAL PARTNER L.P.CONSOLIDATED BALANCE SHEET(dollars in thousands)**

| ** **                                        | ** ** | **June 30,  2007** | ** **  |
|---------------------------------------------------|------------|-------------------------|-------------|
| **Assets**                                        |       |                    |        |
| **Current Assets**                                |       |                    |        |
| Cash and cash equivalents                         |       | $                       | 912         |   |
| Accounts receivable, net                          |       | 20,664                  |        |
| Deferred taxes                                    |       | 948                     |        |
| Prepaid expenses and other current assets         |       | 5,073                   |        |
| **Total current assets**                          | ** ** | **27,597**              |        |
| Vessels and equipment, net                        |       | 358,580                 |        |
| Construction in progress                          |       | 13,285                  |        |
| Deferred financing costs, net                     |       | 1,106                   |        |
| Goodwill                                          |       | 16,385                  |        |
| Other assets                                      |       | 12,861                  |        |
| **Total assets**                                  | ** ** | **$**                   | **429,814** |   |
| **Liabilities  and Partners’ Capital**       |       |                    |        |
| **Current Liabilities**                           |       |                    |        |
| Current portion of long-term debt                 |       | $                       | 9,270       |   |
| Accounts payable                                  |       | 17,091                  |        |
| Accrued expenses and other current liabilities    |       | 12,044                  |        |
| **Total current liabilities**                     | ** ** | **38,405**              |        |
| Term loans and capital lease obligation           |       | 137,946                 |        |
| Credit line borrowings                            |       | 97,071                  |        |
| Deferred taxes                                    |       | 3,739                   |        |
| **Total liabilities**                             | ** ** | **277,161**             |        |
| Non-controlling interests in equity of subsidiary | ** ** | **151,958**             |        |
| Commitments and  contingencies                    |       |                    |        |
| **Partners’ Capital**                        |       | 695                     |        |
| **Total  liabilities and partners’ capital** | ** ** | **$**                   | **429,814** |   |

 

See accompanying notes to consolidated balance sheet.

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**K-SEA GENERALPARTNER L.P.NOTES TO CONSOLIDATED BALANCE SHEET(dollars in thousands, except unit and per unit amounts)**

**Note 1:**   Basisof Presentation

K-Sea General Partner L.P. (the “GeneralPartner”) is the general partner of K-Sea Transportation Partners L.P.(the “Partnership”). On January 14, 2004, the Partnership completed itsinitial public offering of common units representing limited partner interestsand, in connection therewith, also issued to its predecessor companies anaggregate of 4,165,000 subordinated units representing limited partnerinterests. During the subordination period the subordinated units are notentitled to receive any distributions until the common units have receivedtheir minimum quarterly distribution plus any arrearages from prior quarters. Thesubordination period will end once the Partnership meets certain financialtests described in the partnership agreement, but it generally cannot endbefore December 31, 2008. When the subordination period ends, allsubordinated units will convert into common units on a one-for-one basis, andthe common units will no longer be entitled to arrearages. If the Partnershipmeets certain financial tests described in the partnership agreement, 25% ofthe subordinated units can convert into common units on or after December 31,2006, and an additional 25% can convert into common units on or after December 31,2007. The Partnership met the required tests for early conversion of the first25% of subordinated units and, as a result, 1,041,250 of these subordinatedunits converted to common units on February 14, 2007.

The General Partner holds202,447 general partner units (representing an approximate 2% general partnerinterest) and certain incentive distribution rights in the Partnership. Incentivedistribution rights represent the right to receive an increasing percentage ofcash distributions after the minimum quarterly distribution, any cumulativearrearages on common units, and certain target distribution levels have beenachieved. The target distribution levels entitle the general partner to receive15% of quarterly cash distributions in excess of $0.55 per unit until allunitholders have received $0.625 per unit, 25% of quarterly cash distributionsin excess of $0.625 per unit until all unitholders have received $0.75 perunit, and 50% of quarterly cash distributions in excess of $0.75 per unit. ThePartnership is required to distribute all of its available cash from operatingsurplus, as defined in the partnership agreement. On May 1, 2006, the GeneralPartner amended and restated the partnership agreement of the Partnership to,among other things, provide that additional contributions by the generalpartner to the Partnership upon the issuance of additional limited partnerinterests are not mandatory. Previously the general partner was required tomake a capital contribution to the Partnership upon the issuance of new limitedpartner interests to maintain its 2% interest. If the general partner does notmake additional capital contributions upon the issuance of new common units,the general partner’s percentage interest in the Partnership will decreaseaccordingly.

**Note 2:**   Summaryof Significant Accounting Policies

*Basis of Consolidation.  *The accompanying consolidated balance sheet includesthe accounts of the General Partner and the Partnership (collectively, “K-Sea G.P.”).Under the provisions of EITF No. 04-5, “Determining Whether aGeneral Partner, or the General Partners as a Group, Controls a LimitedPartnership or Similar Entity When the Limited Partners Have Certain Rights” (“EITFNo. 04-5”), the Partnership and its consolidated subsidiaries areincluded herein as consolidated subsidiaries effective July 1, 2006. Allmaterial inter-company transactions and balances have been eliminated inconsolidation. EITF No. 04-5 has been applied prospectively usingTransition Method A. The adoption of this new pronouncement had no impacton consolidated partners’ capital. During the year ended June 30, 2007,the 

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*Partnershippaid $25,834 of distributions to limited partners, representing the noncontrolling interests in the Partnership.*

*Cashand Cash Equivalents.**  *Allhighly liquid investments with original maturities of three months or less areconsidered 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 26(including three chartered-in) single-hull vessels currently operated by K-Sea G.P.,representing approximately 29% of total barrel-carrying capacity as of June 30,2007, 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 K-Sea G.P.’s case is the AmericanBureau of Shipping. Such drydocking activities include, but are not limited to,the inspection, 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.

K-Sea G.P. assesses impairment onlong-lived assets used in operations when indicators of impairment are present.An impairment loss would be recognized if the undiscounted cash flows estimatedto be generated by those assets are less than the assets’ carrying amounts, andto the extent the carrying value exceeds fair value by appraisal.

When property itemsare retired, sold or otherwise disposed of, the related cost and accumulateddepreciation are removed from the accounts with any gain or loss on thedispositions included in income. Assets to be disposed of are reported at thelower of their carrying amounts or fair values, less the estimated costs ofdisposal.

*Fuel Supplies.  *Fuel used to operate K-Sea G.P.’s vessels, and on hand at the end ofthe period, is recorded at cost. Such amount totaled $2,660 as of June 30,2007 and is included in prepaid expenses and other current assets in theconsolidated balance sheet.

*Deferred Financing Costs.  *Direct costs associated with obtaining long-termfinancing are deferred and amortized over the terms of the related financings.Deferred financing costs are stated net of accumulated amortization which, at June 30,2007, amounted to $457.

*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. K-Sea G.P. tests for impairment at least annuallyusing a two-step process. The first step identifies potential impairment bycomparing the fair value of a reporting unit with its book value, includinggoodwill. If the fair value of the reporting unit exceeds the carrying amount,goodwill is not impaired and the second step is not necessary. If the carryingvalue exceeds the fair value, the second step calculates the possibleimpairment loss by comparing the implied fair value of goodwill with thecarrying amount. If the implied fair value of goodwill is less than thecarrying amount, a write-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 

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basis over their estimateduseful lives. K-Sea G.P. reviews intangible assets to evaluatewhether events or changes have occurred that would suggest an impairment ofcarrying value. An impairment would be recognized when expected undiscountedfuture operating cash flows are lower than the carrying value, and to theextent the carrying value exceeds the fair value.

As of June 30,2007, the identifiable intangible assets purchased in prior acquisitionsincluded those in the table below. Intangible assets are included in otherassets in the consolidated balance sheet and are stated net of accumulatedamortization, which at June 30, 2007 amounted to $4,694. 

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

 

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

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

 

*RevenueRecognition.**  *K-Sea G.P.earns revenue under contracts of affreightment, voyage charters, time chartersand bareboat charters. 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. Estimated losses on contracts of affreightmentand charters are accrued when such losses become evident.

*Useof Estimates.**  *Thepreparation of financial statements in conformity with generally acceptedaccounting principles requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosures ofcontingent assets and liabilities at the date of the financial statement. Themost significant estimates relate to depreciation of the vessels, liabilitiesincurred from workers’ compensation, commercial and other claims, the allowancefor doubtful accounts and deferred income taxes. Actual results could differfrom these estimates.

*Concentrations of CreditRisk.  *Financialinstruments which potentially subject K-Sea G.P. to concentrations of credit risk are primarily cash andcash equivalents and trade accounts receivable. K-Sea G.P. maintains its cash and cash equivalentson deposit at a financial institution in amounts that, at times, may exceedinsurable limits.

With respect to accounts receivable, K-Sea G.P.extends credit based upon an evaluation of a customer’s financial condition andgenerally does not require collateral. K-Sea G.P. maintains anallowance for doubtful accounts for potential losses totaling $939 at June 30,2007 and does not believe it is exposed to concentrations of credit risk thatare likely to have a material adverse effect on its financial position, resultsof operations or cash flows. For the fiscal year ended June 30, 2007, K-Sea G.P.’sallowance for doubtful amounts was impacted by additional charges of $455, andwrite-offs of $206.

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*CurrencyTranslation.**  *Assetsand liabilities related to K-Sea G.P.’s Canadian subsidiary aretranslated at the exchange rate prevailing on the balance sheet date, andrevenues and expenses are translated at the weighted average exchange rate forthe period. Translation gains and losses are reflected in partners’ capital.

*Derivativeinstruments.**  *K-Sea G.P. utilizes derivative financial instruments toreduce interest rate risks. K-Sea G.P. does not hold or issuederivative financial instruments for trading purposes. Statement of FinancialAccounting Standards No. 133, *Accounting for DerivativeInstruments and Hedging Activities*, (“SFAS No. 133), asamended, establishes accounting and reporting standards for derivativeinstruments and hedging activities. It requires that an entity recognize allderivatives as either assets or liabilities in the statement of financialcondition and measure those instruments at fair value. Changes in the fairvalue of those instruments are reported in earnings or other comprehensiveincome depending on the use of the derivative and whether it qualifies forhedge accounting. The accounting for gains and losses associated with changesin the fair value of the derivative and the effect on the consolidatedfinancial statements will depend on its hedge designation and whether the hedgeis highly effective in achieving offsetting changes in fair value of cash flowsof the asset or liability hedged.

*Income Taxes.**  *K-Sea G.P.’s effectivetax rate comprises the New York City Unincorporated Business Tax and foreigntaxes on its operating partnership, plus federal, state, local and foreigncorporate income taxes on the taxable income of the operating partnership’scorporate subsidiaries. Deferred taxes represent the tax effects of differencesbetween the financial reporting and tax bases of the Partnership, assets andliabilities, as applicable, at enacted tax rates in effect for the years inwhich the differences are expected to reverse. The recoverability of deferredtax assets is evaluated and a valuation allowance established when it is morelikely than not that some portion or all of the deferred tax assets will not berealized.

*Unit-Based Compensation.  *K-Sea G.P.has adopted a long-term incentive plan that permits the granting of awards todirectors and employees in the form of restricted units and unit options. K-Sea G.P. recognizes compensation cost for therestricted units on a straight-line basis over the vesting periods of theawards, which range from three to five years. No unit options have beengranted.

**Note 3:**   Vessels and Equipment and Construction in Progress

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

| ** **                                      | ** ** | **2007** | ** **  |
|-------------------------------------------------|------------|----------|-------------|
| Vessels                                         |       | $        | 475,441     |   |
| Pier and office  equipment                      |       | 5,967    |        |
|                                            |       | 481,408  |        |
| Less accumulated  depreciation and amortization |       | (122,828 | )           |
| Vessels and  equipment, net                     | ** ** | **$**    | **358,580** | ** ** |
| Construction in progress                        | ** ** | **$**    | **13,285**  | ** ** |

 

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

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

 

Construction in progressat June 30, 2007 comprises expenditures for the 80,000-barrel and28,000-barrel tank barges described above.

**Note 4:**   Financing

***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 revolving creditagreement, which was repaid and terminated. On October 18, 2005, to partiallyfinance an acquisition, the Partnership amended the credit agreement toincrease the available borrowings to $120,000, of which $77,000 was drawn downto pay the cash portion of the purchase price. On November 29, 2005, tofund the redemption of its Title XI bonds, which were issued in 2002 through aprivate placement to finance the construction of four vessels, the Partnership furtheramended the credit agreement to increase the maximum borrowings to $155,000. OnApril 3, 2006, the Partnership used the net proceeds from the issuance of$80,000 in new term loans to repay outstanding borrowings under the creditagreement, and further amended it to reduce the available borrowings, torelease certain vessels from the collateral pool, and to reduce certaincovenant requirements. During fiscal 2007, the Partnership further amended thecredit agreement to add additional bank participants, increase the availableborrowings, amend covenants and reduce interest rate margins.

As of June 30, 2007, the credit agreementprovided for available borrowings of $125,000, contained a $20,000 sublimit forletters of credit and allowed the Partnership to request an increase in thetotal borrowing availability by up to $25,000, to a maximum of $150,000, solong as no default or event of default has occurred and is continuing. Obligationsunder the credit agreement are collateralized by a first priority securityinterest, subject to permitted liens, on certain of the Partnership’s vesselshaving an orderly liquidation value equal to at least 1.25 times the amount ofthe obligations (including letters of credit) outstanding. Borrowings under thecredit agreement bear interest, at the option of the Partnership, at a rate perannum equal to (a) the greater of the prime rate (8.25% at June 30,2007) and the federal funds rate (5.25% at June 30, 2007) plus 0.5% (a “baserate loan”), or (b) the 30-day London Interbank Offered Rate, orLIBOR (5.323% at June 30, 2007), plus a margin of 0.70% to 1.60% basedupon the ratio of Total Funded Debt to EBITDA, as defined in the creditagreement. The Partnership also incurs commitment fees, payable quarterly, onthe unused amount of the facility at a rate ranging from 0.15% to 0.30% basedupon the ratio of Total Funded Debt to EBITDA, as defined in the agreement. Asof June 30, 2007, outstanding borrowings under this facility totaled$94,350.

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

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

Termloans and capital lease obligations outstanding at June 30, 2007 were asfollows. Descriptions of these borrowings are included below:

| ** **               | ** ** | **2007**     | ** ** |
|--------------------------|------------|--------------|------------|
| Term loans due:          |       |         |       |
| May 1, 2013.        |       | $75,923      |       |
| January 1, 2013     |       | 13,360       |       |
| June 1, 2014        |       | 20,321       |       |
| December 31, 2012   |       | 9,889        |       |
| March 24, 2008      |       | 9,821        |       |
| April 30, 2013      |       | 16,607       |       |
| November 4, 2008    |       | 23           |       |
| Capital lease obligation |       | 1,272        |       |
|                     |       | 147,216      |       |
| Less current portion     |       | 9,270        |       |
|                     | ** ** | **$137,946** | ** ** |

 

On April 3, 2006, thePartnership entered into an agreement witha lending institution under which the Partnership borrowed $80,000, for which it pledged sixtugboats and six tank barges as collateral. Borrowings are represented by sixnotes which have been assigned to other lending institutions. These loans bearinterest at a rate equal to LIBOR on one-month Eurodollar deposits plus 1.40%,and are repayable in 84 monthly installments with the remaining principalpayable at maturity. The agreement contains certain prepayment premiums. Borrowingsoutstanding on these loans total $75,923 as of June 30, 2007. Also on April 3, 2006, thePartnership entered into an agreement withthe lending institution to swap the one-month, LIBOR based, variable interestpayments on the $80,000 of loans for a fixed payment at a rate of 5.2275%, overthe same terms as the loans. This swap will result in a fixed interest rate onthe Notes of 6.6275% for their seven-year term. This swap contract has beendesignated as a cash flow hedge. The fair value of the swap contract of $446 asof June 30, 2007 is included in other assets in the consolidated balancesheet.

On December 19, 2005, one of the Partnership’ssubsidiaries entered into a seven year Canadian dollar term loan to refinancethe purchase of an integrated tug-barge unit. The proceeds of $13,000 were usedto repay borrowings under the credit agreement which had been used to financethe purchase of the unit. The loan bears interest at a fixed rate of 6.59%, isrepayable in 84 monthly installments of CDN $136 with the remainingprincipal amount payable at maturity, and is collateralized by the relatedtug-barge unit and one other tank barge. Borrowings outstanding on this loantotal $13,360 at June 30, 2007.

In May 2006, the Partnership entered into anagreement to borrow up to $23,000 to partially finance construction of two28,000-barrel and one 100,000-barrel tank barges. The third andfinal vessel was delivered, and the note termed-out, during the fourth quarterof fiscal 2007. The loan bears interest at 30-day LIBOR plus 1.40%, andis repayable, plus accrued interest, over seven years, with the remainingprincipal amount payable at maturity. The loan is collateralized by the relatedtank barges and two other tank vessels. Borrowings outstanding on this loantotal $20,321 at June 30, 2007.

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In March 2005,the Partnership entered into an agreement to borrow up to $11,000 to partiallyfinance construction of a 100,000-barrel tank barge. The loan bearsinterest at 30-day LIBOR plus 1.05%, and is repayable in monthlyprincipal installments of $66 with the remaining principal amount payable atmaturity. The loan is collateralized by the related tank barge. Borrowingsoutstanding on this loan totaled $9,889 at June 30, 2007.

In March 2005, the Partnership entered into athree-year term loan in the amount of $11,700. The loan bears interest at afixed rate of 6.25% annually, and is repayable in monthly principalinstallments of $70 with the remaining principal amount payable at maturity. Theloan is collateralized by three vessels and the proceeds were used to refinancean existing term loan. Borrowings outstanding on this loan total $9,821 at June 30,2007, but it is classified as a long-term liability because K-Sea G.P. intends thatthe Partnership refinance it with its credit agreement.

In June 2005, thePartnership entered into an agreement to borrow up to $18,000 to finance thepurchase of an 80,000-barrel double-hull tank barge and construction oftwo 28,000-barrel double-hull tank barges. The loan bears interest at 30-dayLIBOR plus 1.71%, and is repayable in monthly principal installments of $107with the remaining principal amount payable at maturity. The loan iscollateralized by the related tank barges. Borrowings outstanding on this loanwere $16,607 at June 30, 2007.

***Restrictive Covenants***

The agreements governing the credit agreement and theterm loans contain restrictive covenants that, among others, (a) prohibitdistributions under defined events of default, (b) restrict investmentsand sales of assets, and (c) require the Partnership to adhere to certainfinancial covenants, including defined ratios of fixed charge coverage andfunded debt to Adjusted EBITDA (earnings before interest, taxes, depreciationand amortization and loss on reduction of debt, as defined).

***Maturities of Long-Term Debt***

As of June 30,2007, maturities of long-term debt for each of the next five years were asfollows:

| 2008 |   | $       | 18,466 |   |
|------|--------|---------|--------|--------|
| 2009 |   | 8,957   |   |
| 2010 |   | 9,212   |   |
| 2011 |   | 103,874 |   |
| 2012 |   | 10,451  |   |

 

**Note 5:**   IncomeTaxes

Significantcomponents of deferred income tax liabilities and assets as of June 30,2007 are as follows:

| ** **                                                  | ** ** | **2007** | ** ** |
|-------------------------------------------------------------|------------|----------|------------|
| Deferred tax  liabilities:                                  |       |     |       |
| Book basis of vessels and equipment in excess of tax  basis |       | $        | 4,461      |   |
| Total deferred tax liabilities                              | ** ** | **$**    | **4,461**  | ** ** |
| Deferred tax assets:                                        |       |     |       |
| Allowance for doubtful accounts                             |       | $        | 58         |   |
| Accrued expenses                                            |       | 898      |       |
| Net operating loss carry-forwards                           |       | 679      |       |
| Other                                                       |       | 35       |       |
| Total deferred  tax assets                                  | ** ** | **$**    | **1,670**  | ** ** |

 

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The Partnership had temporary differences atJune 30, 2007 primarily related to the excess of the book basis of vesselsand equipment over the related tax basis in the amount of $121,508. This amountwill result in taxable income, in the years these differences reverse, thatwill be included in the overall allocation of taxable income to the members of theGeneral Partner and the unitholders of the Partnership.

At June 30, 2007, thePartnership had New York City Unincorporated Business Tax net operating lossesof $2,026 and its corporate subsidiaries had state net operating losses of $29which begin to expire in 2011, and foreign net operating losses of $1,886 whichbegin to expire in 2016.

**Note 6:**   Commitmentsand Contingencies

The Partnership leases its New York office and pierfacilities from an affiliate of an employee under an agreement which extendsthrough April 2009. Terms of the agreement provide for annual rentalpayments of $400 annually through April 2009. In addition, a subsidiary ofthe Partnership leases office and pier facilities and a water treatmentfacility in Virginia under an agreement with a third party that extends throughJanuary 2010. The Virginia lease agreement requires annual rental paymentsof $250 through January 8, 2010. The subsidiary receives $84 from subleaseof a portion of the Virginia property which extends to December 31, 2009.The subsidiary has an option to buy the Virginia premises for an aggregatepurchase price of $4,200. K-Sea G.P. and subsidiary are also responsible forreal estate taxes, insurance and all other costs associated with occupyingthese properties. Effective July 1, 2006, the Partnership also leasedoffice space in New Jersey under an agreement with a third party that extendsthrough December 2013. The New Jersey lease requires rental paymentstotaling $18 through December 2006, followed by annual rental payments of$234 through December 2008, $245 through December 2010 and $254 throughDecember 2013.

In connectionwith an acquisition, the Partnership assumed agreements with the port authorityin Seattle, Washington covering the lease of terminal facilities and dockingrights for its vessels. The lease expires in October 2008 with a renewaloption for one additional five-year term. The lease requires monthly paymentsof $26 with escalation each year based on the consumer price index. Additionally,the Partnership leases four barges under non-cancelable operating leases whichexpire in August 2007 through August 2009. The future minimum leasepayments for the four barge operating leases as of June 30, 2007 are asfollows:

| **Year ending June 30,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------|------------|------------|------------|------------|------------|
| 2008                                    |       | $          | 1,927      |       |
| 2009                                    |       | 1,323      |       |
| 2010                                    |       | 83         |       |
| 2011                                    |       | —     |       |
| 2012 and  thereafter                    |       | —     |       |
| Total                                   | ** ** | **$**      | **3,333**  | ** ** |

 

A subsidiary of the Partnership has entered intoemployment agreements with certain of its executive officers. Each of theemployment agreements had an initial term of one year, which is automaticallyextended for successive one-year terms unless either party gives 30-dayswritten notice prior to the end of the term that such party desires not torenew the employment agreement. The employment agreements currently provide forannual base salaries aggregating $930. In addition, each employee is eligibleto receive an annual bonus award based upon the 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 (1.75multiplied by .75) multiplied by the employee’s base salary at the time oftermination or resignation and (b) the product of 

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1.75 multiplied by theremaining term of the employee’s non-competition provisions multiplied by theemployee’s base salary at the time of termination or resignation.

The European Union is currently working toward a newdirective for the insurance industry, called “Solvency 2”, that is expected tobecome law within three to four years and require increases in the level offree, or unallocated, reserves required to be maintained by insurance entities,including protection and indemnity clubs that provide coverage for the maritimeindustry. The West of England Ship Owners Insurance Services Ltd. (“WOE”),a mutual insurance association based in Luxembourg, provides the Partnership’sprotection and indemnity insurance coverage and would be impacted by the newdirective. In anticipation of these new regulatory requirements, the WOE hasassessed its members an additional capital call which it believes willcontribute to achievement of the projected required free reserve increases. ThePartnership’s capital call, payable during calendar year 2007, is approximately$1,119, of which $683 was paid in February 2007. A further request forcapital may be made in the future; however, the amount of such furtherassessment, if any, cannot be reasonably estimated at this time. As a shipownermember of the WOE, the Partnership has an interest in the WOE’s free reserves,and therefore has recorded the additional $1,119 capital call as an investment,at cost, subject to periodic review for impairment. This amount is included inother assets in the June 30, 2007 balance sheet.

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 has come to a final agreement with theNew York taxing authority on a calculation methodology for the PBT. Effective January 1,2007, the Partnership and the other marine transportation companies beganrebilling this tax to customers. For applicable periods prior to 2007, K-SeaG.P has accrued an estimated liability using the agreed methodology.   In accordance with the agreements enteredinto in connection with the Partnership’s initial public offering, anyliability resulting from the PBT prior to January 14, 2004 (the effectivedate of the initial public offering) is a retained liability of the Partnership’spredecessor companies.

In November 2005, 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. In January 2006, submerged oil recoveryoperations were suspended and a monitoring program, which sought to determineif any recoverable oil could be found on the ocean floor, was begun. In February 2007,the Coast Guard agreed to end the cleanup and response phase, including thePartnership’s obligation to conduct any further monitoring of the area aroundthe spill site. The Partnership’s insurers responded to the pollution-relatedcosts and environmental damages resulting from the incident, payingapproximately $65,000 less $60 in total deductibles, and are pursuing their ownfinancial recovery efforts. The Partnership’s incident response effort iscomplete. The Partnership is not aware of any further recovery, cleanup orother costs. However, if any such costs are incurred, the Partnership expectsthem to be paid by their insurers.

K-Sea G.P. is the subjectof various claims and lawsuits in the ordinary course of business for monetaryrelief arising principally from personal injuries, collisions and othercasualties. Although the outcome of any individual claim or action cannot bepredicted with certainty, K-Sea G.P. believes that any adverse outcome,individually or in the aggregate, would be substantially mitigated byapplicable insurance or indemnification from previous owners of K-Sea G.P.’sassets, and would not have a material adverse effect on K-Sea G.P.’s financialposition, results of operations or cash flows. K-Sea G.P. is also subject todeductibles with respect to its insurance coverage that range from $25 to $100per incident and provides on a current basis for estimated payments thereunder.

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**Note 7:   Long-termIncentive Plan**

In January 2004, K-Sea General Partner GP LLC,the general partner of the General Partner, adopted the K-Sea TransportationPartners L.P. Long-term Incentive Plan (the “Plan”) for directors and employeesof K-Sea General Partner GP LLC and its affiliates. The Plan currently permitsthe grant of awards covering an aggregate of 440,000 common units in the formof restricted units and unit options and is administered by the CompensationCommittee of the Board of Directors of K-Sea General Partner GP LLC. The Boardof Directors of K-Sea General Partner GP LLC, in its discretion, may terminatethe Plan at any time with respect to any restricted units for which a grant hasnot yet been made, and also reserves the right to alter or amend the Plan fromtime to time, including increasing the number of common units with respect towhich awards may be granted subject to unitholder approval as required by theNew York Stock Exchange. No change in any outstanding grant may be made, however,which would materially impair the rights of the participant without the consentof such participant. Subject to certain exceptions, restricted units aresubject to forfeiture if employment is terminated prior to vesting. As therestricted units vest, K-Sea General Partner GP LLC has the option to eitheracquire common units in the open market for delivery to the recipient ordistribute newly issued common units from the Partnership. In all cases, K-SeaGeneral Partner GP LLC is reimbursed by the Partnership for such expenditures.

A summary of the status of restricted unit awards asof June 30, 2007, and of changes in restricted units outstanding under thePlan during the year ended June 30, 2007, is as follows:

| ** **                                                | ** ** | **Number of units** | ** ** | **Weighted-  Average Grant  Date Fair Value  per Unit** | ** ** |
|-----------------------------------------------------------|------------|-------------------------------|------------|-----------------------------------------------------------------------------|------------|
| Restricted unit  awards outstanding at June 30, 2006 |       |                          | 94,350     |                                                                        |       |   | $ | 31.97 |   |   |
| Units granted                                             |       |                          | 5,422      |                                                                        |       |   | $ | 32.13 |   |   |
| Units vested and  issued                                  |       |                          | (22,900    | )                                                                           |       |   | $ | 31.89 |   |   |
| Restricted unit awards  outstanding at June 30, 2007 |       |                          | 94,350     |                                                                        |       |   | $ | 32.01 |   |   |

 

**Note 8:   RetirementPlans**

Effective June 29, 2006, the Partnership’s moneypurchase pension plan was terminated and all the assets were merged into thePartnership’s 401(k) Savings Plan (the “Plan”). Also effective June 29,2006, a subsidiary’s defined contribution plan was terminated and all theassets were merged into the Plan. The Plan is a defined contribution plan thatqualifies under Section 401(k) of the Internal Revenue Code. The Plancovers all eligible employees. The Plan provides that eligible employees maymake contributions, subject to Internal Revenue Code limitations, and thePartnership will match the first two percent of employee compensationcontributed, subject to a maximum amount. In addition, the plan allows for anannual discretionary employer contribution up to five percent of an employee’sannual compensation.

Accrued expenses for all pension plans totaled $2,173as of June 30, 2007 and are included in accrued expenses and other currentliabilities in the consolidated balance sheet. Additionally, accrued expensesfor payroll-related costs totaled $2,989 as of June 30, 2007 which arealso included in accrued expenses and other current liabilities in theconsolidated balance sheet.

**Note 9:**   FairValue of Financial Instruments

As of June 30, 2007,the fair value of long-term debt was approximately $243,685 based on theborrowing rates currently available to the Partnership for bank loans withsimilar terms and average maturities. The fair value of the Partnership’s otherfinancial instruments approximated their cost bases as such instruments areshort-term in nature or were recently negotiated.

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**Note 10:**   NewAccounting Pronouncements

On June 2, 2005, theFASB issued FASB Statement No. 154, “Accounting Changes and ErrorCorrections-a replacement of APB No. 20 and FAS No. 3” (“FAS 154”). FAS154 replaces APB Opinion No. 20, “Accounting Changes” (“APB 20”) and FASBStatement No. 3, “Reporting Accounting Changes in Interim FinancialStatements” and changes the requirements for the accounting for and reportingof a change in accounting principle. This Statement applies to all voluntarychanges in accounting principle. It also applies to changes required by anaccounting pronouncement in the unusual instance that the pronouncement doesnot include specific transition provisions. When a pronouncement includesspecific transition provisions, those provisions should be followed. K-Sea G.P.adopted FAS 154 as of July 1, 2006, and such adoption did not have asignificant impact on its financial position.

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”. K-SeaG.P. is required to adopt FAS 155 as of July 1, 2007, and does not expectthat such adoption will have a significant impact on its financial position.

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

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

**Note 11:**   SubsequentEvent

On August 14, 2007, the Partnership, throughcertain wholly owned subsidiaries, completed the acquisition of all of theequity interests in Smith Maritime, Ltd., or Smith Maritime, Go Big CharteringLLC, or Go Big, and Sirius Maritime LLC, or Sirius Maritime. Smith Maritime, GoBig and Sirius Maritime are providers of marine transportation and logisticsservices to major oil companies, oil traders and refiners in Hawaii and alongthe West Coast of the United States. The aggregate purchase price for SmithMaritime, Go Big and Sirius Maritime was approximately $202,962, comprising$169,154 in cash, $23,573 of assumed debt, and 250,000 Partnership units valuedat approximately $10,235.

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On August 14, 2007, the Partnership amended andrestated its credit agreement with KeyBank National Association, asadministrative agent and lead arranger, to provide for (1) an increase inavailability to $175,000 under the senior secured revolving credit facility,with an increase in the term to seven years, (2) a $45,000 364-daysenior secured revolving credit facility, (3) amendments to certainfinancial covenants and (4) a reduction in interest rate margins. Undercertain conditions, the Partnership has the right to increase the revolvingfacility by up to $75,000, to a maximum total facility amount of $250,000. Therevolving facility and the 364-day facility are collateralized by a firstperfected security interest in vessels having a total fair market value ofapproximately $275,000 and certain equipment and machinery related to suchvessels. The revolving facility and the 364-day facility bear interest atthe London Interbank Offered Rate, or LIBOR, plus a margin ranging from 0.7% to1.5% depending on the Partnership’s ratio of total funded debt to EBITDA (asdefined in the agreement). On August 14, 2007, the Partnership borrowed$67,000 under the revolving facility and $45,000 under the 364-dayfacility to fund a portion of the purchase price in connection with the SmithMaritime, Go Big and Sirius Maritime acquisitions. As of August 14, 2007, thePartnership had approximately $166,350 outstanding under the revolving facilityand $45,000 outstanding under the 364-day facility.

Also on August 14, 2007, the Partnership enteredinto a bridge loan facility for up to $60,000 with an affiliate of KeyBankNational Association. The bridge loan facility bears interest at an annual rateof LIBOR plus 1.5%. The bridge loan facility matures on November 12, 2007.The bridge loan facility is unsecured until October 13, 2007 and,thereafter, will be secured by a second perfected security interest in thecollateral securing the revolving facility and the 364-day facility. Duringan event of default, the bridge loan facility will bear interest at an annualrate of LIBOR plus 7.5%. On August 14, 2007, the Partnership borrowed$60,000 under the bridge loan facility in connection with the Smith Maritime,Go Big and Sirius Maritime acquisitions.

K-Sea G.P. will allocate the purchase price to thetangible assets, intangible assets, and liabilities acquired based on theirfair values, which for the fixed assets and intangibles are based onconsideration of independent appraisals. The purchased identifiable intangibleassets will be amortized on a straight-line basis over their respectiveestimated useful lives. The excess of the purchase price over the fair value ofthe acquired net assets will be recorded as goodwill, which is not amortizedbut which will be reviewed annually for impairment. K-Sea G.P.’s preliminaryallocation of the purchase price is as follows:

| Current assets                                     |   | $       | 5,943   |   |
|----------------------------------------------------|--------|---------|---------|--------|
| Vessels and  equipment, net                        |   | 152,500 |    |
| Intangible assets                                  |   | 17,250  |    |
| Goodwill                                           |   | 40,378  |    |
| Other assets                                       |   | 624     |    |
|                                               |   | 216,695 |    |
| Current  liabilities and capital lease obligations |   | 13,733  |    |
| Total purchase price                               |   | $       | 202,962 |   |

 

The identifiable intangible assets purchased in theacquisition include customer relationships and covenants not to compete, whichare amortized over 10 and 3 years, respectively.  An additional $2,250 of intangibles has beenallocated to the excess fair market value of a leased vessel over its optionprice. The annual amortization expense is currently estimated at $1,500. Asubstantial portion of the goodwill is expected to be deductible for taxpurposes.

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