UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549







FORM
10-Q






x
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934




For the
quarterly period ended September 30, 2008




OR




 ̈
            TRANSITION
      REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934




For the
transition period from 
to




Commission
File Number 001-33503






SEMGROUP
ENERGY PARTNERS, L.P.


(Exact
name of registrant as specified in its charter)






Delaware
            
            20-8536826(State
      or other jurisdiction of
              incorporation
      or organization)
            
            (IRS
      Employer
              Identification
      No.)




Two
Warren Place


6120
South Yale Avenue, Suite 500


Tulsa,
Oklahoma 74136


(Address
of principal executive offices, zip code)




Registrant’s
telephone number, including area code: (918) 524-5500






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




Indicate by
check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files).
 
 Yes o No o


Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer”, “accelerated filer”, and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):




Large
accelerated filer    ̈
                                                                                                                                      Accelerated
filer    ̈




Non-accelerated
filer   x  (Do not
check if a smaller reporting
company)                                   Smaller
reporting company    ̈




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).    Yes    ̈
    No   x




As
of May 22, 2009, there were 21,557,309 common
units and 12,570,504subordinated units
outstanding.









Table of
      ContentsPagePART I - FINANCIAL INFORMATIONItem I.
                      
                      Financial Statements
                      1SemGroup
      Energy Partners, L.P.Consolidated Balance Sheets as of December 31, 2007 and
      September 30, 2008
                      1Consolidated Statements of Operations for the three and nine
      months ended September 30, 2007 and 2008
                      2Consolidated Statements of Changes in Partners’ Capital
      (Deficit) for the nine months ended September 30, 2008
                      3Consolidated Statements of Cash Flows for the nine months ended
      September 30, 2007 and 2008
                      4Notes to the Consolidated Financial
      Statements
                      5Item 2.
                      
                      Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
                      32Item 3.
                      
                      Quantitative and Qualitative Disclosures about Market
      Risk
                      55Item 4T.
                      
                      Controls and Procedures
                      56PART II. OTHER INFORMATION
                      57Item 1.
                      
                      Legal Proceedings
                      57Item
      1A.
                      
                      Risk Factors
                      59Item
      3.
                      
                      Defaults Upon Senior Securities
                      84Item 6.
                      
                      Exhibits
                      86SIGNATURESCERTIFICATIONS













Table of Contents




PART I – FINANCIAL INFORMATION




Item1.
            Financial
      Statements




SEMGROUP ENERGY PARTNERS, L.P.


CONSOLIDATED
BALANCE SHEETS


(in
thousands, except units)





As
      of December 31,
                                
                                
                                As
      of September 30,2007
                                
                                
                                2008(unaudited)ASSETSCurrent
      assets:Cash
      and cash equivalents
                                
                                $
                                416
                                
                                
                                $
                                16,558Accounts
      receivable, net of allowance for doubtful accounts of $0 and
      $432at
      December 31, 2007 and September 30, 2008, respectively
                                
                                
                                2,666
                                
                                
                                
                                7,954Receivables
      from related parties, net of allowance for doubtful accounts
      of$0
      for both dates
                                
                                
                                9,665
                                
                                
                                
                                19,291Prepaid
      insurance
                                
                                
                                797
                                
                                
                                
                                3,303Other
      current assets
                                
                                
                                442
                                
                                
                                
                                1,666Total
      current assets
                                
                                
                                13,986
                                
                                
                                
                                48,772Property,
      plant and equipment, net of accumulated depreciation of $40,222 and
      $74,731at
      December 31, 2007 and September 30, 2008, respectively
                                
                                
                                102,239
                                
                                
                                
                                289,716Goodwill
                                
                                
                                6,340
                                
                                
                                
                                6,340Debt
      issuance costs
                                
                                
                                944
                                
                                
                                
                                2,422Other
      assets, net
                                
                                
                                1,973
                                
                                
                                
                                1,863Total
      assets
                                
                                $
                                125,482
                                
                                
                                $
                                349,113LIABILITIES AND PARTNERS' CAPITAL
      (DEFICIT)Current
      liabilities:Accounts
      payable
                                
                                $
                                3,045
                                
                                
                                $
                                2,836Payables
      to related parties
                                
                                
                                10,227
                                
                                
                                
                                15,904Accrued
      interest payable
                                
                                
                                449
                                
                                
                                
                                -Accrued
      property taxes payable
                                
                                
                                -
                                
                                
                                
                                1,944Interest
      rate swap settlements payable
                                
                                
                                -
                                
                                
                                
                                1,505Unearned
      revenue
                                
                                
                                -
                                
                                
                                
                                453Other
      accrued liabilities
                                
                                
                                340
                                
                                
                                
                                1,956Current
      portion of capital lease obligations
                                
                                
                                1,236
                                
                                
                                
                                992Total
      current liabilities
                                
                                
                                15,297
                                
                                
                                
                                25,590Long-term
      debt
                                
                                
                                89,600
                                
                                
                                
                                448,100Long-term
      capital lease obligations
                                
                                
                                1,123
                                
                                
                                
                                418Interest
      rate swaps liability
                                
                                
                                2,233
                                
                                
                                
                                -Commitments
      and contingencies (Notes 4, 10 and 13)Partners'
      capital (deficit):Common
      unitholders (14,375,000 and 21,557,309 units issued and outstanding
      atDecember
      31, 2007 and September 30, 2008, respectively)
                                
                                
                                317,004
                                
                                
                                
                                482,086Subordinated
      unitholders (12,570,504 units issued and outstanding for both
      dates)
                                
                                
                                (287,210
                                )
                                
                                
                                (283,717
                                )General
      partner interest (2.0% interest with 549,908 and 690,725 general partner
      unitsoutstanding
      at December 31, 2007 and September 30, 2008, respectively)
                                
                                
                                (12,565
                                )
                                
                                
                                (323,364
                                )Total
      Partners' capital (deficit)
                                
                                
                                17,229
                                
                                
                                
                                (124,995
                                )Total
      liabilities and Partners' capital (deficit)
                                
                                $
                                125,482
                                
                                
                                $
                                349,113


See
accompanying notes to unaudited consolidated financial
statements.


1
 Table of Contents




SEMGROUP ENERGY PARTNERS, L.P.


CONSOLIDATED
STATEMENTS OF OPERATIONS


(in thousands, except per unit
data)





Three
      Months Ended
                              
                              
                              Nine
      Months EndedSeptember
      30,
                              
                              
                              September
      30,2007
                              
                              
                              2008
                              
                              
                              2007
                              
                              
                              2008(unaudited)Service revenue:Third
      party revenue
                              
                              $
                              4,872
                              
                              
                              $
                              15,571
                              
                              
                              $
                              23,847
                              
                              
                              $
                              26,222Related
      party revenue
                              
                              
                              20,408
                              
                              
                              
                              38,223
                              
                              
                              
                              20,531
                              
                              
                              
                              123,062Total
      revenue
                              
                              
                              25,280
                              
                              
                              
                              53,794
                              
                              
                              
                              44,378
                              
                              
                              
                              149,284Expenses:Operating
                              
                              
                              15,952
                              
                              
                              
                              28,187
                              
                              
                              
                              50,110
                              
                              
                              
                              79,958Allowance
      for doubtful accounts
                              
                              
                              -
                              
                              
                              
                              (819
                              )
                              
                              
                              -
                              
                              
                              
                              447General
      and administrative
                              
                              
                              2,525
                              
                              
                              
                              27,177
                              
                              
                              
                              11,015
                              
                              
                              
                              33,244Total
      expenses
                              
                              
                              18,477
                              
                              
                              
                              54,545
                              
                              
                              
                              61,125
                              
                              
                              
                              113,649Operating
      income (loss)
                              
                              
                              6,803
                              
                              
                              
                              (751
                              )
                              
                              
                              (16,747
                              )
                              
                              
                              35,635Other
      expenses:Interest
      expense
                              
                              
                              2,424
                              
                              
                              
                              11,041
                              
                              
                              
                              3,369
                              
                              
                              
                              15,905Income
      (loss) before income taxes
                              
                              
                              4,379
                              
                              
                              
                              (11,792
                              )
                              
                              
                              (20,116
                              )
                              
                              
                              19,730Provision
      for income taxes
                              
                              
                              62
                              
                              
                              
                              59
                              
                              
                              
                              62
                              
                              
                              
                              227Net
      income (loss)
                              
                              $
                              4,317
                              
                              
                              $
                              (11,851
                              )
                              
                              $
                              (20,178
                              )
                              
                              $
                              19,503Allocation
      of net income (loss) to limited and subordinated
      partners:Net
      loss attributable to SemGroup Energy Partners Predecessor
                              
                              $
                              (1,623
                              )
                              
                              $
                              -
                              
                              
                              $
                              (26,118
                              )
                              
                              $
                              -General
      partner interest in net income (loss)
                              
                              $
                              119
                              
                              
                              $
                              (237
                              )
                              
                              $
                              119
                              
                              
                              $
                              3,368Net
      income (loss) allocable to limited and subordinated
    partners
                              
                              $
                              5,821
                              
                              
                              $
                              (11,614
                              )
                              
                              $
                              5,821
                              
                              
                              $
                              16,135Basic
      and diluted net income (loss) per common unit
                              
                              $
                              0.24
                              
                              
                              $
                              (0.33
                              )
                              
                              $
                              0.24
                              
                              
                              $
                              0.51Basic
      and diluted net income (loss) per subordinated unit
                              
                              $
                              0.19
                              
                              
                              $
                              (0.33
                              )
                              
                              $
                              0.19
                              
                              
                              $
                              0.51Weighted
      average common units outstanding - basic and diluted
                              
                              
                              14,375
                              
                              
                              
                              21,426
                              
                              
                              
                              14,375
                              
                              
                              
                              20,015Weighted
      average subordinated partners' units outstanding - basic and
      diluted
                              
                              
                              12,571
                              
                              
                              
                              12,571
                              
                              
                              
                              12,571
                              
                              
                              
                              12,571


See
accompanying notes to unaudited consolidated financial
statements.


2
 Table of Contents




SEMGROUP ENERGY PARTNERS, L.P.


CONSOLIDATED
STATEMENTS OF CHANGES IN PARTNERS’ CAPITAL (DEFICIT)


(in
thousands)





General
                      
                      
                      TotalCommon
                      
                      
                      Subordinated
                      
                      
                      Partner
                      
                      
                      Partners'Unitholders
                      
                      
                      Unitholders
                      
                      
                      Interest
                      
                      
                      Capital
      (Deficit)(unaudited)Balance,
      December 31, 2007
                      
                      $
                      317,004
                      
                      
                      $
                      (287,210
                      )
                      
                      $
                      (12,565
                      )
                      
                      $
                      17,229Net
      income
                      
                      
                      9,897
                      
                      
                      
                      6,238
                      
                      
                      
                      3,368
                      
                      
                      
                      19,503Equity-based
      incentive compensation
                      
                      
                      11,081
                      
                      
                      
                      6,526
                      
                      
                      
                      357
                      
                      
                      
                      17,964Distributions
      paid
                      
                      
                      (13,719
                      )
                      
                      
                      (9,271
                      )
                      
                      
                      (727
                      )
                      
                      
                      (23,717
                      )Proceeds
      from sale of 6,900,000 common units, net of underwriters' discount
      and
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      -offering
      expenses of $7.1 million
                      
                      
                      157,823
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      157,823Proceeds
      from issuance of 140,817 general partner units
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      3,365
                      
                      
                      
                      3,365Consideration
      paid in excess of historical cost of assets acquired from Private
      Company
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (317,162
                      )
                      
                      
                      (317,162
                      )Balance,
      September 30, 2008
                      
                      $
                      482,086
                      
                      
                      $
                      (283,717
                      )
                      
                      $
                      (323,364
                      )
                      
                      $
                      (124,995
                      )




See
accompanying notes to unaudited consolidated financial statements.


3
 Table of Contents




SEMGROUP ENERGY PARTNERS, L.P.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(in
thousands)


Nine
      Months EndedSeptember
      30,2007
                      
                      
                      2008(unaudited)Cash flows from operating
activities:Net
      income (loss)
                      
                      $
                      (20,178
                      )
                      
                      $
                      19,503Adjustments
      to reconcile net income (loss) to net cash provided by (used in) operating
      activities:Provision
      for uncollectible receivables from third parties
                      
                      
                      (25
                      )
                      
                      
                      432Depreciation
      and amortization
                      
                      
                      6,781
                      
                      
                      
                      15,587Amortization
      and write off of debt issuance costs
                      
                      
                      41
                      
                      
                      
                      616Unrealized
      loss related to interest rate swaps
                      
                      
                      627
                      
                      
                      
                      -Loss
      on sale of assets
                      
                      
                      68
                      
                      
                      
                      178Equity-based
      incentive compensation
                      
                      
                      532
                      
                      
                      
                      17,964Changes
      in assets and liabilities:Decrease
      (increase) in accounts receivable
                      
                      
                      701
                      
                      
                      
                      (5,720
                      )Increase
      in receivables from related parties
                      
                      
                      (1,428
                      )
                      
                      
                      (9,626
                      )Increase
      in prepaid insurance
                      
                      
                      (28
                      )
                      
                      
                      (2,506
                      )Increase
      in other current assets
                      
                      
                      (107
                      )
                      
                      
                      (1,529
                      )Decrease
      (increase) in other assets
                      
                      
                      72
                      
                      
                      
                      (113
                      )Decrease
      in accounts payable
                      
                      
                      (1,126
                      )
                      
                      
                      (377
                      )Increase in
      payables to related parties
                      
                      
                      3,325
                      
                      
                      
                      5,677Increase
      (decrease) in accrued interest payable
                      
                      
                      606
                      
                      
                      
                      (449
                      )Increase
      in accrued property taxes
                      
                      
                      -
                      
                      
                      
                      1,944Increase
      in interest rate swap settlements payable
                      
                      
                      -
                      
                      
                      
                      1,505Increase
      in unearned revenue
                      
                      
                      -
                      
                      
                      
                      453Increase
      (decrease) in other accrued liabilities
                      
                      
                      (1,602
                      )
                      
                      
                      1,616Decrease
      in interest rate swap liability
                      
                      
                      -
                      
                      
                      
                      (2,233
                      )Net
      cash provided by (used in) operating activities
                      
                      
                      (11,741
                      )
                      
                      
                      42,922Cash
      flows from investing activities:Acquisition
      of assets from Private Company
                      
                      
                      -
                      
                      
                      
                      (514,669
                      )Capital
      expenditures
                      
                      
                      (18,951
                      )
                      
                      
                      (5,485
                      )Proceeds
      from sale of assets
                      
                      
                      338
                      
                      
                      
                      386Net
      cash used in investing activities
                      
                      
                      (18,613
                      )
                      
                      
                      (519,768
                      )Cash
      flows from financing activities:Debt
      issuance costs
                      
                      
                      (1,037
                      )
                      
                      
                      (2,094
                      )Payments
      on capital lease obligations
                      
                      
                      (1,294
                      )
                      
                      
                      (939
                      )Borrowings
      under credit facility
                      
                      
                      146,550
                      
                      
                      
                      518,600Payments
      under credit facility
                      
                      
                      (54,050
                      )
                      
                      
                      (160,100
                      )Proceeds
      from equity issuance, net of offering costs
                      
                      
                      38,036
                      
                      
                      
                      161,238Distributions
      paid
                      
                      
                      (136,463
                      )
                      
                      
                      (23,717
                      )Contributions
      from Private Company
                      
                      
                      39,780
                      
                      
                      
                      -Net
      cash provided by financing activities
                      
                      
                      31,522
                      
                      
                      
                      492,988Net
      increase in cash and cash equivalents
                      
                      
                      1,168
                      
                      
                      
                      16,142Cash
      and cash equivalents at beginning of period
                      
                      
                      -
                      
                      
                      
                      416Cash
      and cash equivalents at end of period
                      
                      $
                      1,168
                      
                      
                      $
                      16,558Supplemental
      disclosure of cash flow information:Increase
      (decrease) in accounts payable related to purchases of property, plant and
      equipment
                      
                      $
                      (846
                      )
                      
                      $
                      168


See
accompanying notes to unaudited consolidated financial
statements.


4
 Table of Contents
 SEMGROUP
ENERGY PARTNERS, L.P.
 NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS


1. ORGANIZATIONAND NATURE OF BUSINESS




SemGroup
Energy Partners, L.P. and subsidiaries (the “Partnership”) is a publicly traded
master limited partnership with operations in twenty-three states. The
Partnership provides integrated terminalling, storage, gathering and
transportation services for companies engaged in the production, distribution
and marketing of crude oil and liquid asphalt cement. The Partnership manages
its operations through two operating segments: (i) terminalling and storage
services and (ii) gathering and transportation services. The Partnership
was formed in February 2007 as a Delaware master limited partnership initially
to own, operate and develop a diversified portfolio of complementary midstream
energy assets.




On
July 20, 2007, the Partnership issued 12,500,000 common units, representing
limited partner interests in the Partnership, and 12,570,504 subordinated units,
representing additional limited partner interests in the Partnership, to
SemGroup Holdings, L.P. (“SemGroup Holdings”) and 549,908 general partner units
representing a 2.0% general partner interest in the Partnership to SemGroup
Energy Partners G.P., L.L.C. SemGroup Holdings subsequently offered 12,500,000
common units pursuant to a public offering at a price of $22 per unit. In
addition, the Partnership issued an additional 1,875,000 common units to the
public pursuant to the underwriters’ exercise of their over-allotment option.
The initial public offering closed on July 23, 2007.  In
connection with its initial public offering, the Partnership entered into a
Throughput Agreement (the “Throughput Agreement”) with SemGroup, L.P.
(collectively, with its subsidiaries other than the Partnership and the
Partnership’s general partner, the “Private Company”) under which the
Partnership provided crude oil gathering and transportation and terminalling and
storage services to the Private Company.




On
February 20, 2008, the Partnership purchased land, receiving
infrastructure, machinery, pumps and piping and 46 liquid asphalt cement and
residual fuel oil terminalling and storage facilities (the “Acquired Asphalt
Assets”) from the Private Company for aggregate consideration of $379.5 million,
including $0.7 million of acquisition-related costs. For accounting purposes,
the acquisition has been reflected as a purchase of assets, with the Acquired
Asphalt Assets recorded at the historical cost of the Private Company, which was
approximately $145.5 million, with the additional purchase price of $234.0
million reflected in the statement of changes in partners’ capital as a
distribution to the Private Company.  In conjunction with the purchase
of the Acquired Asphalt Assets, the Partnership amended its existing credit
facility, increasing its borrowing capacity to $600 million. Concurrently, the
Partnership issued 6,000,000 common units, receiving proceeds, net of
underwriting discounts and offering-related costs, of $137.2 million. The
Partnership’s general partner also made a capital contribution of $2.9 million
to maintain its 2.0% general partner interest in the Partnership. On
March 5, 2008, the Partnership issued an additional 900,000 common units,
receiving proceeds, net of underwriting discounts, of $20.6 million, in
connection with the underwriters’ exercise of their over-allotment option in
full. The Partnership’s general partner made a corresponding capital
contribution of $0.4 million to maintain its 2.0% general partner interest in
the Partnership.  In connection with the acquisition of the Acquired
Asphalt Assets, the Partnership entered into a Terminalling and Storage
Agreement (the “Terminalling Agreement”) with the Private Company and certain of
its subsidiaries under which the Partnership provided liquid asphalt cement
terminalling and storage and throughput services to the Private Company and the
Private Company agreed to use the Partnership’s services at certain minimum
levels.  The board of directors of the Partnership’s general partner
(the “Board”) approved the acquisition of the Acquired Asphalt Assets as well as
the terms of the related agreements based on a recommendation from its conflicts
committee, which consisted entirely of independent directors. The conflicts
committee retained independent legal and financial advisors to assist it in
evaluating the transaction and considered a number of factors in approving the
acquisition, including an opinion from the committee’s independent financial
advisor that the consideration paid for the Acquired Asphalt Assets was fair,
from a financial point of view, to the Partnership.




On May
12, 2008, the Partnership purchased the Eagle North Pipeline System, a 130-mile,
8-inch pipeline that originates in Ardmore, Oklahoma and terminates in
Drumright, Oklahoma (the “Acquired Pipeline Assets”) from the Private Company
for aggregate consideration of $45.1 million, including $0.1 million of
acquisition-related costs.  For accounting purposes, the acquisition
has been reflected as a purchase of assets, with the Acquired Pipeline Assets
recorded at the historical cost of the Private Company, which was approximately
$35.1 million, with the additional purchase price of $10.0 million reflected in
the statement of changes in partners’ capital as a distribution to the Private
Company.  The acquisition was funded with borrowings under the
Partnership’s existing revolving credit facility.  The Board approved
the acquisition of the Acquired Pipeline Assets based on a recommendation from
its conflicts committee, which consisted entirely of independent directors. The
conflicts committee retained independent legal and financial advisors to assist
it in evaluating the transaction and considered a number of factors in approving
the acquisition, including an opinion from the committee’s independent financial
advisor that the consideration paid for the Acquired Pipeline Assets was fair,
from a financial point of view, to the Partnership.




5
 Table of Contents
 SEMGROUP
ENERGY PARTNERS, L.P.
 NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS


On May
30, 2008, the Partnership purchased eight recently constructed crude oil storage
tanks located at the Cushing Interchange from the Private Company and the
Private Company assigned a take-or-pay, fee-based agreement to the
Partnership that commits substantially all of the 2.0 million barrels of new
storage to a third-party customer through August 2010 (the “Acquired
Storage Assets”) for aggregate consideration of $90.3 million, including $0.3
million of acquisition-related costs.  For accounting purposes, the
acquisition has been reflected as a purchase of assets, with the Acquired
Storage Assets recorded at the historical cost of the Private Company, which was
approximately $17.1 million, inclusive of $0.5 million of completion costs
subsequent to the close of the acquisition, with the additional purchase price
of $73.2 million reflected in the statement of changes in partners’ capital as a
distribution to the Private Company.  The acquisition was funded with
borrowings under the Partnership’s existing revolving credit
facility.  The Board approved the acquisition of the Acquired Storage
Assets based on a recommendation from its conflicts committee, which consisted
entirely of independent directors. The conflicts committee retained independent
legal and financial advisors to assist it in evaluating the transaction and
considered a number of factors in approving the acquisition, including an
opinion from the committee’s independent financial advisor that the
consideration paid for the Acquired Storage Assets was fair, from a financial
point of view, to the Partnership.




For the
nine months ended September 30, 2008 and the year ended December 31, 2008, the
Partnership derived approximately 81% and approximately 73%, respectively, of
its revenues, excluding fuel surcharge revenues related to fuel and power
consumed to operate its liquid asphalt cement storage tanks, from services it
provided to the Private Company.




On July
22, 2008, the Private Company and certain of its subsidiaries filed voluntary
petitions (the “Bankruptcy Filings”) for reorganization under Chapter 11 of the
Bankruptcy Code in the United States Bankruptcy Court for the District of
Delaware (the “Bankruptcy Court”), Case No. 08-11547-BLS.   The
Private Company and its subsidiaries continue to operate their businesses and
own and manage their properties as debtors-in-possession under the jurisdiction
of the Bankruptcy Court and in accordance with the applicable provisions of the
Bankruptcy Code. None of the Partnership, its general partner, the
subsidiaries of the Partnership nor the subsidiaries of the Partnership’s
general partner were party to the Bankruptcy Filings.  See Notes 4 and
13 for a discussion of the impact of the Bankruptcy Filings and related events
upon the Partnership.




2.
BASIS OF PRESENTATION




The
accompanying financial statements have been prepared assuming that the
Partnership will continue as a going concern.  Prior to consummating
the Settlement (as defined below), events of default existed under the
Partnership’s credit facility, including during the quarter ended September 30,
2008.  As discussed in Notes 4 and 13 to the financial statements, the
Partnership entered into the Credit Agreement Amendment (as defined below) under
which, among other things, the lenders under the Partnership’s credit facility
consented to the Settlement and waived all existing defaults and events of
default described in the Forbearance Agreement (as defined below) and amendments
thereto.  However, the Partnership continues to face uncertainty
relating to its future cash flows and operations, particularly with respect to
its liquid asphalt cement terminalling and storage
operations.  Additionally, the Partnership earned 73% of its revenues,
excluding fuel surcharge revenues related to fuel and power consumed to operate
its liquid asphalt cement storage tanks, for the year ended December 31, 2008
from the Private Company, which made the Bankruptcy Filings in July 2008, the
effects of which are more fully disclosed in Note 13.  These factors
raise substantial doubt about the Partnership’s ability to continue as a going
concern.  Management’s plans in regard to these matters are also
discussed in Note 13.  The accompanying financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.




The
accompanying consolidated financial statements and related notes include the
accounts of the Partnership, and prior to July 20, 2007, the operations
contributed to the Partnership by the Private Company in connection with the
Partnership’s initial public offering. The financial statements have been
prepared in accordance with accounting principles and practices generally
accepted in the United States of America (“GAAP”).




The
accompanying financial statements include the results of operations of crude oil
terminalling and storage and gathering and transportation operations that were
contributed to the Partnership prior to the closing of the Partnership’s initial
public offering on a carve-out basis and are referred to herein as the
“Predecessor.”  Both the Partnership and the Predecessor had common
ownership and, in accordance with Emerging Issues Task Force Issue
No. 87-21, “Change of Accounting Basis in Master Limited Partnership
Transactions,” the assets and liabilities transferred were carried forward to
the Partnership at their historical amounts.  Additionally, due to the
previous common control of the Private Company and the Partnership, the
subsequent acquisitions of fixed assets from the Private Company prior to July
2008 were recorded at the historical cost of the Private Company.  All
significant intercompany accounts and transactions have been eliminated in the
preparation of the accompanying financial statements.




6
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 SEMGROUP
ENERGY PARTNERS, L.P.
 NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS


Through
the date of the initial public offering, the Private Company provided cash
management services to the Predecessor through a centralized treasury system. As
a result, all of the Predecessor’s charges and cost allocations covered by the
centralized treasury system were deemed to have been paid to the Private Company
in cash during the period in which the cost was recorded in the financial
statements. In addition, cash advances by the Private Company in excess of cash
earned by the Predecessor are reflected as contributions from the Private
Company in the statements of cash flows.




Historically,
the Predecessor was a part of the integrated operations of the Private Company,
and neither the Private Company nor the Predecessor recorded revenue associated
with the terminalling and storage and gathering and transportation services
provided on an intercompany basis. The Private Company and the Predecessor
recognized only the costs associated with providing such services. Accordingly,
revenues reflected in these financial statements for all periods prior to the
contribution of the assets, liabilities and operations to the Partnership by the
Private Company on July 20, 2007 relate to services provided to third
parties. Prior to the close of its initial public offering in July 2007, the
Partnership entered into a Throughput Agreement with the Private Company under
which the Partnership provided crude oil gathering and transportation and
terminalling and storage services to the Private Company.  In
connection with its February 2008 purchase of the Acquired Asphalt Assets, the
Partnership entered into a Terminalling Agreement with the Private Company under
which the Partnership provided liquid asphalt cement terminalling and storage
and throughput services to the Private Company (see Note 8).  In
connection with the Settlement, the Private Company rejected the Throughput
Agreement and the Terminalling Agreement as part of its Bankruptcy Proceedings
(as defined below) (see Note 13).




The
accompanying financial statements include allocated general and administrative
charges from the Private Company for indirect corporate overhead to cover costs
of functions such as legal, accounting, treasury, environmental safety,
information technology and other corporate services. General and administrative
charges allocated by the Private Company prior to the contribution of the
assets, liabilities and operations to the Partnership by the Private Company
were $3.2 million for the nine months ended September 30, 2007. Management
believes that the allocated general and administrative expense is representative
of the costs and expenses incurred by the Private Company for the Predecessor.
Prior to the close of its initial public offering in July 2007, the Partnership
entered into an Omnibus Agreement with the Private Company under which the
Partnership reimbursed the Private Company for the provision of various general
and administrative services for the Partnership’s benefit.  The
Omnibus Agreement was amended and restated in conjunction with the purchase of
the Acquired Asphalt Assets in February 2008 (the "Amended Omnibus Agreement")
(see Note 8).  The events related to the Bankruptcy Filings
terminated the Private Company’s obligations to provide services to the
Partnership under the Amended Omnibus Agreement.  The Private Company
continued to provide such services to the Partnership until the effective date
of the Settlement at which time the Private Company rejected the Amended Omnibus
Agreement and the Private Company and the Partnership entered into the Shared
Services Agreement (as defined below) and the Transition Services Agreement (as
defined below) relating to the provision of such services (see Note
13).





The
statements of operations for the three and nine months ended September 30, 2007
and 2008 and the statements of cash flows for the nine months ended September
30, 2007 and 2008 are unaudited. In the opinion of management, the unaudited
interim financial statements have been prepared on the same bases as the audited
financial statements and include all adjustments necessary to present fairly the
financial position and results of operations for the respective interim periods.
 These consolidated financial statements and notes should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Partnership’s annual report on Form 10-K for the year ended
December 31, 2007 filed with the Securities and Exchange Commission (the
“SEC”) on March 6, 2008.  Interim financial results are not
necessarily indicative of the results to be expected for an annual period. The
year-end balance sheet data was derived from audited financial statements, but
does not include all disclosures required by accounting principles generally
accepted in the United States of America.




7
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 SEMGROUP
ENERGY PARTNERS, L.P.
 NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS


3.
PROPERTY, PLANT AND EQUIPMENT




Property,
plant and equipment, net is stated at cost and consisted of the following (in
thousands):


EstimatedUseful
                          
                          
                          December
      31,
                          
                          
                          September
      30,Lives
      (Years)
                          
                          
                          2007
                          
                          
                          2008Land
                          
                          
                          
                          
                          $
                          309
                          
                          
                          $
                          15,065Land
      improvements
                          
                          
                          10-20
                          
                          
                          
                          -
                          
                          
                          
                          5,297Pipelines
      and facilities
                          
                          
                          5-31
                          
                          
                          
                          34,626
                          
                          
                          
                          94,600Storage
      and terminal facilities
                          
                          
                          10-35
                          
                          
                          
                          71,873
                          
                          
                          
                          166,944Transportation
      equipment
                          
                          
                          3-10
                          
                          
                          
                          25,133
                          
                          
                          
                          24,824Office
      property and equipment and other
                          
                          
                          3-31
                          
                          
                          
                          8,505
                          
                          
                          
                          19,983Construction-in-progress
                          
                          
                          
                          
                          
                          
                          2,015
                          
                          
                          
                          37,734Property,
      plant and equipment, gross
                          
                          
                          
                          
                          
                          
                          142,461
                          
                          
                          
                          364,447Accumulated
      depreciation
                          
                          
                          
                          
                          
                          
                          (40,222
                          )
                          
                          
                          (74,731
                          )Property,
      plant and equipment, net
                          
                          
                          
                          
                          
                          $
                          102,239
                          
                          
                          $
                          289,716


Property,
plant and equipment includes assets under capital leases of $2.4 million and
$1.4 million, net of accumulated depreciation of $4.2 million and
$5.1 million at December 31, 2007 and September 30, 2008,
respectively. All capital leases relate to the transportation equipment asset
category.  At September 30, 2008, $37.6 million of
construction-in-progress consists of the Eagle North Pipeline System, a
130-mile, 8-inch pipeline that was acquired by the Partnership from the Private
Company on May 12, 2008.  The Partnership has suspended capital
expenditures on this pipeline due to the continuing impact of the Bankruptcy
Filings (see Note 13).  Management currently intends to put the asset into
service by late 2009 or early 2010 and is exploring various alternatives to
complete the project.




Depreciation
expense for the nine months ended September 30, 2007 and September 30, 2008 was
$6.5 million and $15.4 million, respectively.




4.
LONG TERM DEBT




On
July 20, 2007, the Partnership entered into a $250.0 million five-year
credit facility with a syndicate of financial institutions. The Partnership
borrowed approximately $137.5 million prior to the closing of the initial
public offering. The Partnership distributed $136.5 million, net of debt
issuance costs of $1.0 million, advanced under the credit agreement to SemGroup
Holdings. On July 23, 2007, the Partnership repaid approximately $38.7
million under the credit facility with the proceeds it received in connection
with the exercise of the underwriters’ over-allotment option in the
Partnership’s initial public offering.




In
connection with its purchase of the Acquired Asphalt Assets, the Partnership
amended this credit facility to increase the total borrowing capacity to $600.0
million.




Due to
events related to the Bankruptcy Filings, events of default occurred under the
Partnership’s credit agreement (see Note 13).  Effective on September
18, 2008, the Partnership and the requisite lenders under its credit facility
entered into a Forbearance Agreement and Amendment to Credit Agreement (the
“Forbearance Agreement”) under which the lenders agreed, subject to specified
limitations and conditions, to forbear from exercising their rights and remedies
arising from the Partnership’s defaults and events of default described therein
for the period commencing on September 18, 2008 and ending on the earliest of
(i) December 11, 2008, (ii) the occurrence of any default or event of default
under the credit agreement other than certain defaults and events of default
indicated in the Forbearance Agreement, or (iii) the failure of the Partnership
to comply with any of the terms of the Forbearance Agreement (the “Forbearance
Period”).  On December 11, 2008, the lenders agreed to extend the
Forbearance Period until December 18, 2008 pursuant to a First Amendment to
Forbearance Agreement and Amendment to Credit Agreement (the “First Forbearance
Amendment”), on December 18, 2008, the lenders agreed to extend the Forbearance
Period until March 18, 2009 pursuant to a Second Amendment to Forbearance
Agreement and Amendment to Credit Agreement (the “Second Forbearance
Amendment”), and on March 18, 2009, the lenders agreed to further extend the
Forbearance Period until April 8, 2009 pursuant to a Third Amendment to
Forbearance Agreement and Amendment to Credit Agreement (the “Third Forbearance
Amendment”).


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 SEMGROUP
ENERGY PARTNERS, L.P.
 NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS




The
Partnership, its subsidiaries that are guarantors of the obligations under the
credit facility, Wachovia Bank, National Association, as Administrative Agent,
and the requisite lenders under the Partnership’s credit agreement entered into
the Consent, Waiver and Amendment to Credit Agreement (the “Credit Agreement
Amendment”), dated as of April 7, 2009, under which, among other
things, the lenders consented to the Settlement (see Note 13) and
waived all existing defaults and events of default described in the Forbearance
Agreement and amendments thereto.




Prior to
the execution of the Forbearance Agreement, the credit agreement was comprised
of a $350 million revolving credit facility and a $250 million term loan
facility.  The Forbearance Agreement permanently reduced the
Partnership’s revolving credit facility under the credit agreement from $350
million to $300 million and prohibited the Partnership from borrowing additional
funds under its revolving credit facility during the Forbearance
Period.   Under the Forbearance Agreement, the Partnership agreed
to pay the lenders executing the Forbearance Agreement a fee equal to 0.25% of
the aggregate commitments under the credit agreement after giving effect to the
above described commitment reduction.  The Second Forbearance
Amendment further permanently reduced the Partnership’s revolving credit
facility under the credit agreement from $300 million to $220
million.  In addition, under the Second Forbearance Amendment, the
Partnership agreed to pay the lenders executing the Second Forbearance Amendment
a fee equal to 0.375% of the aggregate commitments under the credit agreement
after the above described commitment reduction.  Under the Third
Forbearance Amendment, the Partnership agreed to pay a fee equal to 0.25% of the
aggregate commitments under the credit agreement after the above described
commitment reduction.  The amendments to the Forbearance Agreement
prohibited the Partnership from borrowing additional funds under its revolving
credit facility during the extended Forbearance Period.




The
Credit Agreement Amendment subsequently further permanently reduced the
Partnership’s revolving credit facility under the credit agreement from $220
million to $50 million, and increased the term loan facility from $250 million
to $400 million.  Upon the execution of the Credit Agreement
Amendment, $150 million of the Partnership’s outstanding revolving loans were
converted to term loans and the Partnership became able to borrow additional
funds under its revolving credit facility.  Pursuant to the Credit
Agreement Amendment, the credit facility  and all obligations thereunder
will mature on June 30, 2011.  Under the Credit Agreement Amendment,
the Partnership agreed to pay the lenders executing the Credit Agreement
Amendment a fee equal to 2.00% of the aggregate commitments under the credit
agreement after the above described commitment reduction, offset by the fee paid
pursuant to the Third Forbearance Amendment.  As
of May 22, 2009, the Partnership had $423.4 million in outstanding
borrowings under its credit facility (including $23.4 million under its
revolving credit facility and $400.0 million under its term loan facility) with
an aggregate unused credit availability under its revolving credit facility and
cash on hand of approximately $27.2 million. Pursuant to the Credit Agreement
Amendment, the Partnership’s revolving credit facility is limited
to $50.0million.  If any of
the financial institutions that support the Partnership’s revolving credit
facility were to fail, it may not be able to find a replacement lender, which
could negatively impact its ability to borrow under its revolving credit
facility.  For instance, Lehman Brothers Commercial Bank is one of the
lenders under the Partnership’s $50.0 million revolving credit facility, and
Lehman Brothers Commercial Bank has agreed to fund approximately $2.5 million
(approximately 5%) of the revolving credit facility.  On several occasions
Lehman Brothers Commercial Bank has failed to fund revolving loan requests under
the Partnership’s revolving credit facility, effectively limiting the aggregate
amount of the Partnership’s revolving credit facility to $47.5
million.




Prior
to the events of default, indebtedness under the credit agreement bore interest
at the Partnership’s option, at either (i) the higher of the administrative
agent’s prime rate or the federal funds rate plus 0.5% (the "Base rate"), plus
an applicable margin that ranges from 0.50% to 1.75%, depending on the
Partnership’s total leverage ratio and senior secured leverage ratio, or
(ii) LIBOR plus an applicable margin that ranges from 1.50% to 2.75%,
depending upon the Partnership’s total leverage ratio and senior secured
leverage ratio.  During the Forbearance Period indebtedness under the
credit agreement bore interest at the Partnership’s option, at either
(i) the Base rate, plus an applicable margin that ranges from 2.75% to
3.75%, depending upon the Partnership’s total leverage ratio, or (ii) LIBOR
plus an applicable margin that ranges from 4.25% to 5.25%, depending upon the
Partnership’s total leverage ratio.  Pursuant to the Second
Forbearance Amendment, commencing on December 12, 2008, indebtedness under the
credit agreement bore interest at the Partnership’s option, at either
(i) the Base rate plus 5.0% per annum, with a Base rate floor of
4.0% per annum, or (ii) LIBOR plus 6.0% per annum, with a LIBOR floor of
3.0% per annum.




After
giving effect to the Credit Agreement Amendment, amounts outstanding under the
Partnership’s credit facility bear interest at either the LIBOR rate plus 6.50%
per annum, with a LIBOR floor of 3.00%, or the Base rate plus 5.50% per annum,
with a Base rate floor of 4.00% per annum.  The Partnership now pays a
fee of 1.50% on unused commitments under its revolving credit
facility.  After giving effect to the Credit Agreement Amendment,
interest on amounts outstanding under the Partnership’s credit facility must be
paid monthly.  The Partnership’s credit facility, as amended by the
Credit Agreement Amendment, now requires the Partnership to pay additional
interest on October 6, 2009, April 6, 2010, October 6, 2010 and April 6, 2011,
equal to the product of (i) the sum of the total amount of term loans then
outstanding plus the aggregate commitments under the revolving credit facility
and (ii) 0.50%, 0.50%, 1.00% and 1.00%, respectively.




9
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 SEMGROUP
ENERGY PARTNERS, L.P.
 NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS




During
the three months ended September 30, 2008, the weighted average interest rate
incurred by the Partnership was 7.04% resulting in interest expense of
approximately $8.2 million.  During the three months ended December
31, 2008, the weighted average interest rate incurred by the Partnership was
7.72% resulting in interest expense of approximately $8.9 million.




Among
other things, the Partnership’s credit facility, as amended by the Credit
Agreement Amendment, now requires the Partnership to make (i) minimum quarterly
amortization payments on March 31, 2010 in the amount of $2.0 million, June 30,
2010 in the amount of $2.0 million, September 30, 2010 in the amount of $2.5
million, December 31, 2010 in the amount of $2.5 million and March 31, 2011 in
the amount of $2.5 million, (ii) mandatory prepayments of amounts outstanding
under the revolving credit facility (with no commitment reduction) whenever cash
on hand exceeds $15.0 million, (iii) mandatory prepayments with 100% of asset
sale proceeds, (iv) mandatory prepayment with 50% of the proceeds raised through
equity sales and (v) annual prepayments with 50% of excess cash flow (as
defined in the Credit Agreement Amendment).  The Partnership’s credit
facility, as amended by the Credit Agreement Amendment, prohibits the
Partnership from making draws under the revolving credit facility if it would
have more than $15.0 million of cash on hand after making the draw and applying
the proceeds thereof.




Under the
credit agreement, the Partnership is subject to certain limitations, including
limitations on its ability to grant liens, incur additional indebtedness, engage
in a merger, consolidation or dissolution, enter into transactions with
affiliates, sell or otherwise dispose of its assets (other than the sale or
other disposition of the assets of the asphalt business, provided that such
disposition is at arm’s length to a non-affiliate for fair market value in
exchange for cash and the proceeds of the disposition are used to pay down
outstanding loans), businesses and operations, materially alter the character of
its business, and make acquisitions, investments and capital
expenditures.  The credit agreement prohibits the Partnership from
making distributions of available cash to its unitholders if any default or
event of default (as defined in the credit agreement) exists.  The
credit agreement, as amended by the Credit Agreement Amendment, requires the
Partnership to maintain a leverage ratio (the ratio of its consolidated funded
indebtedness to its consolidated adjusted EBITDA, in each case as defined in the
credit agreement), determined as of the last day of eachmonth
for the twelve month period ending on the date of determination, that
ranges on a monthly basis from not more than 5.50 to 1.00 to not more than 9.75
to 1.00.  In addition, pursuant to the Credit Agreement Amendment, the
Partnership’s ability to make acquisitions and investments in unrestricted
subsidiaries is limited and the Partnership may only make distributions if its
leverage ratio is less than 3.50 to 1.00 and certain other conditions are
met.  As of September 30, 2008 and December 31, 2008, the
Partnership’s leverage ratio was 4.34 to 1.00 and 4.83 to 1.00,
respectively. If the Partnership’s leverage ratio does not improve, it may
not make quarterly distributions to its unitholders in the future.




The
credit agreement, as amended by the Credit Agreement Amendment, also requires
the Partnership to maintain an interest coverage ratio (the ratio of its
consolidated EBITDA to its consolidated interest expense, in each case as
defined in the credit agreement) that ranges on a monthly basis from not less
than 2.50 to 1.00 to not less than 1.00 to 1.00. As of September 30, 2008 and
December 31, 2008, the Partnership’s interest coverage ratio was 4.95 to 1.00
and 3.60 to 1.00, respectively.




Further,
the Partnership is required to maintain a monthly consolidated adjusted EBITDA
for the prior twelve months ranging from $45.4 million to $82.9 million as
determined at the end of each month.  In addition, capital
expenditures are limited to $12.5 million in 2009, $8.0 million in 2010 and $4.0
million in the six months ending June 30, 2011.




The
credit agreement specifies a number of events of default (many of which are
subject to applicable cure periods), including, among others, failure to pay any
principal when due or any interest or fees within three business days of the due
date, failure to perform or otherwise comply with the covenants in the credit
agreement, failure of any representation or warranty to be true and correct in
any material respect, failure to pay debt, a change of control of the
Partnership or the Partnership’s general partner, and other customary
defaults.  In
addition, it is an event of default under the credit agreement if the
Partnership does not file its delinquent quarterly and annual reports with the
SEC by September 30, 2009, unless the Partnership retains new auditors, in which
case such deadline is extended to December 31, 2009.If an event of
default exists under the credit agreement, the lenders will be able to
accelerate the maturity of the credit agreement and exercise other rights and
remedies, including taking available cash in the Partnership’s bank
accounts.  If an event of default exists and the Partnership is unable
to obtain forbearance from its lenders or a waiver of the events of default
under its credit agreement, it may be forced to sell assets, make a bankruptcy
filing or take other action that could have a material adverse effect on its
business, the price of its common units and its results of
operations.  The Partnership is also prohibited from making cash
distributions to its unitholders while the events of default
exist.




The
Partnership is exposed to market risk for changes in interest rates related to
its credit facility. Interest rate swap agreements were used to manage a portion
of the exposure related to changing interest rates by converting floating-rate
debt to fixed-rate debt. In August 2007 the Partnership entered into interest
rate swap agreements with an aggregate notional value of $80.0 million that
mature on August 20, 2010. Under the terms of the interest rate swap
agreements, the Partnership was to pay fixed rates of 4.9% and receive
three-month LIBOR with quarterly settlement.  In March 2008 the
Partnership entered into interest rate swap agreements with an aggregate
notional value of $100.0 million that mature on March 31, 2011.  Under
the terms of the interest rate swap agreements, the Partnership was to pay fixed
rates of 2.6% to 2.7% and receive three-month LIBOR with quarterly
settlement.  The interest rate swaps do not receive hedge accounting
treatment under Statement of Financial Accounting Standard (“SFAS”) SFAS No.
133, “Accounting for
Derivative Instruments and Hedging Activities” (“SFAS 133”). Changes in
the fair value of the interest rate swaps are recorded in interest expense in
the statements of operations.  In addition, the interest rate swap
agreements contain cross-default provisions to events of default under the
credit agreement.  Due to events related to the Bankruptcy Filings,
all of these interest rate swap positions were terminated in the third quarter
of 2008, and the Partnership has recorded a $1.5 million liability as of
September 30, 2008 with respect to these positions.


10
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 SEMGROUP
ENERGY PARTNERS, L.P.
 NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS




5.
FAIR VALUE MEASUREMENTS




The
Partnership adopted SFAS No. 157, “Fair Value Measurements,”
effective January 1, 2008 for financial assets and liabilities measured on
a recurring basis. SFAS No. 157 applies to all financial assets and
financial liabilities that are being measured and reported on a fair value
basis. In February 2008, the FASB issued FSP No. 157-2, which delayed the
effective date of SFAS No. 157 by one year for nonfinancial assets and
liabilities except those that are recognized and recorded in the financial
statements at fair value on a recurring basis. As defined in SFAS No. 157, fair
value is the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the
measurement date (exit price). SFAS No. 157 requires disclosure that
establishes a framework for measuring fair value and expands disclosure about
fair value measurements. The statement requires fair value measurements be
classified and disclosed in one of the following categories:




Level
      1:
            
            Unadjusted
      quoted prices in active markets that are accessible at the measurement
      date for identical, unrestricted assets or liabilities. The Partnership
      considers active markets as those in which transactions for the assets or
      liabilities occur in sufficient frequency and volume to provide pricing
      information on an ongoing basis.Level
      2:
            
            Quoted
      prices in markets that are not active, or inputs which are observable,
      either directly or indirectly, for substantially the full term of the
      asset or liability.Level
      3:
            
            Measured
      based on prices or valuation models that require inputs that are both
      significant to the fair value measurement and less observable from
      objective sources (i.e., supported by little or no market activity). The
      Partnership’s Level 3 instruments are comprised of interest rate
      swaps.  Although the Partnership utilizes third party broker
      quotes to assess the reasonableness of its prices and valuation, the
      Partnership does not have sufficient corroborating market evidence to
      support classifying these assets and liabilities as Level
    2.





As
required by SFAS No. 157, financial assets and liabilities are classified
based on the lowest level of input that is significant to the fair value
measurement. The Partnership’s assessment of the significance of a particular
input to the fair value measurement requires judgment, and may affect the
valuation of the fair value of assets and liabilities and their placement within
the fair value hierarchy levels. The following table summarizes the valuation of
the Partnership’s investments and financial instruments by SFAS No. 157
pricing levels as of September 30, 2008 (in thousands):




Fair
      Value Measurements at Reporting Date UsingQuoted
      Prices in Active
                    
                    
                    Significant
      Other
                    
                    
                    SignificantMarkets
      for Identical
                    
                    
                    Observable
                    
                    
                    UnobservableAssets
                    
                    
                    Inputs
                    
                    
                    InputsDescription
                    
                    September
      30, 2008
                    
                    
                    (Level
      1)
                    
                    
                    (Level
      2)
                    
                    
                    (Level
      3)Interest
      rate swap assets
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -Interest
      rate swap liabilities
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Total
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
 
  11
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 SEMGROUP
ENERGY PARTNERS, L.P.
 NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS


The
following table sets forth a reconciliation of changes in the fair value of the
Partnership’s net financial liabilities classified as level 3 in the fair value
hierarchy (in thousands):





Fair
      Value Measurements UsingSignificant
      Unobservable Inputs
                                (Level
      3)Three
      Months Ended September 30, 2008
                              
                              Nine
      Months Ended September 30, 2008Beginning
      balance
                              
                              $
                              496
                              
                              
                              $
                              (2,233
                              )Total
      gains or losses (realized/unrealized)Included
      in earnings (1)
                              
                              
                              216
                              
                              
                              
                              2,785Included
      in other comprehensive income
                              
                              
                              -
                              
                              
                              
                              -Purchases,
      issuances, and settlements
                              
                              
                              (712
                              )
                              
                              
                              (552
                              )Transfers
      in and/or out of Level 3
                              
                              
                              -
                              
                              
                              
                              -Ending
      balance, September 30, 2008
                              
                              $
                              -
                              
                              
                              $
                              -The
      amount of total losses for the period includedin
      earnings attributable to the change in the unrealizedgains
      or losses relating to liabilities still held atthe
      reporting date
                              
                              $
                              -
                              
                              
                              $
                              -(1)
      Amounts reported as included in earnings are reported as interest expense
      on the statements of operations.




6.
NET INCOME PER LIMITED PARTNER UNIT




Subject
to applicability of Emerging Issues Task Force Issue No. 03-06 (“EITF
03-06”), “Participating Securities and the Two-Class Method under Financial
Accounting Standards Board (“FASB”) Statement No. 128,” as discussed below,
Partnership income is allocated to the limited partners, including the holders
of subordinated units, and to the general partner after consideration of its
incentive distribution rights.  Income allocable to the limited
partners is first allocated to the common unitholders up to the quarterly
minimum distribution of $0.3125 per unit, with remaining income allocated to the
subordinated unitholders up to the minimum distribution amount. Basic and
diluted net income per common and subordinated partner unit is determined by
dividing net income attributable to common and subordinated partners by the
weighted average number of outstanding common and subordinated partner units
during the period.




EITF
03-06 addresses the computation of earnings per share by entities that have
issued securities other than common stock that contractually entitle the holder
to participate in dividends and earnings of the entity when, and if, it declares
dividends on its common stock (or partnership distributions to unitholders).
Under EITF 03-06, in accounting periods where the Partnership’s aggregate net
income exceeds aggregate dividends declared in the period, the Partnership is
required to present earnings per unit as if all of the earnings for the periods
were distributed.  The nine months ended September 30, 2008 earnings
per share calculation reflects the summation of the quarterly calculations, as
earnings per share for master limited partnerships is calculated based on the
distribution provisions set forth in the partnership
agreement.  The following sets forth the computation of basic and
diluted net income per common and subordinated unit (in thousands, except per
unit data):


July
      1, 2007 to
                                                
                                                
                                                July
      20, 2007 to
                                                
                                                
                                                Three
      Months Ended
                                                
                                                
                                                January
      1, 2007 to
                                                
                                                
                                                July
      20, 2007 to
                                                
                                                
                                                Nine
      Months EndedJuly
      19,
                                                
                                                
                                                September
      30,
                                                
                                                
                                                September
      30,
                                                
                                                
                                                July
      19,
                                                
                                                
                                                September
      30,
                                                
                                                
                                                September
      30,2007
                                                
                                                
                                                2007
                                                
                                                
                                                2008
                                                
                                                
                                                2007
                                                
                                                
                                                2007
                                                
                                                
                                                2008Net
      income (loss)
                                                
                                                $
                                                (1,623
                                                )
                                                
                                                $
                                                5,940
                                                
                                                
                                                $
                                                (11,851
                                                )
                                                
                                                $
                                                (26,118
                                                )
                                                
                                                $
                                                5,940
                                                
                                                
                                                $
                                                19,503Less:
      General partner interest in net income (loss)
                                                
                                                
                                                (1,623
                                                )
                                                
                                                
                                                119
                                                
                                                
                                                
                                                (237
                                                )
                                                
                                                
                                                (26,118
                                                )
                                                
                                                
                                                119
                                                
                                                
                                                
                                                3,368Net
      income (loss) available to limited and subordinated
    partners
                                                
                                                $
                                                -
                                                
                                                
                                                $
                                                5,821
                                                
                                                
                                                $
                                                (11,614
                                                )
                                                
                                                $
                                                -
                                                
                                                
                                                $
                                                5,821
                                                
                                                
                                                $
                                                16,135Basic
      weighted average number of units:Common
      units
                                                
                                                
                                                
                                                
                                                
                                                
                                                14,375
                                                
                                                
                                                
                                                21,426
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                14,375
                                                
                                                
                                                
                                                20,015Subordinated
      units
                                                
                                                
                                                
                                                
                                                
                                                
                                                12,571
                                                
                                                
                                                
                                                12,571
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                12,571
                                                
                                                
                                                
                                                12,571Restricted
      and phantom units
                                                
                                                
                                                
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                641
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                552Diluted
      weighted average number of units:Common
      units
                                                
                                                
                                                
                                                
                                                
                                                
                                                14,508
                                                
                                                
                                                
                                                21,426
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                14,508
                                                
                                                
                                                
                                                20,015Subordinated
      units
                                                
                                                
                                                
                                                
                                                
                                                
                                                12,571
                                                
                                                
                                                
                                                12,571
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                12,571
                                                
                                                
                                                
                                                12,571Restricted
      and phantom units
                                                
                                                
                                                
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                641
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                552Basic
      and diluted net income (loss) per common unit
                                                
                                                
                                                
                                                
                                                
                                                $
                                                0.24
                                                
                                                
                                                $
                                                (0.33
                                                )
                                                
                                                
                                                
                                                
                                                
                                                $
                                                0.24
                                                
                                                
                                                $
                                                0.51Basic
      and diluted net income (loss) per subordinated unit
                                                
                                                
                                                
                                                
                                                
                                                $
                                                0.19
                                                
                                                
                                                $
                                                (0.33
                                                )
                                                
                                                
                                                
                                                
                                                
                                                $
                                                0.19
                                                
                                                
                                                $
                                                0.51





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 SEMGROUP
ENERGY PARTNERS, L.P.
 NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS




7.
PARTNERS’ CAPITAL AND DISTRIBUTIONS




The
Partnership has not made a distribution to its common unitholders, subordinated
unitholders or general partner since May 15, 2008 due to the events of default
that existed under its credit agreement and the uncertainty of its future cash
flows relating to the Bankruptcy Filings.  The Partnership’s
unitholders will be required to pay taxes on their share of the Partnership’s
taxable income even though they did not receive a distribution for the quarters
ended June 30, 2008, September 30, 2008, December 31, 2008 or March 31,
2009.  In addition, the Partnership does not currently expect to make
a distribution relating to operations during the second quarter of
2009.  Pursuant to the Credit Agreement Amendment, the Partnership is
prohibited from making distributions to its unitholders if its leverage ratio
(as defined in the credit agreement) exceeds 3.50 to 1.00.  As of
September 30, 2008 and December 31, 2008, the Partnership’s leverage ratio was
4.34 to 1.00 and 4.83 to 1.00, respectively. If the Partnership’s leverage
ratio does not improve, it may not make quarterly distributions to its
unitholders in the future.  The Partnership’s partnership agreement
provides that, during the subordination period, which the Partnership is
currently in, the Partnership’s common units will have the right to receive
distributions of available cash from operating surplus in an amount equal to the
minimum quarterly distribution of $0.3125 per common unit per quarter, plus any
arrearages in the payment of the minimum quarterly distribution on the common
units from prior quarters, before any distributions of available cash from
operating surplus may be made on the subordinated units.




On April
24, 2008, the Partnership declared a cash distribution of $0.40 per unit on its
outstanding units for the three month period ended March 31,
2008.  The distribution was paid on May 15, 2008 to unitholders of
record on May 5, 2008. The total distribution paid was approximately $14.3
million, with approximately $8.5 million, $5.0 million, and $0.6 million paid to
the Partnership’s common unitholders, subordinated unitholders and general
partner, respectively, and $0.2 million paid to phantom and restricted
unitholders pursuant to awards granted under the Partnership’s long-term
incentive plan.





On
February 20, 2008, the Partnership purchased the Acquired Asphalt Assets
from the Private Company for aggregate consideration of $379.5 million,
including $0.7 million of acquisition-related costs. For accounting purposes,
the acquisition has been reflected as a purchase of assets, with the Acquired
Asphalt Assets recorded at the historical cost of the Private Company, which was
approximately $145.5 million, and with the additional purchase price of $234.0
million reflected in the statement of changes in partners’ capital as a
distribution to the Private Company.  The Board approved the
acquisition of the Acquired Asphalt Assets as well as the terms of the related
agreements based on a recommendation from its conflicts committee, which
consisted entirely of independent directors. The conflicts committee retained
independent legal and financial advisors to assist it in evaluating the
transaction and considered a number of factors in approving the acquisition,
including an opinion from the committee’s independent financial advisor that the
consideration paid for the Acquired Asphalt Assets was fair, from a financial
point of view, to the Partnership.





On May
12, 2008, the Partnership purchased the Acquired Pipeline Assets from the
Private Company for aggregate consideration of $45.1 million, including $0.1
million of acquisition-related costs. For accounting purposes, the acquisition
has been reflected as a purchase of assets, with the Acquired Pipeline Assets
recorded at the historical cost of the Private Company, which was approximately
$35.1 million, and with the additional purchase price of $10.0 million reflected
in the statement of changes in partners’ capital as a distribution to the
Private Company.  The Board approved the acquisition of the Acquired
Pipeline Assets based on a recommendation from its conflicts committee, which
consisted entirely of independent directors. The conflicts committee retained
independent legal and financial advisors to assist it in evaluating the
transaction and considered a number of factors in approving the acquisition,
including an opinion from the committee’s independent financial advisor that the
consideration paid for the Acquired Pipeline Assets was fair, from a financial
point of view, to the Partnership.





On May
30, 2008, the Partnership purchased the Acquired Storage Assets from the Private
Company for aggregate consideration of $90.3 million, including $0.3 million of
acquisition-related costs. For accounting purposes, the acquisition has been
reflected as a purchase of assets, with the Acquired Storage Assets recorded at
the historical cost of the Private Company, which was approximately $17.1
million, inclusive of $0.5 million of completion costs subsequent to the close
of the acquisition, and with the additional purchase price of $73.2 million
reflected in the statement of changes in partners’ capital as a distribution to
the Private Company.  The Board approved the acquisition of the
Acquired Storage Assets based on a recommendation from its conflicts committee,
which consisted entirely of independent directors. The conflicts committee
retained independent legal and financial advisors to assist it in evaluating the
transaction and considered a number of factors in approving the acquisition,
including an opinion from the committee’s independent financial advisor that the
consideration paid for the Acquired Storage Assets was fair, from a financial
point of view, to the Partnership.





13
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 SEMGROUP
ENERGY PARTNERS, L.P.
 NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS


As a
result of the Private Company’s control of the Partnership’s general partner,
consideration paid in excess of the historical cost of the Acquired Asphalt
Assets, Acquired Pipeline Assets, and Acquired Storage Assets were treated as
distributions to the Private Company.  This resulted in an aggregate
reduction in Partners’ Capital of $317.2 million and negative Partners’ Capital
of $125.0 million as of September 30, 2008.  As discussed in the
Partnership’s Annual Report on Form 10-K for the year ended December 31, 2007,
as a result of the Private Company’s control of the Partnership’s general
partner, the Partnership was subject to the risk that the Private Company may
favor its own interest in proposing the terms of any acquisition (or drop downs)
the Partnership makes from the Private Company and such terms may not be as
favorable as those received from an unrelated third party.  The Board
approved the acquisition of the Acquired Asphalt Assets, the Acquired Pipeline
Assets, and Acquired Storage Assets, as well as the terms of the related
agreements based on a recommendation from its conflicts committee, which
consisted entirely of independent directors. The conflicts committee retained
independent legal and financial advisors to assist it in evaluating these
transactions and considered a number of factors in approving the acquisitions,
including opinions from the committee’s independent financial advisor that the
consideration paid for the Acquired Asphalt Assets, the Acquired Pipeline
Assets, and the Acquired Storage Assets was fair, from a financial point of
view, to the Partnership.




8.
RELATED PARTY TRANSACTIONS





Prior to
the close of its initial public offering in July 2007, the Partnership entered
into the Throughput Agreement with the Private Company. For the nine months
ended September 30, 2008, the Partnership recognized revenue of $73.4 million
under the Throughput Agreement.




In
conjunction with the purchase of the Acquired Asphalt Assets in February 2008,
the Partnership entered into the Terminalling Agreement with the Private
Company. For the nine months ended September 30, 2008, the Partnership
recognized revenue of $49.1 million under the Terminalling Agreement, including
fuel surcharge revenues related to fuel and power consumed to operate its liquid
asphalt cement storage tanks.




Based on
the minimum requirements under the Throughput Agreement and the Terminalling
Agreement, the Private Company was obligated to pay the Partnership an aggregate
minimum monthly fee totaling $135 million annually for the Partnership’s
gathering and transportation services and the Partnership’s terminalling and
storage services.  Pursuant to an order of the Bankruptcy Court
entered on September 9, 2008, the Private Company began making payments under
the Throughput Agreement at a market rate based upon the Private Company’s
actual usage rather than the contractual minimums.  In connection with
the Settlement, the Private Company rejected the Throughput Agreement and the
Terminalling Agreement as part of its Bankruptcy Proceedings (see
Note 13).




In
connection with the Settlement, the Partnership and the Private Company entered
into various agreements including the New Throughput Agreement pursuant to which
the Partnership provides certain crude oil gathering, transportation,
terminalling and storage services to the Private Company and the New
Terminalling Agreement pursuant to which the Partnership provides certain
liquid asphalt cement terminalling and storage services for the Private
Company’s remaining asphalt inventory.  For a further discussion of
these agreements, and the other agreements entered into in connection with the
Settlement, please see Note 13.




As of
December 31, 2007 and September 30, 2008, the Partnership had
$9.7 million and $19.3 million, respectively, in receivables from the
Private Company and its subsidiaries, including the pre-petition
receivables that will be netted and waived due to the Settlement of $0 and $10.5
million, respectively.  The $10.5 million relates to amounts that were
due from the Private Company as of September 30, 2008 and are considered
prepetition debt in the Bankruptcy Cases.  In connection with the
Settlement, these pre-petition claims by the Partnership will be netted against
pre-petition claims by the Private Company and waived (see Note
13).




Prior to
the Bankruptcy Filings, the Partnership paid the Private Company a fixed
administrative fee for providing general and administrative services to the
Partnership.  This fixed administrative fee was initially fixed at
$5.0 million per year through July 2010.  Concurrently with the
closing of the purchase of the Acquired Asphalt Assets, the Partnership amended
and restated the Omnibus Agreement, increasing the fixed administrative fee the
Partnership paid the Private Company for providing general and administrative
services to the Partnership from $5.0 million per year to $7.0 million per
year.  For the nine months ended September 30, 2008, the Partnership
paid the Private Company $5.0million for the services
provided under the Omnibus Agreement.  The obligation for the Private
Company to provide services under the Amended Omnibus Agreement and the
corresponding administrative fee payable by the Partnership were terminated in
connection with the events related to the change of control of the Partnership’s
general partner.  The Private Company continued to provide such
services to the Partnership until the effective date of the Settlement at which
time the Private Company rejected the Amended Omnibus Agreement and the Private
Company and the Partnership entered into the Shared Services Agreement and
the Transition Services Agreement relating to the provision of such
services (see Note 13).  In
addition, in connection with the Settlement, the Private Company
waived the fixed administrative fee payable by the Partnership under
the Amended Omnibus Agreement for the month of March 2009 (see Note
13).


14
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 SEMGROUP
ENERGY PARTNERS, L.P.
 NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS




The
Partnership also reimburses the Private Company for direct operating payroll and
payroll-related costs and other operating costs associated with services the
Private Company’s employees provide to the Partnership. For the three months and
nine months ended September 30, 2008, the Partnership recorded $7.3 million and
$21.6 million, respectively, in compensation costs and $0.7 and $2.3 million,
respectively, in other operating costs related to services provided by the
Private Company’s employees which are reflected as operating expenses in the
accompanying statement of operations. As of December 31, 2007 and September
30, 2008, the Partnership had $10.2 million and $15.9 million in
payables to the Private Company and its subsidiaries, including the pre-petition
payables that will be netted and waived due to the Settlement of $0 and $10.6
million, respectively.  Pursuant to the Settlement, these pre-petition
claims by the Private Company will be netted against pre-petition claims by the
Partnership and waived (see Note 13).  After the effective date of the
Settlement, these costs will be reimbursed pursuant to the Shared Services
Agreement and the Transition Services Agreement (see Note 13).  In
addition, in connection with the Settlement, the Private Company waived the
direct operational costs attributable to the Partnership’s asphalt operations
and payable by the Partnership under the Amended Omnibus Agreement for the month
of March 2009 (see Note 13).




The
Partnership has acquired various assets, including the Acquired Asphalt Assets,
the Acquired Pipeline Assets and the Acquired Storage Assets, from the Private
Company.  See Notes 1 and 7 for a description of these
acquisitions.  In addition, the Partnership acquired certain liquid
asphalt cement assets and crude oil assets from the Private Company in
connection with the Settlement (see Note 13).




During
the three months and nine months ended September 30, 2008, the Partnership made
payments of $0.8 million and $1.8 million, respectively, to a third party
entity on whose board of directors a former member of the Board served in
connection with leased transport trucks and trailers utilized in the
Partnership’s gathering and transportation services segment. At September
30, 2008 the Partnership had future commitments to this entity totaling $8.3
million.




As of
September 30, 2008, the Partnership had a banking relationship with a third
party banking entity on whose board of directors a former member of the Board
served.




9.
LONG-TERM INCENTIVE PLAN




In July
2007, the Partnership’s general partner adopted the SemGroup Energy Partners
G.P., L.L.C. Long-Term Incentive Plan (the “Plan”). The compensation committee
of the Board administers the Plan. The Plan authorizes the grant of an aggregate
of 1.25 million common units deliverable upon vesting. Although other types
of awards are contemplated under the Plan, currently outstanding awards include
“phantom” units, which convey the right to receive common units upon vesting,
and “restricted” units, which are grants of common units restricted until the
time of vesting. The phantom unit awards also include distribution equivalent
rights (“DERs”).




Subject
to applicable earning criteria, a DER entitles the grantee to a cash payment
equal to the cash distribution paid on an outstanding common unit prior to the
vesting date of the underlying award. Recipients of restricted units are
entitled to receive cash distributions paid on common units during the vesting
period which distributions are reflected initially as a reduction of partners’
capital. Distributions paid on units which ultimately do not vest are
reclassified as compensation expense.




In July
2007, 475,000 phantom common units and 5,000 restricted common units were
granted which vest ratably over periods of four and three years, respectively.
In October 2007, 5,000 restricted common units were granted which vest ratably
over three years. In June 2008, 375,000 phantom common units were granted which
vest ratably over three years.  In July 2008, 5,000 restricted common
units were granted which vest ratably over three years.  These grants
are equity awards under SFAS 123(R), “Share-Based Payment” and,
accordingly, the fair value of the awards as of the grant date is expensed over
the vesting period. The weighted average grant date fair-value of the awards is
$23.86 per unit. The value of these award grants was approximately
$10.5 million, $0.1 million, $0.1 million, $9.8 million and $0.1
million on their grant dates, respectively.  Due to the change of
control of the Partnership’s general partner related to the Private Company’s
liquidity issues, all outstanding awards as of July 18, 2008
vested.  The Partnership’s equity-based incentive compensation expense
for the three months and nine months ended September 30, 2007 and 2008 was $0.5
million, $0.5 million, $18.0 and $19.4 million, respectively.  On
August 14, 2008, 282,309 common units were issued in connection with the vesting
of certain of the outstanding awards.  In addition, in December 2008
the Plan was amended to provide for the delivery of subordinated units in
addition to common units upon vesting and 3,333 restricted common units and
1,667 restricted subordinated units were awarded under the Plan (see Note
13).  In April 2009, the 1,667 restricted subordinated units were
cancelled and were replaced by a grant of 1,667 restricted common units (see
Note 13).


15
 Table of Contents
 SEMGROUP
ENERGY PARTNERS, L.P.
 NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS




10.
COMMITMENTS AND CONTINGENCIES




The
Partnership is from time to time subject to various legal actions and claims
incidental to its business, including those arising out of environmental-related
matters. Management believes that these routine legal proceedings will not have
a material adverse effect on the financial position, results of operations or
cash flows of the Partnership. Once management determines that information
pertaining to a legal proceeding indicates that it is probable that a liability
has been incurred and the amount of such liability can be reasonably estimated,
an accrual is established equal to its estimate of the likely exposure. The
Partnership did not have an accrual for legal settlements as of
December 31, 2007 or September 30, 2008.  The Partnership is
subject to a securities class action and other lawsuits, an SEC investigation
and a Grand Jury investigation due to events related to the Bankruptcy Filings
(see Note 13).  An unfavorable outcome in any of these matters may
have a material adverse effect on the Partnership’s business, financial
condition, results of operations, cash flows, ability to make distributions to
its unitholders and the trading price of the Partnership’s common
units.




The
Partnership has contractual obligations to perform dismantlement and removal
activities in the event that some of its liquid asphalt cement and residual fuel
oil terminalling and storage assets are abandoned. These obligations include
varying levels of activity including completely removing the assets and
returning the land to its original state. The Partnership has determined that
the settlement dates related to the retirement obligations are indeterminate.
The assets with indeterminate settlement dates have been in existence for many
years and with regular maintenance will continue to be in service for many years
to come. Also, it is not possible to predict when demands for the Partnership’s
terminalling and storage services will cease, and the Partnership does not
believe that such demand will cease for the foreseeable
future.  Accordingly, the Partnership believes the date when these
assets will be abandoned is indeterminate. With no reasonably determinable
abandonment date, the Partnership cannot reasonably estimate the fair value of
the associated asset retirement obligations.  Management believes that
if the Partnership’s asset retirement obligations were settled in the
foreseeable future the potential cash flows that would be required to settle the
obligations based on current costs are not material.  The Partnership
will record asset retirement obligations for these assets in the period in which
sufficient information becomes available for it to reasonably determine the
settlement dates.




In the
Amended Omnibus Agreement and other agreements with the Private Company, the
Private Company agreed to indemnify the Partnership for certain environmental
and other claims relating to the crude oil and liquid asphalt cement assets that
have been contributed to the Partnership.  In connection with the
Settlement, the Partnership waived these claims and the Amended Omnibus
Agreement and other relevant agreements, including the indemnification
provisions therein, were rejected as part of the Bankruptcy
Proceedings.  If the Partnership experiences an environmental or other
loss, it would experience increased losses which may have a material adverse
effect on its business, financial condition, results of operations, cash flows,
ability to make distributions to its unitholders, the trading price of its
common units and the ability to conduct its business.




11.
OPERATING SEGMENTS




The
Partnership’s operations consist of two operating segments:
(i) terminalling and storage services and (ii) gathering and
transportation services.




TERMINALLING AND STORAGE
SERVICES —The Partnership provides crude oil and liquid asphalt cement
terminalling and storage services at its terminalling and storage facilities
located in twenty-three states.




GATHERING AND TRANSPORTATION
SERVICES —The Partnership owns and operates two pipeline systems, the
Mid-Continent system and the Longview system, that gather crude oil purchased by
the Private Company and its other customers and transports it to refiners, to
common carrier pipelines for ultimate delivery to refiners or to terminalling
and storage facilities owned by the Partnership and others. The Partnership
refers to its gathering and transportation system located in Oklahoma and the
Texas Panhandle as the Mid-Continent system. It refers to its second gathering
and transportation system, which is located in Texas, as the Longview system. In
addition to its pipelines, the Partnership uses its owned and leased tanker
trucks to gather crude oil for the Private Company and its other customers at
remote wellhead locations generally not covered by pipeline and gathering
systems and to transport the crude oil to aggregation points and storage
facilities located along pipeline gathering and transportation systems. In
connection with its gathering services, the Partnership also provides a number
of producer field services, ranging from gathering condensates from natural gas
companies to hauling produced water to disposal wells.





16
 Table of Contents
 SEMGROUP
ENERGY PARTNERS, L.P.
 NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS


The
Partnership’s management evaluates performance based upon segment operating
margin, which includes revenues from related parties and external customers and
operating expenses excluding depreciation and amortization. The non-GAAP measure
of operating margin (in the aggregate and by segment) is presented in the
following table. The Partnership computes the components of operating margin by
using amounts that are determined in accordance with GAAP. A reconciliation of
operating margin to income (loss) before income tax, which is its nearest
comparable GAAP financial measure, is included in the following table. The
Partnership believes that investors benefit from having access to the same
financial measures being utilized by management. Operating margin is an
important measure of the economic performance of the Partnership’s core
operations. This measure forms the basis of the Partnership’s internal financial
reporting and is used by its management in deciding how to allocate capital
resources between segments.  Income (loss) before income tax,
alternatively, includes expense items, such as depreciation and amortization,
general and administrative expenses and interest expense, which management does
not consider when evaluating the core profitability of an
operation.




The
following table reflects certain financial data for each segment for the periods
indicated:




Terminalling
      and Storage
                                                                                      
                                                                                      
                                                                                      Gathering
      and Transportation
                                                                                      
                                                                                      
                                                                                      Total(in thousands)Three
      Months Ended September 30, 2007Service
      revenueThird
      party revenue
                                                                                      
                                                                                      $
                                                                                      691
                                                                                      
                                                                                      
                                                                                      $
                                                                                      4,181
                                                                                      
                                                                                      
                                                                                      $
                                                                                      4,872Related
      party revenue
                                                                                      
                                                                                      
                                                                                      7,245
                                                                                      
                                                                                      
                                                                                      
                                                                                      13,163
                                                                                      
                                                                                      
                                                                                      
                                                                                      20,408Total
      revenue for reportable segments
                                                                                      
                                                                                      
                                                                                      7,936
                                                                                      
                                                                                      
                                                                                      
                                                                                      17,344
                                                                                      
                                                                                      
                                                                                      
                                                                                      25,280
                                                                                      (1
                                                                                      )Operating
      expenses (excluding depreciation and amortization)
                                                                                      
                                                                                      
                                                                                      293
                                                                                      
                                                                                      
                                                                                      
                                                                                      13,265
                                                                                      
                                                                                      
                                                                                      
                                                                                      13,558Operating
      margin (excluding depreciation and amortization)
                                                                                      
                                                                                      
                                                                                      7,643
                                                                                      
                                                                                      
                                                                                      
                                                                                      4,079
                                                                                      
                                                                                      
                                                                                      
                                                                                      11,722
                                                                                      (2
                                                                                      )Total
      assets (end of period)
                                                                                      
                                                                                      
                                                                                      63,134
                                                                                      
                                                                                      
                                                                                      
                                                                                      54,182
                                                                                      
                                                                                      
                                                                                      
                                                                                      117,316Three
      Months Ended September 30, 2008Service
      revenueThird
      party revenue
                                                                                      
                                                                                      $
                                                                                      4,661
                                                                                      
                                                                                      
                                                                                      $
                                                                                      10,910
                                                                                      
                                                                                      
                                                                                      $
                                                                                      15,571Related
      party revenue
                                                                                      
                                                                                      
                                                                                      27,555
                                                                                      
                                                                                      
                                                                                      
                                                                                      10,668
                                                                                      
                                                                                      
                                                                                      
                                                                                      38,223Total
      revenue for reportable segments
                                                                                      
                                                                                      
                                                                                      32,216
                                                                                      
                                                                                      
                                                                                      
                                                                                      21,578
                                                                                      
                                                                                      
                                                                                      
                                                                                      53,794Operating
      expenses (excluding depreciation and amortization)
                                                                                      
                                                                                      
                                                                                      7,958
                                                                                      
                                                                                      
                                                                                      
                                                                                      14,415
                                                                                      
                                                                                      
                                                                                      
                                                                                      22,373Allowance
      for doubtful accounts
                                                                                      
                                                                                      
                                                                                      (817
                                                                                      )
                                                                                      
                                                                                      
                                                                                      (2
                                                                                      )
                                                                                      
                                                                                      
                                                                                      (819)Operating
      margin (excluding depreciation and amortization)
                                                                                      
                                                                                      
                                                                                      25,075
                                                                                      
                                                                                      
                                                                                      
                                                                                      7,165
                                                                                      
                                                                                      
                                                                                      
                                                                                      32,240
                                                                                      (2
                                                                                      )Total
      assets (end of period)
                                                                                      
                                                                                      
                                                                                      246,651
                                                                                      
                                                                                      
                                                                                      
                                                                                      102,462
                                                                                      
                                                                                      
                                                                                      
                                                                                      349,113Nine
      Months Ended September 30, 2007Service
      revenueThird
      party revenue
                                                                                      
                                                                                      $
                                                                                      7,836
                                                                                      
                                                                                      
                                                                                      $
                                                                                      16,011
                                                                                      
                                                                                      
                                                                                      $
                                                                                      23,847Related
      party revenue
                                                                                      
                                                                                      
                                                                                      7,245
                                                                                      
                                                                                      
                                                                                      
                                                                                      13,286
                                                                                      
                                                                                      
                                                                                      
                                                                                      20,531Total
      revenue for reportable segments
                                                                                      
                                                                                      
                                                                                      15,081
                                                                                      
                                                                                      
                                                                                      
                                                                                      29,297
                                                                                      
                                                                                      
                                                                                      
                                                                                      44,378
                                                                                      (1
                                                                                      )Operating
      expenses (excluding depreciation and amortization)
                                                                                      
                                                                                      
                                                                                      1,449
                                                                                      
                                                                                      
                                                                                      
                                                                                      41,880
                                                                                      
                                                                                      
                                                                                      
                                                                                      43,329Operating
      margin (excluding depreciation and amortization)
                                                                                      
                                                                                      
                                                                                      13,632
                                                                                      
                                                                                      
                                                                                      
                                                                                      (12,583
                                                                                      )
                                                                                      
                                                                                      
                                                                                      1,049
                                                                                      (2
                                                                                      )Total
      assets (end of period)
                                                                                      
                                                                                      
                                                                                      63,134
                                                                                      
                                                                                      
                                                                                      
                                                                                      54,182
                                                                                      
                                                                                      
                                                                                      
                                                                                      117,316Nine
      Months Ended September 30, 2008Service
      revenueThird
      party revenue
                                                                                      
                                                                                      $
                                                                                      5,674
                                                                                      
                                                                                      
                                                                                      $
                                                                                      20,548
                                                                                      
                                                                                      
                                                                                      $
                                                                                      26,222Related
      party revenue
                                                                                      
                                                                                      
                                                                                      75,434
                                                                                      
                                                                                      
                                                                                      
                                                                                      47,628
                                                                                      
                                                                                      
                                                                                      
                                                                                      123,062Total
      revenue for reportable segments
                                                                                      
                                                                                      
                                                                                      81,108
                                                                                      
                                                                                      
                                                                                      
                                                                                      68,176
                                                                                      
                                                                                      
                                                                                      
                                                                                      149,284Operating
      expenses (excluding depreciation and amortization)
                                                                                      
                                                                                      
                                                                                      18,928
                                                                                      
                                                                                      
                                                                                      
                                                                                      45,444
                                                                                      
                                                                                      
                                                                                      
                                                                                      64,372Allowance
      for doubtful accounts
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      447
                                                                                      
                                                                                      
                                                                                      
                                                                                      447Operating
      margin (excluding depreciation and amortization)
                                                                                      
                                                                                      
                                                                                      62,180
                                                                                      
                                                                                      
                                                                                      
                                                                                      22,285
                                                                                      
                                                                                      
                                                                                      
                                                                                      84,465
                                                                                      (2
                                                                                      )Total
      assets (end of period)
                                                                                      
                                                                                      
                                                                                      246,651
                                                                                      
                                                                                      
                                                                                      
                                                                                      102,462
                                                                                      
                                                                                      
                                                                                      
                                                                                      349,113
 (1)
      Historically, the Predecessor was a part of the integrated operations of
      the Private Company, and neither the Private Company nor the Predecessor
      recorded revenue associated with the terminalling and storage and
      gathering and transportation services provided on an intercompany basis.
      Accordingly, revenues reflected for all periods prior to the contribution
      of the assets, liabilities and operations to the Partnership by the
      Private Company on July 20, 2007 are substantially services provided
      to third parties.(2)
      The following table reconciles segment operating margin (excluding
      depreciation and amortization) to income (loss) before income
      taxes:


Three
      Months Ended September 30,
                        
                        
                        Nine
      Months Ended September 30,2007
                        
                        
                        2008
                        
                        
                        2007
                        
                        
                        2008(in
      thousands)Operating
      margin (excluding depreciation and amortization)
                        
                        $
                        11,722
                        
                        
                        $
                        32,240
                        
                        
                        $
                        1,049
                        
                        
                        $
                        84,465Depreciation
      and amortization
                        
                        
                        2,394
                        
                        
                        
                        5,814
                        
                        
                        
                        6,781
                        
                        
                        
                        15,586General
      and administrative expenses
                        
                        
                        2,525
                        
                        
                        
                        27,177
                        
                        
                        
                        11,015
                        
                        
                        
                        33,244Interest expense
                        
                        
                        2,424
                        
                        
                        
                        11,041
                        
                        
                        
                        3,369
                        
                        
                        
                        15,905Income
      (loss) before income taxes
                        
                        $
                        4,379
                        
                        
                        $
                        (11,792
                        )
                        
                        $
                        (20,116
                        )
                        
                        $
                        19,730


17
 Table of Contents
 SEMGROUP
ENERGY PARTNERS, L.P.
 NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS


12.
RECENTLY ISSUED ACCOUNTING STANDARDS




In April
2009, the Financial and Accounting Standards Board (FASB) issued FASB Staff
Position (FSP) Statement No. 107-1 and Accounting Principles Board (APB)
28-1 (collectively, FSP FAS 107-1), “Interim Disclosures about Fair Value of
Financial Instruments.”  FSP FAS 107-1 amends FAS 107, “Disclosures about
Fair Value of Financial Instruments,” to require an entity to provide
disclosures about fair value of financial instruments in interim financial
information.  The FSP FAS 107-1 also amends APB Opinion 28, “Interim
Financial Reporting,” to require those disclosures in summarized financial
information at interim reporting periods. Under FSP FAS 107-1, the Partnership
will be required to include disclosures about the fair value of its financial
instruments whenever it issues financial information for interim reporting
periods.  In addition, the Partnership will be required to disclose in the
body or in the accompanying notes of its summarized financial information for
interim reporting periods and in its financial statements for annual reporting
periods the fair value of all financial instruments for which it is practicable
to estimate that value, whether recognized or not recognized in the statement of
financial position.  FSP FAS 107-1 is effective for periods ending after
June 15, 2009. The Partnership is currently evaluating the impact FSP FAS
107-1 may have on our consolidated financial statements.




In
June 2008, the Emerging Issues Task Force (“EITF”) issued Issue
No. 03-6-1, “Determining
Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities“ (“EITF 03-6-1”).  EITF 03-6-1 addresses
whether instruments granted in share-based payment transactions are
participating securities prior to vesting and, therefore, need to be included in
the earnings allocation in computing earnings per share (“EPS”) under the
two-class method.  EITF 03-6-1 will be effective for financial statements
issued for fiscal years beginning after December 15, 2008, and interim
periods within those years.  All prior-period EPS data presented will be
adjusted retrospectively to conform with the provisions of EITF 03-6-1. The
Partnership is evaluating the expected impact of adoption of EITF
03-6-1.




In
April 2008, the Financial Accounting Standards Board (“FASB”) issued FASB
Staff Position (“FSP”) No. FAS 142-3 “Determination of the Useful Life of
Intangible Assets“ (“FSP No. FAS 142-3”).  FSP No. FAS
142-3 amends the factors that should be considered in developing renewal or
extension assumptions used to determine the useful life of a recognized
intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets“ (“SFAS 142”).  The intent of this FSP is to improve the
consistency between the useful life of a recognized intangible asset under
SFAS 142 and the period of expected cash flows used to measure the fair
value of the asset under SFAS No. 141 (revised 2007), “Business Combinations,” and
other GAAP.  This FSP will be effective for financial statements issued for
fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years.  The Partnership is evaluating the expected impact;
however, it believes adoption will not impact the Partnership’s financial
position, results of operations or cash flows.




In
March 2008, the FASB issued SFAS No. 161, “Disclosures about
Derivative Instruments and Hedging Activities-an amendment of FASB Statement No.
133” (“SFAS No. 161”). This Statement requires enhanced disclosures about the
Partnership’s derivative and hedging activities. This statement is effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008. The Partnership will adopt SFAS No. 161 beginning
January 1, 2009. With the adoption of this statement, the Partnership does
not expect any significant impact on its financial position, results of
operations or cash flows.




In March
2008, the Emerging Issues Task Force (“EITF”) of the FASB reached a final
consensus on Issue No. 07-4, “Application of the Two-Class Method under
FASB Statement No. 128, Earnings per Share, to Master Limited Partnerships”
(“Issue No. 07-4”). This conclusion reached by the EITF affects how a
master limited partnership (“MLP”) allocates income between its general partner,
which typically holds incentive distribution rights (“IDRs”) along with the
general partner interest, and the limited partners. It is not uncommon for MLPs
to experience timing differences between the recognition of income and
partnership distributions. The amount of incentive distribution is typically
calculated based on the amount of distributions paid to the MLP’s partners. The
issue is whether current period earnings of an MLP should be allocated to the
holders of IDRs as well as the holders of the general and limited partnership
interests when applying the two-class method under SFAS No. 128, “Earnings Per
Share.”




The
conclusion reached by the EITF in Issue No. 07-4 is that when current
period earnings are in excess of cash distributions, the undistributed earnings
should be allocated to the holders of the general partner interest, the holders
of the limited partner interest and incentive distribution rights holders based
upon the terms of the partnership agreement. Under this model, contractual
limitations on distributions to incentive distribution rights holders would be
considered when determining the amount of earnings to allocate to them. That is,
undistributed earnings would not be considered available cash for purposes of
allocating earnings to incentive distribution rights holders. Conversely, when
cash distributions are in excess of earnings, net income (or loss) should be
reduced (increased) by the distributions made to the holders of the general
partner interest, the holders of the limited partner interest and incentive
distribution rights holders. The resulting net loss would then be allocated to
the holders of the general partner interest and the holders of the limited
partner interest based on their respective sharing of the losses based upon the
terms of the partnership agreement.




Issue
No. 07-4 is effective for fiscal years beginning after December 15,
2008 and interim periods within those fiscal years. The accounting treatment is
effective for all financial statements presented. The Partnership is currently
considering the impact of the adoption of Issue 07-4 on its presentation of
earnings per unit.




In
December 2007, the FASB issued SFAS No. 141(R), “Business
Combinations.”  This statement requires assets acquired and
liabilities assumed to be measured at fair value as of the acquisition date,
acquisition related costs incurred prior to the acquisition to be expensed and
contractual contingencies to be recognized at fair value as of the acquisition
date. This statement is effective for financial statements issued for fiscal
years beginning after December 15, 2008. The Partnership is currently
assessing the impact, if any, the adoption of this statement will have on its
financial position, results of operations or cash flows.


18
 Table of Contents
 SEMGROUP
ENERGY PARTNERS, L.P.
 NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS




13.
EVENTS RELATED TO THE BANKRUPTCY FILINGS AND SUBSEQUENT EVENTS




Due to
the events related to the Bankruptcy Filings described herein, including the
uncertainty relating to future cash flows, the Partnership faces substantial
doubt as to its ability to continue as a going concern.  While it is
not feasible to predict the ultimate outcome of the events surrounding the
Bankruptcy Cases, the Partnership has been and could continue to be materially
and adversely affected by such events and it may be forced to make a bankruptcy
filing or take other action that could have a material adverse effect on its
business, the price of its common units and its results of
operations.




Bankruptcy
Filings




On July
17, 2008, the Partnership issued a press release announcing that the Private
Company was experiencing liquidity issues and was exploring various
alternatives, including raising additional equity, debt capital or the filing of
a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code
to address these issues.  The Partnership filed this press release in
a Current Report on Form 8-K filed with the SEC on July 18, 2008.




On July
22, 2008 and thereafter, the Private Company and certain of its subsidiaries
made the Bankruptcy Filings.  The Private Company and its subsidiaries
continue to operate their businesses and own and manage their properties as
debtors-in-possession under the jurisdiction of the Bankruptcy Court and in
accordance with the applicable provisions of the Bankruptcy Code (the
“Bankruptcy Cases”). None of the Partnership, its general partner, the
subsidiaries of the Partnership nor the subsidiaries of the general partner are
debtors in the Bankruptcy Cases.  However, because of the contractual
relationships with the Private Company and certain of its subsidiaries, the
Bankruptcy Filings have adversely impacted the Partnership and may in the future
impact the Partnership in various ways, including the items discussed
below.  The Partnership’s financial results as of September 30, 2008
also reflect a $0.4 million allowance for doubtful accounts related to amounts
due from third parties as of September 30, 2008.  The allowance
related to amounts due from third parties was established as a result of certain
third party customers netting amounts due them from the Private Company with
amounts due to the Partnership.  Also, due to the change of control of
the Partnership’s general partner related to the Private Company’s liquidity
issues, all outstanding awards under the Plan vested on July 18, 2008, resulting
in an incremental $18.0 million in non-cash compensation expense for the three
months ended September 30, 2008 (see Note 9).  In addition to the
allowance for doubtful accounts and non-cash compensation expense described
above, the results of operations for the three and nine months ended September
30, 2008 included in this quarterly report were affected by the Bankruptcy
Filings and related events, which resulted in decreased revenues and increased
general and administrative expenses as described below under “—Partnership
Revenues,” and “—Other Effects,” respectively.




Board
and Management Composition




On July
9, 2008, Edward F. Kosnik was appointed as an independent member of the
Board.  Mr. Kosnik is the chairman of the compensation committee
and also serves on the audit committee and the conflicts committee of the Board.
Under the provisions of the Plan, Mr. Kosnik was granted an award of 5,000
restricted common units on July 9, 2008. These restricted common units
vested on July 18, 2008 in connection with the change of control of the
Partnership’s general partner described below.




On July
18, 2008, Manchester Securities Corp. (“Manchester”) and Alerian Finance
Partners, LP (“Alerian”), as lenders to SemGroup Holdings, the sole member of
the Partnership’s general partner, exercised certain rights described below
under a Loan Agreement and a Pledge Agreement, each dated June 25, 2008 (the
“Holdings Credit Agreements”), that were triggered by certain events of default
under the Holdings Credit Agreements.  On March 20, 2009, Alerian
transferred its interest in the Holdings Credit Agreements to
Manchester.  The Holdings Credit Agreements are secured by the
subordinated units and incentive distribution rights of the Partnership and the
membership interests in the Partnership’s general partner owned by SemGroup
Holdings.  Manchester has not foreclosed on the subordinated units of
the Partnership owned by SemGroup Holdings or the membership interests in the
Partnership’s general partner.  Manchester may in the future exercise
other remedies available to them under the Holdings Credit Agreement and related
loan documents, including taking action to foreclose on the collateral securing
the loan.  Neither the Partnership nor the Partnership’s general
partner is a party to the Holdings Credit Agreements or the related loan
documents.


19
 Table of Contents
 SEMGROUP
ENERGY PARTNERS, L.P.
 NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS




On July
18, 2008, Manchester and Alerian exercised their right under the Holdings Credit
Agreements to vote the membership interests of the Partnership’s general partner
in order to reconstitute the Board (the “Change of Control”).  Messrs.
Thomas L. Kivisto, Gregory C. Wallace, Kevin L. Foxx, Michael J. Brochetti and
W. Anderson Bishop were removed from the Board.  Mr. Bishop had served
as the chairman of the audit committee and as a member of the conflicts
committee and compensation committee of the Board.  Messrs. Sundar S.
Srinivasan, David N. Bernfeld and Gabriel Hammond (each of whom is affiliated
with Manchester or Alerian) were appointed to the Board.  Mr.
Srinivasan was elected as Chairman of the Board.  Messrs. Brian F.
Billings and Edward F. Kosnik remain as independent directors of the Board and
continue to serve as members of the conflicts committee, audit committee and
compensation committee of the Board.  In addition, Messrs. Foxx and
Alex Stallings resigned the positions each officer held with SemGroup, L.P. in
July 2008.  Mr. Brochetti had previously resigned from his position
with SemGroup, L.P. in March 2008.  Messrs. Foxx, Brochetti and
Stallings remain as officers of the Partnership’s general partner.




On
October 1, 2008, Dave Miller (who is an affiliate of Manchester) and Duke R.
Ligon were appointed members of the Board. Mr. Ligon is an independent member of
the Board and is the chairman of the audit committee and also serves on the
compensation committee and the conflicts committee of the Board. Under the
provisions of the Plan, Mr. Ligon was granted an award of 3,333 restricted
common units and 1,667 restricted subordinated units on December 23, 2008 (see
Note 9). In April 2009, the 1,667 restricted subordinated units granted to Mr.
Ligon were cancelled and replaced with 1,667 restricted common units (see Note
9).  The restricted common units granted to Mr. Ligon vest in
one-third increments over a three-year period.




On
January 9, 2009, Mr. Srinivasan resigned his positions as Chairman of the Board
and as a director.  Mr. Ligon was subsequently elected as Chairman of
the Board.




On March
18, 2009, the Board realigned the officers of the Partnership’s general partner
appointing Michael J. Brochetti as Executive Vice President—Corporate
Development and Treasurer, Alex G. Stallings as Chief Financial Officer and
Secretary, and James R. Griffin as Chief Accounting Officer.  Mr.
Brochetti had previously served as Chief Financial Officer, Mr. Stallings had
previously served as Chief Accounting Officer and Secretary and Mr. Griffin had
previously served as Controller.




Bankruptcy
Court Order




On
September 9, 2008, the Bankruptcy Court entered an order relating to the
settlement of certain matters between the Partnership and the Private Company
(the “Order”) in the Bankruptcy Cases.  Among other things, the Order
provided that (i) the Private Company was to directly pay any utility costs
attributable to the operations of the Private Company at certain shared
facilities, and the Private Company was to pay the Partnership for past utility
cost reimbursements that were due from the Private Company; (ii) commencing
on September 15, 2008, payments under the Terminalling Agreement were netted
against amounts due under the Amended Omnibus Agreement and were made on the
15th day of each month for the prior month (with a three business-day grace
period); (iii) the Private Company provided the Partnership with a letter of
credit in the amount of approximately $4.9 million to secure the Private
Company’s postpetition obligations under the Terminalling Agreement; (iv) the
Private Company was to make payments under the Throughput Agreement for the
month of August on September 15, 2008 (with a three business-day grace period)
based upon the monthly contract minimums in the Throughput Agreement and netted
against amounts due under the Amended Omnibus Agreement; (v) the Private Company
was to make payments under the Throughput Agreement for the months of September
and October on October 15, 2008 (with a three business-day grace period) and
November 15, 2008 (with a three business-day grace period), respectively, or
three business days after amounts due are determined and documentation therefore
was provided and exchanged based upon actual volumes for each such month and at
a rate equal to the average rate charged by the Partnership to third-party
shippers in the same geographical area, with any such amounts netted against
amounts due under the Amended Omnibus Agreement; (vi) the parties were to
reevaluate the Throughput Agreement and the payment terms with respect to
services provided after October 2008; (vii) representatives of the Private
Company and the Partnership were to meet to discuss the transition to the
Partnership of certain of the Private Company’s employees necessary to maintain
the Partnership’s business, and pending agreement between the parties, the
Private Company was to continue to provide services in accordance with the
Amended Omnibus Agreement through at least November 30, 2008; (viii) the Private
Company was to consent to an order relating a third-party storage contract which
provided that the Partnership was the rightful owner of the rights in and to a
certain third-party storage agreement and the corresponding amounts due
thereunder; and (ix) the Partnership was to enter into a specified lease with
the Private Company to permit the Private Company to construct a
pipeline.




20
 Table of Contents
 SEMGROUP
ENERGY PARTNERS, L.P.
 NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS


Settlement
with the Private Company




On March
12, 2009, the Bankruptcy Court held a hearing and approved the transactions
contemplated by a term sheet (the “Settlement Term Sheet”) relating to the
settlement of certain matters between the Private Company and the Partnership
(the “Settlement”).  The Bankruptcy Court entered an order approving
the Settlement upon the terms contained in the Settlement Term Sheet on March
20, 2009.  The Partnership and the Private Company executed definitive
documentation, in the form of a master agreement (the “Master Agreement”), dated
April 7, 2009 to be effective as of 11:59 PM CDT March 31, 2009, and certain
other transaction documents to effectuate the Settlement and that superseded the
Settlement Term Sheet.  The Bankruptcy Court entered an order
approving the Master Agreement and the Settlement on April 7,
2009.  In addition, in connection with the Settlement, the Partnership
and the requisite lenders under the Partnership’s secured credit facility
entered into the Credit Agreement Amendment under which, among other things, the
lenders consented to the Settlement and waived all existing defaults and events
of default described in the Forbearance Agreement and amendments
thereto.




The
Settlement provided for the following:




·
            the
      Partnership transferred certain crude oil storage assets located in Kansas
      and northern Oklahoma to the Private
Company;





·
            the
      Private Company transferred ownership of 355,000 barrels of crude oil tank
      bottoms and line fill to the
Partnership;





·
            the
      Private Company rejected the Throughput
  Agreement;





·
            the
      Partnership and one of its subsidiaries have a $20 million unsecured claim
      against the Private Company and certain of its subsidiaries relating to
      rejection of the Throughput
Agreement;





·
            the
      Partnership and the Private Company entered into the New Throughput
      Agreement (as defined below) pursuant to which the Partnership provides
      certain crude oil gathering, transportation, terminalling and storage
      services to the Private Company;





·
            the
      Partnership offered employment to certain crude oil
    employees;





·
            the
      Private Company transferred its asphalt assets that are connected to the
      Partnership’s asphalt assets to the
Partnership;





·
            the
      Private Company rejected the Terminalling
  Agreement;





·
            a
      subsidiary of the Partnership has a $35 million unsecured claim against
      the Private Company and certain of its subsidiaries relating to rejection
      of the Terminalling Agreement;





·
            the
      Partnership and the Private Company entered into the New Terminalling
      Agreement (as defined below) pursuant to which the Partnership provides
      liquid asphalt cement terminalling and storage services for the Private
      Company’s remaining asphalt
inventory;





·
            the
      Private Company agreed to remove all of its remaining asphalt inventory
      from the Partnership’s asphalt storage facilities no later than October
      31, 2009;





·
            the
      Private Company will be entitled to receive 20% of the proceeds of any
      sale by the Partnership of any of the asphalt assets transferred to the
      Partnership in connection with the Settlement that occurs prior to
      December 31, 2009;





·
            the
      Private Company rejected the Amended Omnibus
  Agreement;





·
            the
      Partnership and the Private Company entered into the Shared Services
      Agreement (as defined below) pursuant to which the Private Company
      provides certain operational services for the
  Partnership;





·
            other
      than as provided above, the Partnership and the Private Company entered
      into mutual releases of claims relating to the rejection of the
      Terminalling Agreement, the Throughput Agreement and the Amended Omnibus
      Agreement;





·
            certain
      pre-petition claims by the Private Company and the Partnership were netted
      and waived;





·
            the
      Private Company and the Partnership resolved certain remaining issues
      related to the contribution of crude oil assets to the Partnership in
      connection with the Partnership’s initial public offering, the
      Partnership’s acquisition of the Acquired Asphalt Assets, the
      Partnership’s acquisition of the Acquired Pipeline Assets and the
      Partnership’s acquisition of the Acquired Storage Assets, including the
      release of claims relating to such acquisitions;
  and





·
            the
      Partnership and the Private Company entered into the Trademark Agreement
      (as defined below) which provides the Partnership with a non-exclusive,
      worldwide license to use certain trade names, including the name
      “SemGroup”, and the corresponding mark until December 31, 2009, and the
      Private Company waived claims for infringement relating to such trade
      names and mark prior to the date of such license
  agreement.





Management
is currently evaluating the accounting for the Settlement, and is obtaining
independent valuations of the assets transferred.  Certain terms of
transaction documents relating to the Settlement are discussed in more detail
below.





21
 Table of Contents
 SEMGROUP
ENERGY PARTNERS, L.P.
 NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS


Shared
Services Agreement





In
connection with the Settlement, the Partnership entered into a Shared Services
Agreement, dated April 7, 2009 to be effective as of 11:59 PM CDT March 31, 2009
(the “Shared Services Agreement”), with the Private Company.  Pursuant
to the Shared Services Agreement, the Private Company will provide certain
general shared services, Cushing shared services (as described below), and SCADA
services (as described below) to the Partnership.





The
general shared services include crude oil movement services, Department of
Transportation services, right-of-way services, environmental services, pipeline
and civil structural maintenance services, safety services, pipeline truck
station maintenance services, project support services and truck dispatch
services.  The fees for such general shared services are fixed at
$125,000 for the month of April 2009 and such fixed fee may be extended by
mutual agreement of the parties for one additional month.  Thereafter
the fees will be calculated in accordance with the formulas contained
therein.  The Private Company has agreed to provide the general shared
services for three years (subject to earlier termination as provided therein)
and the term may be extended an additional year by mutual agreement of the
parties.





The
Cushing shared services include operational and maintenance services related to
terminals at Cushing, Oklahoma.  The fees for such Cushing shared
services are fixed at $20,000 for the month of April 2009 and such fixed
fee may be extended by mutual agreement of the parties for one additional
month.  Thereafter the fees will be calculated in accordance with the
formulas contained therein.  The Private Company has agreed to provide
the Cushing shared services for three years (subject to earlier termination as
provided therein) and the term may be extended an additional year by mutual
agreement of the parties.





The SCADA
services include services related to the operation of the SCADA system which is
used in connection with the Partnership’s crude oil operations.  The
fees for such SCADA services are fixed at $15,000 for the month of April
2009 and such fixed fee may be extended by mutual agreement of the parties for
one additional month.  Thereafter the fees will be calculated in
accordance with the formulas contained therein.  The Private Company
has agreed to provide the SCADA services for five years (subject to earlier
termination as provided therein) and the Partnership may elect to extend the
term for two subsequent five year periods.





Transition
Services Agreement





In
connection with the Settlement, the Partnership entered into a Transition
Services Agreement, dated April 7, 2009 to be effective as of 11:59 PM CDT March
31, 2009 (the “Transition Services Agreement”), with the Private
Company.  Pursuant to the Transition Services Agreement, the Private
Company will provide certain corporate, crude oil and asphalt transition
services, in each case for a limited amount of time, to the
Partnership.





Transfer
of Crude Oil Assets





In
connection with the Settlement, the Partnership transferred certain crude oil
assets located in Kansas and northern Oklahoma to the Private
Company.  These transfers included real property and associated
personal property at locations where the Private Company owned the
pipeline.  The Partnership retained certain access and connection
rights to enable it to continue to operate its crude oil trucking business in
such areas.  In addition, the Partnership transferred its interests in
the SCADA System, a crude oil inventory tracking system, to the Private
Company.





In
addition, the Private Company transferred to the Partnership (i) 355,000 barrels
of crude oil line fill and tank bottoms, which are necessary for the Partnership
to operate its crude oil tank storage operations and its Oklahoma and Texas
crude oil pipeline systems, (ii) certain personal property located in Oklahoma,
Texas and Kansas used in connection with the Partnership’s crude oil trucking
business and (iii) certain real property located in Oklahoma, Kansas, Texas and
New Mexico that was intended to be transferred in connection with the
Partnership’s initial public offering.





Transfer
of Asphalt Assets





In
connection with the Settlement, the Private Company transferred certain asphalt
processing assets that were connected to, adjacent to, or otherwise
contiguous with the Partnership’s existing asphalt facilities and associated
real property interests to the Partnership.  The transfer of the
Private Company’s asphalt assets in connection with the Settlement provides the
Partnership with outbound logistics for its existing asphalt assets and,
therefore, allows it to provide asphalt terminalling and storage services to
third parties.





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New
Throughput Agreement





In
connection with the Settlement, the Partnership and the Private Company entered
into a Throughput Agreement, dated as of April 7, 2009 to be effective as of
11:59 PM CDT March 31, 2009 (the “New Throughput Agreement”), pursuant to which
the Partnership provides certain crude oil gathering, transportation,
terminalling and storage services to the Private Company.





Under the
New Throughput Agreement, the Partnership charges the following fees: (i)
barrels gathered via gathering lines will be charged a gathering rate of $0.75
per barrel, (ii) barrels transported within Oklahoma will be charged $1.00 per
barrel while barrels transported on the Masterson Mainline will be charged $0.55
per barrel, (iii) barrels transported by truck will be charged in accordance
with the schedule contained therein, including a fuel surcharge, (iv) storage
fees shall equal $0.50 per barrel per month for product located in storage tanks
located in Cushing, Oklahoma and $0.44 per barrel per month for product not
located in dedicated Cushing storage tanks, and (v) a delivery charge of $0.08
per barrel will be charged for deliveries out of the Cushing Interchange
Terminal. The New Throughput Agreement has an initial term of one year with
additional automatic one-month renewals unless either party terminates the
agreement upon thirty-days prior notice.





New
Terminalling and Storage Agreement





In
connection with the Settlement, the Partnership and the Private Company entered
into a Terminalling and Storage Agreement, dated as of April 7, 2009 to be
effective as of 11:59 PM CDT March 31, 2009 (the “New Terminalling Agreement”),
pursuant to which the Partnership provides certain asphalt terminalling and
storage services for the remaining asphalt inventory of the Private
Company.  Storage services under the New Terminalling Agreement are
equal to $0.565 per barrel per month multiplied by the total shell capacity in
barrels for each storage tank where the Private Company and its affiliates have
product; provided that if the Private Company removes all product from a storage
tank prior to the end of the month, then the storage service fees shall be
pro-rated for such month based on the number of calendar days storage was
actually used.  Throughput fees under the New Terminalling Agreement
are equal to $9.25 per ton; provided that no fees are payable for transfers of
product between storage tanks located at the same or different
terminals.  The New Terminalling Agreement has an initial term that
expires on October 31, 2009, which may be extended for one month by mutual
agreement of the parties.





New
Access and Use Agreement





In
connection with the Settlement, the Partnership and the Private Company entered
into an Access and Use Agreement, dated as of April 7, 2009 to be effective as
of 11:59 PM CDT March 31, 2009 (the “New Access and Use Agreement”), pursuant to
which the Partnership will allow the Private Company access rights to the
Partnership’s asphalt facilities relating to its existing asphalt
inventory.  The term of the Access and Use Agreement will end
separately for each terminal upon the earlier of October 31, 2009 or until all
of the existing asphalt inventory of the Private Company is removed from such
terminal.





Trademark
Agreement





In
connection with the Settlement, the Private Company and the Partnership entered
into a Trademark License Agreement, dated as of April 7, 2009 to be effective as
of 11:59 PM CDT March 31, 2009 (the “Trademark Agreement”), pursuant to which
the Private Company granted the Partnership a non-exclusive, worldwide license
to use certain trade names, including the name “SemGroup”, and the corresponding
mark until December 31, 2009, and the Private Company waived claims for
infringement relating to such trade names and mark prior to the effective date
of the Trademark Agreement.





Building
and Office Leases





In
connection with the Settlement, the Partnership leased office space in Oklahoma
City, Oklahoma and certain facilities in Cushing, Oklahoma to the Private
Company.  The terms for the leases expire on March 31,
2014.  The rents for such leases are as described in the exhibits
thereto.





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Easements





In
connection with the Settlement, the Partnership and the Private Company granted
mutual easements relating to access, facility improvements, existing and future
pipeline rights and corresponding rights of ingress and egress for properties
owned by the parties at Cushing, Oklahoma.  In addition, the
Partnership granted the Private Company certain pipeline easements at Cushing,
Oklahoma, together with the corresponding rights of ingress and
egress.




Partnership
Revenues




For the
nine months ended September 30, 2008 and the year ended December 31, 2008, the
Partnership derived approximately 81% and approximately 73%, respectively, of
its revenues, excluding fuel surcharge revenues related to fuel and power
consumed to operate its liquid asphalt cement storage tanks, from services it
provided to the Private Company and its subsidiaries.  Prior to the
Order and the Settlement, the Private Company was obligated to pay the
Partnership minimum monthly fees totaling $76.1 million annually and $58.9
million annually in respect of the minimum commitments under the Throughput
Agreement and the Terminalling Agreement, respectively, regardless of whether
such services were actually utilized by the Private Company.  As
described above, the Order required the Private Company to make certain payments
under the Throughput Agreement and Terminalling Agreement during a portion of
the third quarter of 2008, including the contractual minimum payments under the
Terminalling Agreement.  In connection with the Settlement, the
Partnership waived the fees due under the Terminalling Agreement during March
2009.  In addition, the Private Company rejected the Throughput
Agreement and the Terminalling Agreement and the Partnership and the Private
Company entered into the New Throughput Agreement and the New Terminalling
Agreement.  The Partnership expects revenues from services provided to
the Private Company under the New Throughput Agreement and New Terminalling
Agreement to be substantially less than prior revenues from services provided to
the Private Company as the new agreements are based upon actual volumes
gathered, transported, terminalled and stored instead of certain minimum volumes
and are at reduced rates when compared to the Throughput Agreement and
Terminalling Agreement.




The
Partnership has been pursuing opportunities to provide crude oil terminalling
and storage services and crude oil gathering and transportation services to
third parties.  As a result of new crude oil third-party storage
contracts, the Partnership increased its third-party terminalling and storage
revenue (excluding fuel surcharge revenues related to fuel and power consumed to
operate its liquid asphalt cement storage tanks) from approximately $1.0
million, or approximately 4% of total terminalling and storage
revenue during the second quarter of 2008, to approximately $4.6 million
and $8.4 million, or approximately 17% and 34% of total terminalling and storage
revenue for the third quarter of 2008 and the fourth quarter of 2008,
respectively.




In
addition, as a result of new third-party crude oil transportation contracts and
reduced commitments of usage by the Private Company under the Throughput
Agreement, the Partnership increased its third-party gathering and
transportation revenue from approximately $5.0 million, or approximately 21% of
total gathering and transportation revenue during the second quarter of 2008, to
approximately $10.9 million and $13.6 million, or approximately 51% and 85% of
total gathering and transportation revenue for the third quarter of 2008
and the fourth quarter of 2008, respectively.





The
significant majority of the increase in third party revenues results from an
increase in third-party crude oil services provided and a corresponding decrease
in the Private Company’s crude oil services provided due to the termination of
the monthly contract minimum revenues under the Throughput Agreement in
September 2008.  Average rates for the new third-party crude oil
terminalling and storage and transportation and gathering contracts are
comparable with those previously received from the Private
Company.  However, the volumes being terminalled, stored, transported
and gathered have decreased as compared to periods prior to the Bankruptcy
Filings, which has negatively impacted total revenues.  As an example,
fourth quarter 2008 total revenues are approximately $8.2 million less than
third quarter 2008 total revenues, in each case excluding fuel surcharge
revenues related to fuel and power consumed to operate its liquid
asphalt cement storage tanks.




In addition,
the Partnership has recently entered into leases and storage agreements with
third parties relating to 39 of its 46 asphalt
facilities.


The
Partnership has entered into various crude oil transportation and storage
contracts with third parties and is continuing to pursue additional contracts
with third parties; however, there can be no assurance that any of these
additional efforts will be successful.  In addition, certain third
parties may be less likely to enter into business transactions with the
Partnership due to the Bankruptcy Filings.  The Private Company may
also choose to curtail its operations or liquidate its assets as part of the
Bankruptcy Cases.  As a result, unless the Partnership is able to
generate additional third party revenues, the Partnership will continue to
experience lower volumes in its system which could have a material adverse
effect on its results of operations and cash flows.




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Asphalt
Operations




Historically,
the Partnership provided liquid asphalt cement terminalling and storage services
to the Private Company pursuant to the Terminalling Agreement.  In
connection with the Settlement, the Private Company rejected the Terminalling
Agreement and the Partnership and the Private Company entered into the New
Terminalling Agreement whereby the Partnership provides liquid asphalt cement
terminalling and storage services to the Private Company in connection with its
remaining asphalt inventory.  The New Terminalling Agreement has an
initial term that ends on October 31, 2009 and the Private Company has agreed to
remove all of its existing asphalt inventory no later than such date, and the
Partnership expects that the Private Company may remove it much earlier than
such date.  Also in connection with the Settlement, the Private
Company transferred certain asphalt assets to the Partnership that were
connected to the Partnership’s existing asphalt assets.  The transfer
of the Private Company’s asphalt assets in connection with the Settlement
provides the Partnership with outbound logistics for its existing asphalt assets
and, therefore, allows it to provide asphalt terminalling and storage services
to third parties.




The
asphalt industry in the United States is characterized by a high degree of
seasonality. Much of this seasonality is due to the impact that weather
conditions have on road construction schedules, particularly in cold weather
states. Refineries produce liquid asphalt cement year round, but the peak
asphalt demand season is during the warm weather months when most of the road
construction activity in the United States takes place. As a result, liquid
asphalt cement is typically purchased from refineries at low prices in the low
demand winter months and then processed and sold at higher prices in the peak
summer demand season.  Any significant decrease in the amount of
revenues that the Partnership receives from its liquid asphalt cement
terminalling and storage operations could have a material adverse effect on the
Partnership’s cash flows, financial condition and results of
operations.




The Partnership has
recently entered into leases and storage agreements with third parties relating
to 39 of its 46 asphalt
facilities.
  The
revenues that the Partnership will receive pursuant to these leases and storage
agreements will be less than the revenues received under the Terminalling
Agreement with the Private Company.  Without sufficient revenues from its
asphalt assets, the Partnership may be unable to meet the covenants, including
the minimum liquidity, minimum EBITDA and minimum receipt requirements, under
its credit agreement.


Operation
and General Administration of the Partnership




As is the
case with many publicly traded partnerships, the Partnership has not
historically directly employed any persons responsible for managing or operating
the Partnership or for providing services relating to day-to-day business
affairs.  Pursuant to the Amended Omnibus Agreement, the Private
Company operated the Partnership’s assets and performed other administrative
services for the Partnership such as accounting, legal, regulatory, development,
finance, land and engineering.  The events related to the Bankruptcy
Filings terminated the Private Company’s obligations to provide services to the
Partnership under the Amended Omnibus Agreement.  The Private Company
continued to provide such services to the Partnership until the effective date
of the Settlement at which time the Private Company rejected the Amended Omnibus
Agreement and the Private Company and the Partnership entered into the Shared
Services Agreement and the Transition Services Agreement relating to the
provision of such services.  In addition, in connection with the
Settlement, the Partnership made offers of employment to certain individuals
associated with its crude oil operations and expects to make additional offers
of employment to certain individuals associated with its asphalt
operations.  The costs to directly employ these individuals as well as
the costs under the Shared Services Agreement and the Transition Services
Agreement may be higher than those previously paid by the Partnership under the
Amended Omnibus Agreement, which could have a material adverse effect on the
Partnership’s business, financial condition, results of operations, cash flows,
ability to make distributions to its unitholders, the trading price of its
common units and its ability to conduct its business.




In
addition, in connection with the Settlement, the Partnership agreed to not
solicit the Private Company’s employees for a year from the time of the
Settlement.  In connection with the Bankruptcy Cases, the Private
Company may reduce a substantial number of its employees or some of the Private
Company’s employees may choose to terminate their employment with the Private
Company, some of whom may currently be providing general and administrative and
operating services to the Partnership under the Shared Services Agreement or the
Transition Services Agreement.  Any reductions in critical personnel
who provide services to the Partnership and any increased costs to replace such
personnel could have a material adverse effect on the Partnership’s ability to
conduct its business and its results of operations.




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Intellectual
Property Rights




Pursuant
to the Amended Omnibus Agreement, the Partnership licensed the use of certain
trade names and marks, including the name “SemGroup.”  This license
terminated automatically upon the Change of Control.  In connection
with the Settlement, the Private Company and the Partnership entered into the
Trademark Agreement, pursuant to which the Private Company granted the
Partnership a non-exclusive, worldwide license to use certain trade names,
including the name “SemGroup” and the corresponding mark, until December 31,
2009, and the Private Company waived claims for infringement relating to such
trade names and mark prior to the effective date of such Trademark
Agreement (see “—Settlement with the Private Company”).  As such, the
Partnership will be required to change its name and trademark upon or prior to
the expiration of the Trademark Agreement.  The expenses associated
with such a change may be significant, which could have a material adverse
effect on the Partnership’s business, financial condition, results of
operations, cash flows, ability to make distributions to its unitholders, the
trading price of its common units and its ability to conduct its
business.




Credit
Facility




As
described in Note 4, in connection with the events related to the Bankruptcy
Filings, events of default occurred under the Partnership’s credit
agreement.  On September 18, 2008, the Partnership and the requisite
lenders under its credit facility entered into the Forbearance Agreement
relating to such events of default.   On April 7, 2009, the
Partnership and the requisite lenders entered into the Credit Agreement
Amendment, under which the lenders consented to the Settlement and waived all
existing defaults and events of default described in the Forbearance Agreement
and amendments thereto.  See Note 4 for more information regarding the
Partnership’s credit facility, the Forbearance Agreement and the Credit
Agreement Amendment.




Distributions
to Unitholders





The
Partnership did not make a distribution to its common unitholders, subordinated
unitholders or general partner attributable to the results of operations for the
quarters ended June 30, 2008, September 30, 2008, December 31, 2008 or March 31,
2009 due to the events of default under its credit agreement and the uncertainty
of its future cash flows relating to the Bankruptcy Filings.  The
Partnership’s unitholders will be required to pay taxes on their share of the
Partnership’s taxable income even though they did not receive a cash
distribution for such periods.  In addition, the Partnership does not
currently expect to make a distribution relating to the second quarter of
2009.  The Partnership distributed approximately $14.3 million to its
unitholders for the three months ended March 31, 2008.  Pursuant to
the Credit Agreement Amendment, the Partnership is prohibited from making
distributions to its unitholders if its leverage ratio (as defined in the credit
agreement) exceeds 3.50 to 1.00.  As of September 30, 2008 and
December 31, 2008, the Partnership’s leverage ratio was 4.34 to 1.00 and 4.83 to
1.00, respectively. If the Partnership’s leverage ratio does not improve,
it may not make quarterly distributions to its unitholders in the
future.





The
Partnership’s partnership agreement provides that, during the subordination
period, which the Partnership is currently in, the Partnership’s common units
will have the right to receive distributions of available cash from operating
surplus in an amount equal to the minimum quarterly distribution of $0.3125 per
common unit per quarter, plus any arrearages in the payment of the minimum
quarterly distribution on the common units from prior quarters, before any
distributions of available cash from operating surplus may be made on the
subordinated units.





Nasdaq
Delisting




Effective
at the opening of business on February 20, 2009, the Partnership’s common units
were delisted from the Nasdaq Global Market (“Nasdaq”) due to the Partnership’s
failure to timely file this Quarterly Report as well as its Quarterly Report on
Form 10-Q for the quarter ended June 30, 2008.  The Partnership filed
its Quarterly Report on Form 10-Q for the quarter ended June 30, 2008 on March
23, 2009.  The Partnership’s common units are currently traded on the
Pink Sheets, which is an over-the-counter securities market, under the symbol
SGLP.PK.  The fact that the Partnership’s common units are not listed
on a national securities exchange is likely to make trading such common units
more difficult for broker-dealers, unitholders and investors, potentially
leading to further declines in the price of the common units.  In
addition, it may limit the number of institutional and other investors that will
consider investing in the Partnership’s common units, which may have an adverse
effect on the price of its common units.  It may also make it more
difficult for the Partnership to raise capital in the future.




The
Partnership continues to work to become compliant with its SEC reporting
obligations and intends to promptly seek the relisting of its common units on
Nasdaq as soon as practicable after it has become compliant with such reporting
obligations.  However, there can be no assurances that the Partnership
will be able to relist its common units on Nasdaq or any other national
securities exchange and the Partnership may face a lengthy process to relist its
common units if it is able to relist them at all.




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ENERGY PARTNERS, L.P.
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Claims
Against and By the Private Company’s Bankruptcy Estate




In
connection with the Settlement, the Partnership and the Private Company entered
into mutual releases regarding certain claims.  In addition, the
Settlement provided that the Partnership has a $35 million unsecured claim
against the Private Company relating to the rejection of the Terminalling
Agreement and a $20 million unsecured claim against the Private Company relating
to rejection of the Throughput Agreement.  On May
15, 2009, the Private Company filed a joint plan of
reorganization.  If such plan is confirmed without material amendment,
the Partnership’s claims will be impaired.  The Partnership may
also have additional claims against the Private Company that were not released
in connection with the Settlement, and the Private Company may also have
additional claims against the Partnership that were not released in connection
with the Settlement.  Any claims asserted by the Partnership against
the Private Company in the Bankruptcy Cases will be subject to the claim
allowance procedure provided in the Bankruptcy Code and Bankruptcy
Rules.  If an objection is filed, the Bankruptcy Court will determine
the extent to which any such claim that has been objected to is allowed and the
priority of such claims.




Governmental
Investigations




On July
21, 2008, the Partnership received a letter from the staff of the SEC giving
notice that the SEC is conducting an inquiry relating to the Partnership and
requesting, among other things, that the Partnership voluntarily preserve,
retain and produce to the SEC certain documents and information relating
primarily to the Partnership’s disclosures respecting the Private Company’s
liquidity issues, which were the subject of the Partnership’s July 17, 2008
press release.  On October 22, 2008, the Partnership received a
subpoena from the SEC pursuant to a formal order of investigation requesting
certain documents relating to, among other things, the Private Company’s
liquidity issues.  The Partnership has been cooperating, and intends
to continue cooperating, with the SEC in its investigation.




On July
23, 2008, the Partnership and its general partner each received a Grand Jury
subpoena from the United States Attorney’s Office in Oklahoma City, Oklahoma,
requiring, among other things, that the Partnership and its general partner
produce financial and other records related to the Partnership’s July 17, 2008
press release.  The Partnership has been informed that the U.S.
Attorneys’ Offices for the Western District of Oklahoma and the Northern
District of Oklahoma are in discussions regarding the subpoenas, and no date has
been set for a response to the subpoenas.  The Partnership and its
general partner intend to cooperate fully with this investigation if and when it
proceeds.




Securities
and Other Litigation




Between
July 21, 2008 and September 4, 2008, the following class action complaints were
filed:




1.     Poelman v. SemGroup Energy
Partners, L.P., et al., Civil Action No. 08-CV-6477, in the United States
District Court for the Southern District of New York (filed July 21,
2008).  The plaintiff voluntarily dismissed this case on August 26,
2008;




2.     Carson v. SemGroup Energy Partners,
L.P. et al.,
Civil Action No. 08-cv-425, in the Northern District of Oklahoma (filed July 22,
2008);




3.      Charles D. Maurer SIMP Profit
Sharing Plan f/b/o Charles D. Maurer v. SemGroup Energy Partners, L.P. et
al., Civil Action No. 08-cv-6598, in the United States District Court for
the Southern District of New York (filed July 25, 2008);




4.     Michael Rubin v. SemGroup Energy
Partners, L.P. et al., Civil Action No. 08-cv-7063, in the United States
District Court for the Southern District of New York (filed August 8,
2008);




5.     Dharam V. Jain v. SemGroup Energy
Partners, L.P. et al., Civil Action No. 08-cv-7510, in the United States
District Court for the Southern District of New York  (filed August 25,
2008); and




6.     William L. Hickman v. SemGroup
Energy Partners, L.P. et al., Civil Action No. 08-cv-7749, in the United
States District Court for the Southern District of New York (filed September 4,
2008).














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ENERGY PARTNERS, L.P.
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Pursuant
to a motion filed with the United States Judicial Panel on Multidistrict
Litigation (“MDL Panel”), theMaurer case has been transferred to the Northern District of Oklahoma and
consolidated with theCarson case.  TheRubin, Jain, andHickman cases have also been transferred to the Northern District of
Oklahoma.




A hearing
on motions for appointment as lead plaintiff was held in theCarson case on October 17,
2008.  At that hearing, the court granted a motion to consolidate the Carson and Maurer cases for pretrial
proceedings, and the consolidated litigation is now pending asIn Re: SemGroup Energy Partners,
L.P. Securities Litigation, Case No. 08-CV-425-GKF-PJC. The court entered
an order on October 27, 2008, granting the motion of Harvest Fund Advisors LLC
to be appointed lead plaintiff in the consolidated litigation.  On
January 23, 2009, the court entered a Scheduling Order providing, among other
things, that the lead plaintiff may file a consolidated amended complaint within
70 days of the date of the order, and that defendants may answer or otherwise
respond within 60 days of the date of the filing of a consolidated amended
complaint.  On
January 30, 2009 the lead plaintiff filed a motion to modify the stay of
discovery provided for under the Private Securities Litigation Reform Act. The
court granted Plaintiff's motion, and the Partnership and certain other
defendants filed a Petition for Writ of Mandamus in the Tenth Circuit Court of
Appeals that was denied after oral argument on April 24,
2009.




The lead
plaintiff obtained an extension to file its consolidated amended complaint until
May 4, 2009; defendants have 60 days from that date to answer or otherwise
respond to the complaint.




The lead
plaintiff filed a consolidated amended complaint on May 4, 2009.  In
that complaint, filed as a putative class action on behalf of all purchasers of
the Partnership’s units from July 17, 2007 to July 17, 2008 (the “class
period”), lead plaintiff asserts claims under the federal securities laws
against the Partnership, its general partner, certain of the Partnership’s
current and former officers and directors, certain underwriters in the
Partnership’s initial and secondary public offerings, and certain entities who
were investors in the Private Company and their individual representatives who
served on the Private Company’s management committee. Among other allegations,
the amended complaint alleges that the Partnership’s financial condition
throughout the class period was dependent upon speculative commodities trading
by the Private Company and its Chief Executive Officer, Thomas L. Kivisto, and
that Defendants negligently and intentionally failed to disclose this
speculative trading in the Partnership’s public filings during the class period.
Specifically, the amended complaint alleges claims for violations of sections
11, 12(a)(2), and 15 of the Securities Act of 1933 for damages and rescission
with respect to all persons who purchased the Partnership’s units in the initial
and secondary offerings, and also asserts claims under section 10b, Rule 10b-5,
and section 20(a) of the Securities and Exchange Act of 1934. The amended
complaint seeks certification as a class action under the Federal Rules of Civil
Procedure, compensatory and rescissory damages for class members, pre-judgment
interest, costs of court, and attorneys’ fees.





The
Partnership intends to vigorously defend these actions.  There can be
no assurance regarding the outcome of the litigation.  An estimate of
possible loss, if any, or the range of loss cannot be made and therefore the
Partnership has not accrued a loss contingency related to these actions.
However, the ultimate resolution of these actions could have a material adverse
effect on the Partnership’s business, financial condition, results of
operations, cash flows, ability to make distributions to its unitholders, the
trading price of the Partnership’s common units and its ability to conduct its
business.




In March
and April 2009, nine current or former executives of the Private Company and
certain of its affiliates filed wage claims with the Oklahoma Department of
Labor against the Partnership’s general partner.  Their claims arise
from the Partnership’s general partner’s Long-Term Incentive Plan, Employee
Phantom Unit Agreement (“Phantom Unit
Agreement”).  Most claimants allege that phantom units previously
awarded to them vested upon the Change of Control that occurred in July
2008.  One claimant alleges that his phantom units vested upon his
termination.  The claimants contend the Partnership’s general
partner’s failure to deliver certificates for the phantom units within 60 days
after vesting has caused them to be damaged, and they seek recovery of
approximately $2 million in damages and penalties.  On April
30, 2009, all of the wage claims were dismissed on jurisdictional grounds by the
Department of Labor.The Partnership’s general partner intends to
vigorously defend these claims.




The
Partnership may become the subject of additional private or government actions
regarding these matters in the future.  Litigation may be
time-consuming, expensive and disruptive to normal business operations, and the
outcome of litigation is difficult to predict.  The defense of these
lawsuits may result in the incurrence of significant legal expense, both
directly and as the result of the Partnership’s indemnification
obligations.  The litigation may also divert management’s attention
from the Partnership’s operations which may cause its business to
suffer.  An unfavorable outcome in any of these matters may have a
material adverse effect on the Partnership’s business, financial condition,
results of operations, cash flows, ability to make distributions to its
unitholders, the trading price of the Partnership’s common units and its ability
to conduct its business. All or a portion of the defense costs and any amount
the Partnership may be required to pay to satisfy a judgment or settlement of
these claims may not be covered by insurance.




28
 SEMGROUP
ENERGY PARTNERS, L.P.
 NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS


Examiner




On August
12, 2008, a motion was filed by the United States Trustee asking the Bankruptcy
Court to appoint an examiner to investigate the Private Company’s trading
strategies as well as certain “insider transactions,” including the contribution
of the crude oil assets to the Partnership in connection with its initial public
offering, the sale of the Acquired Asphalt Assets to the Partnership, the sale
of the Acquired Pipeline Assets to the Partnership, the sale of the Acquired
Storage Assets to the Partnership, and the entering into the Holdings Credit
Agreements by SemGroup Holdings.  On September 10, 2008, the
Bankruptcy Court approved the appointment of an examiner, and on October 14,
2008, the United States Trustee appointed Louis J. Freeh, former director of the
Federal Bureau of Investigation, as the examiner.  On April
15, 2009, the examiner filed a report summarizing the findings of his
investigation with the Bankruptcy Court (the “Examiner’s Report”).  The examiner
was directed by the Bankruptcy Court to (i) investigate the circumstances
surrounding the Private Company’s trading strategy, the transfer of the New York
Mercantile Exchange account, certain insider transactions, the formation of the
Partnership, the potential improper use of borrowed funds and funds generated
from the Private Company’s operations and the liquidation of their assets to
satisfy margin calls related to the trading strategy for the Private Company and
certain entities owned or controlled by the Private Company’s officers and
directors and (ii) determine whether any directors, officers or employees of the
Private Company participated in fraud, dishonesty, incompetence, misconduct,
mismanagement, or irregularity in the management of the affairs of the Private
Company and whether the Private Company’s estates have causes of action against
such persons arising from any such participation.
  The
Examiner’s Report identified potential claims or causes of action against
current officers of the Partnership’s general partner who were former officers
of the Private Company, including, without limitation, (i)against Kevin L. Foxx
for his failure to develop a suitable risk management policy or integrate a
suitable risk management policy into the Private Company’s business controls,
and for his failure to comply with the risk management policy that did exist,
thereby subjecting the Private Company to increased risk and (ii) against Alex
Stallings for his failure to stop Thomas L. Kivisto from engaging in trading
activity on his own behalf through Westback Purchasing Company, L.L.C., a
limited liability trading partnership which Mr. Kivisto owned and controlled,
thereby subjecting the Private Company to increased risk and
losses.  In
addition, the Examiner’s Report criticized Mr. Foxx for certain conflicts of
interest with entities that he or his family invested in and which had a
business relationship with the Private Company.  Additionally, the
Examiner’s Report identified a number of potential claims or causes of action
against Mr. Kivisto and Gregory C. Wallace, who are former directors of the
Partnership’s general partner and former officers of the Private Company,
including, without limitation, for negligence and mismanagement, fraud and false
statements, conversion and corporate waste, unjust enrichment, breach of
fiduciary duties and breach of contract.
  The
Examiner’s Report and related exhibits are publicly available at
www.kccllc.net/SemGroup.




Internal
Review




As
previously announced, in July 2008 the Board created an internal review
subcommittee of the Board comprised of directors who are independent of
management and the Private Company to determine whether the Partnership
participates in businesses other than as described in its filings with the SEC
and to conduct investigations into other such specific items as are deemed to be
appropriate by the subcommittee.  The subcommittee retained
independent legal counsel to assist it in its investigations.




The
subcommittee has investigated a short-term financing transaction involving two
subsidiaries of the Private Company.  This transaction was identified
as a potential source of concern in a whistleblower report made after the
Private Company filed for bankruptcy.  Although the transaction did
not involve the Partnership or its subsidiaries, it was investigated because it
did involve certain senior executive officers of the Partnership’s general
partner who were also senior executive officers of the Private Company at the
time of the transaction.  Based upon its investigation, counsel for
the subcommittee found that, subject to the subcommittee’s lack of access to
Private Company documents and electronic records and witnesses, although certain
irregularities occurred in the transactions, the transaction did not appear to
cause the relevant officers to understand or believe that the Private Company
had a lack of liquidity that imperiled the Private Company’s ability to meet its
obligations to the Partnership and that certain aspects of the documentation of
the transaction that were out of the ordinary did not call into question the
integrity of any of the relevant officers.




The
subcommittee also investigated whether certain senior executive officers of the
Partnership’s general partner who were also senior executive officers of the
Private Company knew and understood, beginning as early as July 2007 and at
various times thereafter, about a lack of liquidity at the Private Company that
imperiled the Private Company’s ability to meet its obligations to the
Partnership.  Based upon this investigation, and subject to the
subcommittee’s lack of access to Private Company documents and electronic
records and witnesses, counsel for the subcommittee found that each of the
officers had access to and reviewed Private Company financial information,
including information regarding the Private Company’s commodity trading
activities, from which they could have developed an understanding of the nature
and significance of the trading activities that led to liquidity problems at the
Private Company well before they say they did.  While the officers
each stated sincerely that they did not understand the nature or extent of the
Private Company’s trading-related problems until the first week of July 2008 or
later, objective evidence suggests that they showed at least some indifference
to known or easily discoverable facts and that they failed to adhere to
procedures under the Private Company’s Risk Management Policy created expressly
to ensure that the Private Company’s trading activities were properly
monitored.  Nonetheless, counsel for the subcommittee was not
persuaded by the documents and other evidence it was able to access that the
officers in fact knew and understood that the Private Company’s liquidity or
capital needs were a significant cause for alarm until, at the earliest, the
second quarter of 2008.  Moreover, while it appeared to counsel that
the officers developed a growing awareness of the nature and severity of the
Private Company’s liquidity issues over the second quarter of 2008, counsel was
unable to identify with any more precision the specific level of concern or
understanding these individuals had prior to July 2008.  While not
within the scope of such counsel’s investigation, counsel was requested by the
subcommittee to note any information that came to counsel’s attention during its
investigation that suggested that the officers intended to deceive or mislead
any third party.  Subject to limitations described in its report, no
information came to counsel’s attention during its investigation that suggested
to counsel that the officers intended to deceive or to mislead any third
parties.  In addition, in connection with the investigation, counsel
for the subcommittee did not express any findings of intentional misconduct or
fraud on the part of any officer or employee of the Partnership.




29
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 SEMGROUP
ENERGY PARTNERS, L.P.
 NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS


After
completion of the internal review, a plan was developed with the advice of the
Audit Committee of the Board to further strengthen the processes and procedures
at the Partnership.  This plan includes, among other things,
reevaluating executive officers and accounting and finance personnel (including
a realignment of officers as described elsewhere in this report) and hiring, as
deemed necessary, additional accounting and finance personnel or consultants;
reevaluating the Partnership’s internal audit function and determining whether
to expand the duties and responsibilities of such group; evaluating the
comprehensive training programs for all management personnel covering, among
other things, compliance with controls and procedures, revising the reporting
structure so that the Chief Financial Officer reports directly to the Audit
Committee, and increasing the business and operational oversight role of the
Audit Committee.




Equity
Awards and Employment Agreements




The
Change of Control constituted a change of control under the Plan, which resulted
in the early vesting of all awards under the Plan.  As such, the
phantom units awarded to Messrs. Kevin L. Foxx, Michael J. Brochetti, Alex G.
Stallings, Peter L. Schwiering and Jerry A. Parsons in the amounts of 150,000
units, 90,000 units, 75,000 units, 45,000 units and 20,000 units, respectively,
are fully vested.  The common units underlying such awards were issued
to such individuals in August 2008.  In addition, the 5,000 restricted
units awarded to each of Messrs. Billings, Kosnik and Bishop for their service
as independent members of the Board fully vested.




The
Change of Control also resulted in a change of control under the employment
agreements of Messrs. Foxx, Brochetti, Stallings, Schwiering and
Parsons.  If within one year after the Change of Control any such
officer is terminated by the Partnership’s general partner without Cause (as
defined below) or such officer terminates the agreement for Good Reason (as
defined below), he will be entitled to payment of any unpaid base salary and
vested benefits under any incentive plans, a lump sum payment equal to 24 months
of base salary and continued participation in the Partnership’s general
partner’s welfare benefit programs for one year after termination. Upon such an
event, Messrs Foxx, Brochetti, Stallings, Schwiering and Parsons would be
entitled to lump sum payments of $900,000, $600,000, $550,000, $500,000 and
$500,000, respectively, in addition to continued participation in the
Partnership’s general partner’s welfare benefit programs.  As of the
date of the filing of this report, none of these officers is entitled to these
benefits as none of them has been terminated by the Partnership’s general
partner without Cause or has terminated his agreement for Good
Reason.




For
purposes of the employment agreements:




“Cause”
means (i) conviction of the executive officer by a court of competent
jurisdiction of any felony or a crime involving moral turpitude; (ii) the
executive officer’s willful and intentional failure or willful intentional
refusal to follow reasonable and lawful instructions of the Board;
(iii) the executive officer’s material breach or default in the performance
of his obligations under the employment agreement; or (iv) the executive
officer’s act of misappropriation, embezzlement, intentional fraud or similar
conduct involving the Partnership’s general partner.




“Good
Reason” means (i) a material reduction in the executive officer’s base
salary; (ii) a material diminution of the executive officer’s duties,
authority or responsibilities as in effect immediately prior to such diminution;
or (iii) the relocation of the named executive officer’s principal work
location to a location more than 50 miles from its current
location.





30
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 SEMGROUP
ENERGY PARTNERS, L.P.
 NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS


Taxation
as a Corporation




The
anticipated after-tax economic benefit of an investment in the Partnership’s
common units depends largely on the Partnership being treated as a partnership
for federal income tax purposes.  If less than 90% of the gross income
of a publicly traded partnership, such as the Partnership, for any taxable year
is “qualifying income” from sources such as the transportation, marketing (other
than to end users), or processing of crude oil, natural gas or products thereof,
interest, dividends or similar sources, that partnership will be taxable as a
corporation under Section 7704 of the Internal Revenue Code for federal income
tax purposes for that taxable year and all subsequent years.  In this
regard, because the income the Partnership earns from the Throughput Agreement
and the Terminalling Agreement with the Private Company is “qualifying income”
any material reduction or elimination of that income or any amendment to the
Throughput Agreement or the Terminalling Agreement which changes the nature of
the services provided or the income generated thereunder, may cause the
Partnership’s remaining “qualifying income” to constitute less than 90% of its
gross income.  As a result, the Partnership could become taxable as a
corporation for federal income tax purposes, unless it were to transfer the
businesses that generate non-qualifying income to one or more subsidiaries taxed
as corporations and pay entity level income taxes on such non-qualifying
income.  The IRS has not provided any ruling to the Partnership on
this matter.




If the
Partnership were treated as a corporation for federal income tax purposes, then
it would pay federal income tax on its income at the corporate tax rate, which
is currently a maximum of 35%, and would likely pay state income tax at varying
rates.  Distributions would generally be taxed again to unitholders as
corporate distributions and none of the Partnership’s income, gains, losses,
deductions or credits would flow through to its unitholders.  Because
a tax would be imposed upon the Partnership as an entity, cash available for
distribution to its unitholders would be substantially
reduced.  Treatment of the Partnership as a corporation would result
in a material reduction in the anticipated cash flow and after-tax return to
unitholders and thus would likely result in a substantial reduction in the value
of the Partnership’s common units.




Other
Effects




The
Bankruptcy Filings have had and may in the future continue to have a number of
other impacts on the Partnership’s business and management.  In the
Amended Omnibus Agreement and other agreements with the Private Company, the
Private Company agreed to indemnify the Partnership for certain environmental
and other claims relating to the crude oil and liquid asphalt cement assets that
have been contributed to the Partnership.  In connection with the
Settlement, the Partnership waived these claims and the Amended Omnibus
Agreement and other relevant agreements, including the indemnification
provisions therein, were rejected as part of the Bankruptcy
Proceedings.  If the Partnership experiences an environmental or other
loss, it would experience increased losses which may have a material adverse
effect on its business, financial condition, results of operations, cash flows,
ability to make distributions to its unitholders, the trading price of its
common units and the ability to conduct its business.




The
Partnership is currently pursuing various strategic alternatives for its
business and assets including the possibility of entering into storage contracts
with third party customers and the sale of all or a portion of its
assets.  The uncertainty relating to the Bankruptcy Filings and the
recent global market and economic conditions may make it more difficult to
pursue merger opportunities or enter into storage contracts with third party
customers.




In
addition, general and administrative expenses (exclusive of non-cash
compensation expense related to the vesting of the units under the Plan - see
Note 9) increased by approximately $6.9 million and $7.5 million, or
approximately 300% and 326%, to approximately $9.2 million for the third quarter
of 2008 and $9.8 million for the fourth quarter of 2008, respectively, compared
to $2.3 million in the second quarter of 2008.  This increase is due
to increased costs related to legal and financial advisors as well as other
related costs in connection with events related to the Bankruptcy Filings, the
securities litigation and governmental investigations, and the Partnership’s
efforts to enter into storage contracts with third party customers and pursue
merger opportunities.  The Partnership expects this increased level of
general and administrative expenses to continue into 2009.




31
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Item 2.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations




As
used in this quarterly report, unless we indicate otherwise: (1) "SemGroup
Energy Partners,” “our,” “we,” “us” and similar terms refer to SemGroup Energy
Partners, L.P., together with our subsidiaries, (2) the “Private Company” refers
to SemGroup, L.P. and its subsidiaries and affiliates (other than our general
partner and us), and (3) "Crude Oil Business” refers to the crude oil
gathering, transportation, terminalling and storage assets that were contributed
to us by the Private Company. The historical financial statements for periods
prior to the contribution of the operations to us by the Private Company on
July 20, 2007 reflect the operations of our predecessor. The following
discussion analyzes the historical financial condition and results of operations
of the Partnership and should be read in conjunction with our predecessor’s
financial statements and notes thereto, and Management’s Discussion and Analysis
of Financial Condition and Results of Operations presented in our Annual Report
on Form 10-K for the year ended December 31, 2007.  The Partnership as
used herein refers to the financial results and operations of our predecessor
until its contribution to us, and to our financial results and operations
thereafter.




Forward-Looking
Statements




This
report contains “forward-looking statements” intended to qualify for the safe
harbors from liability established by the federal securities laws. Statements
included in this quarterly report that are not historical facts (including any
statements concerning the benefits of the Settlement (as defined below) or the
Credit Agreement Amendment (as defined below), the impact of the Bankruptcy
Filings (as defined below) and any statements regarding plans and objectives of
management for future operations or economic performance, or assumptions or
forecasts related thereto), including, without limitation, the information set
forth in Management’s Discussion and Analysis of Financial Condition and Results
of Operations, are forward-looking statements. These statements can be
identified by the use of forward-looking terminology including “may,” “will,”
“should,” “believe,” “expect,” “intend,” “anticipate,” “estimate,” “continue,”
or other similar words. These statements discuss future expectations, contain
projections of results of operations or of financial condition, or state other
“forward-looking” information. We and our representatives may from time to time
make other oral or written statements that are also forward-looking
statements.




Such
forward-looking statements are subject to various risks and uncertainties that
could cause actual results to differ materially from those anticipated as of the
date of the filing of this report. Although we believe that the expectations
reflected in these forward-looking statements are based on reasonable
assumptions, no assurance can be given that these expectations will prove to be
correct. Important factors that could cause our actual results to differ
materially from the expectations reflected in these forward-looking statements
include, among other things, those set forth in Part I, “Item 1A. Risk Factors”
in our Annual Report on Form 10-K for the year ended December 31, 2007, which
was filed with the Securities and Exchange Commission (the “SEC”) on March 6,
2008 (the “2007 Form 10-K”), and those set forth in “Item 1A. Risk Factors” of
this report.




All
forward-looking statements included in this report are based on information
available to us on the date of this report. We undertake no obligation to
publicly update or revise any forward-looking statement, whether as a result of
new information, future events or otherwise. All subsequent written and oral
forward-looking statements attributable to us or persons acting on our behalf
are expressly qualified in their entirety by the cautionary statements contained
throughout this report.




Overview




We are a
publicly traded master limited partnership with operations in twenty-three
states. We provide integrated terminalling, storage, gathering and
transportation services for companies engaged in the production, distribution
and marketing of crude oil and liquid asphalt cement. We manage our operations
through two operating segments: (i) terminalling and storage services and
(ii) gathering and transportation services. We were formed in February 2007
as a Delaware master limited partnership initially to own, operate and develop a
diversified portfolio of complementary midstream energy assets.




In July
2007, we issued 12,500,000 common units, representing limited partner interests,
and 12,570,504 subordinated units, representing additional limited partner
interests, to SemGroup Holdings, L.P., or SemGroup Holdings, and 549,908 general
partner units representing a 2% general partner interest to SemGroup Energy
Partners G.P., L.L.C., our general partner. SemGroup Holdings then completed a
public offering of 12,500,000 common units at a price of $22 per unit. In
addition, we issued an additional 1,875,000 common units to the public pursuant
to the underwriters’ exercise of their over-allotment option. We did not receive
any proceeds from the common units sold by SemGroup Holdings. We received net
proceeds of approximately $38.7 million after deducting underwriting discounts
from the sale of common units in connection with the exercise of the
underwriters’ over-allotment option. We used these net proceeds to reduce
outstanding borrowings under our credit facility.  In connection with
our initial public offering, we entered into a Throughput Agreement (the
“Throughput Agreement”) with the Private Company under which we provided crude
oil gathering and transportation and terminalling and storage services to the
Private Company.





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 Table of Contents


On
February 20, 2008, we purchased land, receiving infrastructure, machinery,
pumps and piping and 46 liquid asphalt cement and residual fuel oil terminalling
and storage facilities (the “Acquired Asphalt Assets”) from the Private Company
for aggregate consideration of $379.5 million, including $0.7 million of
acquisition-related costs. For accounting purposes, the acquisition has been
reflected as a purchase of assets, with the Acquired Asphalt Assets recorded at
the historical cost of the Private Company, which was approximately $145.5
million, with the additional purchase price of $234.0 million reflected in the
statement of changes in partners’ capital as a distribution to the Private
Company.  In conjunction with the purchase of the Acquired Asphalt
Assets, we amended our existing credit facility, increasing our
borrowing capacity to $600 million. Concurrently, we issued 6,000,000
common units, receiving proceeds, net of underwriting discounts and
offering-related costs, of $137.2 million. Our general partner also made a
capital contribution of $2.9 million to maintain its 2.0% general partner
interest in us. On March 5, 2008, we issued an additional 900,000
common units, receiving proceeds, net of underwriting discounts, of $20.6
million, in connection with the underwriters’ exercise of their over-allotment
option in full. Our general partner made a corresponding capital
contribution of $0.4 million to maintain its 2.0% general partner interest in
us.  In connection with the acquisition of the Acquired Asphalt
Assets, we entered into a Terminalling and Storage Agreement (the
“Terminalling Agreement”) with the Private Company and certain of its
subsidiaries under which we provided liquid asphalt cement terminalling and
storage and throughput services to the Private Company and the Private Company
has agreed to use the our services at certain minimum
levels.  Our general partner’s Board of Directors (the “Board”)
approved the acquisition of the Acquired Asphalt Assets as well as the terms of
the related agreements based on a recommendation from its conflicts committee,
which consisted entirely of independent directors. The conflicts committee
retained independent legal and financial advisors to assist it in evaluating the
transaction and considered a number of factors in approving the acquisition,
including an opinion from the committee’s independent financial advisor that the
consideration paid for the Acquired Asphalt Assets was fair, from a financial
point of view, to us.




On May
12, 2008, we purchased the Eagle North Pipeline System, a 130-mile, 8-inch
pipeline that originates in Ardmore, Oklahoma and terminates in Drumright,
Oklahoma as well as other real and personal property related to the pipeline
(the “Acquired Pipeline Assets”) from the Private Company for aggregate
consideration of $45.1 million, including $0.1 million of acquisition-related
costs.  The acquisition was funded with borrowings under our revolving
credit facility.  We have suspended capital expenditures on this
pipeline due to the continuing impact of the Bankruptcy Filings. 
Management currently intends to put the asset into service by late 2009 or early
2010 and is exploring various alternatives to complete the
project.  The Board approved the acquisition of the Acquired Pipeline
Assets based on a recommendation from its conflicts committee, which consisted
entirely of independent directors. The conflicts committee retained independent
legal and financial advisors to assist it in evaluating the transaction and
considered a number of factors in approving the acquisition, including an
opinion from the committee’s independent financial advisor that the
consideration paid for the Acquired Pipeline Assets was fair, from a financial
point of view, to us.




On May
30, 2008, we purchased certain land, crude oil storage and terminalling
facilities with an aggregate of approximately 2.0 million barrels of storage
capacity and related assets located at the Cushing Interchange from the Private
Company and we assumed a take-or-pay, fee-based, third party contract through
August 2010 relating to the additional 2.0 million barrels of storage capacity
(the “Acquired Storage Assets”) for aggregate consideration of $90.3 million,
including $0.3 million of acquisition-related costs.  The acquisition
was funded with borrowings under our revolving credit facility.  The
Board approved the acquisition of the Acquired Storage Assets based on a
recommendation from its conflicts committee, which consisted entirely of
independent directors. The conflicts committee retained independent legal and
financial advisors to assist it in evaluating the transaction and considered a
number of factors in approving the acquisition, including an opinion from the
committee’s independent financial advisor that the consideration paid for the
Acquired Storage Assets was fair, from a financial point of view, to
us.




Impact
of the Bankruptcy of the Private Company and Certain of its Subsidiaries and
Related Events




Due to
the events related to the Bankruptcy Filings (as defined below) described
herein, including the uncertainty relating to future cash flows, we face
substantial doubt as to our ability to continue as a going
concern.  While it is not feasible to predict the ultimate outcome of
the events surrounding the Bankruptcy Cases (as defined below), we have been and
could continue to be materially and adversely affected by such events and we may
be forced to make a bankruptcy filing or take other action that could have a
material adverse effect on our business, the price of our common units and our
results of operations.





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 Table of Contents


Bankruptcy
Filings




On July
17, 2008, we issued a press release announcing that the Private Company was
experiencing liquidity issues and was exploring various alternatives, including
raising additional equity, debt capital or the filing of a voluntary petition
for reorganization under Chapter 11 of the Bankruptcy Code to address these
issues.  We filed this press release in a Current Report on Form 8-K
filed with the SEC on July 18, 2008.




On July
22, 2008, the Private Company and certain of its subsidiaries filed voluntary
petitions (the “Bankruptcy Filings”) for reorganization under Chapter 11 of the
Bankruptcy Code in the United States Bankruptcy Court for the District of
Delaware (the “Bankruptcy Court”), Case No. 08-11547-BLS.   The
Private Company and its subsidiaries continue to operate their businesses and
own and manage their properties as debtors-in-possession under the jurisdiction
of the Bankruptcy Court and in accordance with the applicable provisions of the
Bankruptcy Code (the “Bankruptcy Cases”). None of us, our general partner,
our subsidiaries nor the subsidiaries of our general partner are debtors in the
Bankruptcy Cases.  However, because of the contractual relationships
with the Private Company and certain of its subsidiaries, the Bankruptcy Filings
have adversely impacted us and may in the future impact us in various ways,
including the items discussed below.  Our financial results as of
September 30, 2008 reflect a $0.4 million allowance for doubtful accounts
related to amounts due from third parties as of September 30,
2008.  The allowance related to amounts due from third parties was
established as a result of certain third party customers netting amounts due
them from the Private Company with amounts due to us.  Also, due to
the change of control of our general partner related to the Private Company’s
liquidity issues, all outstanding awards under our general partner’s long-term
incentive plan (the "Plan") vested on July 18, 2008, resulting in an
incremental $18.0 million in non-cash compensation expense for the three months
ended September 30, 2008.  In addition to the allowance for doubtful
accounts and non-cash compensation expense described above, the results of
operations for the three and nine months ended September 30, 2008 included in
this quarterly report were affected by the Bankruptcy Filings and related
events, which resulted in decreased revenues and increased general and
administrative expenses as described below under “—Our Revenues,” and “—Other
Effects,” respectively.




Board
and Management Composition




On July
9, 2008, Edward F. Kosnik was appointed as an independent member of the
Board.  Mr. Kosnik is the chairman of the compensation committee
and also serves on the audit committee and the conflicts committee of the Board.
Under the provisions of the Plan, Mr. Kosnik was granted an award of 5,000
restricted common units on July 9, 2008. These restricted common units
vested on July 18, 2008 in connection with the change of control of our general
partner described below.




On July
18, 2008, Manchester Securities Corp. (“Manchester”) and Alerian Finance
Partners, LP (“Alerian”), as lenders to SemGroup Holdings, the sole member of
our general partner, exercised certain rights described below under a Loan
Agreement and a Pledge Agreement, each dated June 25, 2008 (the “Holdings Credit
Agreements”), that were triggered by certain events of default under the
Holdings Credit Agreements.  On March 20, 2009, Alerian transferred
its interest in the Holdings Credit Agreements to Manchester.  The
Holdings Credit Agreements are secured by our subordinated units and incentive
distribution rights and the membership interests in our general partner owned by
SemGroup Holdings.  Manchester has not foreclosed on our subordinated
units owned by SemGroup Holdings or the membership interests in our general
partner.  Manchester may in the future exercise other remedies
available to them under the Holdings Credit Agreement and related loan
documents, including taking action to foreclose on the collateral securing the
loan.  Neither us nor our general partner is a party to the Holdings
Credit Agreements or the related loan documents.




On July
18, 2008, Manchester and Alerian exercised their right under the Holdings Credit
Agreements to vote the membership interests of our general partner in order to
reconstitute the Board (the “Change of Control”).  Messrs. Thomas L.
Kivisto, Gregory C. Wallace, Kevin L. Foxx, Michael J. Brochetti and W. Anderson
Bishop were removed from the Board.  Mr. Bishop had served as the
chairman of the audit committee and as a member of the conflicts committee and
compensation committee of the Board.  Messrs. Sundar S. Srinivasan,
David N. Bernfeld and Gabriel Hammond (each of whom is affiliated with
Manchester or Alerian) were appointed to the Board.  Mr. Srinivasan
was elected as Chairman of the Board.  Messrs. Brian F. Billings and
Edward F. Kosnik remain as independent directors of the Board and continue to
serve as members of the conflicts committee, audit committee and compensation
committee of the Board.  In addition, Messrs. Foxx and Alex Stallings
resigned the positions each officer held with SemGroup, L.P. in July
2008.  Mr. Brochetti had previously resigned from his position with
SemGroup, L.P. in March 2008.  Messrs. Foxx, Brochetti and Stallings
remain as officers of our general partner.


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 Table of Contents




On
October 1, 2008, Dave Miller (who is an affiliate of Manchester) and Duke R.
Ligon were appointed members of the Board. Mr. Ligon is an independent member of
the Board and is the chairman of the audit committee and also serves on the
compensation committee and the conflicts committee of the Board. In connection
with his appointment to the Board, Mr. Ligon was granted an award of 5,000
restricted common units.  The restricted common units granted to Mr.
Ligon vest in one-third increments over a three-year period.




On
January 9, 2009, Mr. Srinivasan resigned his positions as Chairman of the Board
and as a director.  Mr. Ligon was subsequently elected as Chairman of
the Board.




On March
18, 2009, the Board realigned the officers of our general partner appointing
Michael J. Brochetti as Executive Vice President—Corporate Development and
Treasurer, Alex G. Stallings as Chief Financial Officer and Secretary, and James
R. Griffin as Chief Accounting Officer.  Mr. Brochetti had previously
served as Chief Financial Officer, Mr. Stallings had previously served as Chief
Accounting Officer and Secretary and Mr. Griffin had previously served as
Controller.




Bankruptcy
Court Order




On
September 9, 2008, the Bankruptcy Court entered an order relating to the
settlement of certain matters between us and the Private Company (the “Order”)
in the Bankruptcy Cases.  Among other things, the Order provided that
(i) the Private Company was to directly pay any utility costs attributable to
the operations of the Private Company at certain shared facilities, and the
Private Company was to pay us for past utility cost reimbursements that were due
from the Private Company; (ii) commencing on September 15, 2008, payments under
the Terminalling Agreement were netted against amounts due under the Amended
Omnibus Agreement and were made on the 15th day of each month for the prior
month (with a three business-day grace period); (iii) the Private Company
provided us with a letter of credit in the amount of approximately $4.9 million
to secure the Private Company’s postpetition obligations under the Terminalling
Agreement; (iv) the Private Company was to make payments under the Throughput
Agreement for the month of August on September 15, 2008 (with a three
business-day grace period) based upon the monthly contract minimums in the
Throughput Agreement and netted against amounts due under the Amended Omnibus
Agreement; (v) the Private Company was to make payments under the Throughput
Agreement for the months of September and October on October 15, 2008 (with a
three business-day grace period) and November 15, 2008 (with a three
business-day grace period), respectively, or three business days after amounts
due are determined and documentation therefore was provided and exchanged based
upon actual volumes for each such month and at a rate equal to the average rate
charged by us to third-party shippers in the same geographical area, with any
such amounts netted against amounts due under the Amended Omnibus Agreement (as
defined below); (vi) the parties were to reevaluate the Throughput Agreement and
the payment terms with respect to services provided after October 2008; (vii)
representatives of us and the Private Company were to meet to discuss the
transition to us of certain of the Private Company’s employees necessary to
maintain our business, and pending agreement between the parties, the Private
Company was to continue to provide services in accordance with the Amended
Omnibus Agreement through at least November 30, 2008; (viii) the Private Company
was to consent to an order relating a third-party storage contract which
provided that we were the rightful owner of the rights in and to a certain
third-party storage agreement and the corresponding amounts due thereunder; and
(ix) we were to enter into a specified lease with the Private Company to permit
the Private Company to construct a pipeline.




Settlement
with the Private Company




On March
12, 2009, the Bankruptcy Court held a hearing and approved the transactions
contemplated by a term sheet (the “Settlement Term Sheet”) relating to the
settlement of certain matters between the Private Company and us (the
“Settlement”).  The Bankruptcy Court entered an order approving the
Settlement upon the terms contained in the Settlement Term Sheet on March 20,
2009.  We and the Private Company executed definitive documentation,
in the form of a master agreement (the “Master Agreement”), dated April 7, 2009
to be effective as of 11:59 PM CDT March 31, 2009, and certain other transaction
documents to effectuate the Settlement and that superseded the Settlement Term
Sheet.  The Bankruptcy Court entered an order approving the Master
Agreement and the Settlement on April 7, 2009.  In addition, in
connection with the Settlement, we and the requisite lenders under our secured
credit facility entered into the Credit Agreement Amendment (as defined below)
under which, among other things, the lenders consented to the Settlement and
waived all existing defaults and events of default described in the Forbearance
Agreement (as defined below) and amendments thereto.




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The
Settlement provided for the following:




·
            we
      transferred certain crude oil storage assets located in Kansas and
      northern Oklahoma to the Private
Company;





·
            the
      Private Company transferred ownership of 355,000 barrels of crude oil tank
      bottoms and line fill to us;





·
            the
      Private Company rejected the Throughput
  Agreement;





·
            we
      and one of our subsidiaries have a $20 million unsecured claim against the
      Private Company and certain of its subsidiaries relating to rejection of
      the Throughput Agreement;





·
            we
      and the Private Company entered into the New Throughput Agreement (as
      defined below) pursuant to which we provide certain crude oil gathering,
      transportation, terminalling and storage services to the Private
      Company;





·
            we
      offered employment to certain crude oil
  employees;





·
            the
      Private Company transferred its asphalt assets that are connected to our
      asphalt assets to us;





·
            the
      Private Company rejected the Terminalling
  Agreement;





·
            one
      of our subsidiaries has a $35 million unsecured claim against the Private
      Company and certain of its subsidiaries relating to rejection of the
      Terminalling Agreement;





·
            we
      and the Private Company entered into the New Terminalling Agreement (as
      defined below) pursuant to which we provide liquid asphalt cement
      terminalling and storage services for the Private Company’s remaining
      asphalt inventory;





·
            the
      Private Company agreed to remove all of its remaining asphalt inventory
      from our asphalt storage facilities no later than October 31,
      2009;





·
            the
      Private Company will be entitled to receive 20% of the proceeds of any
      sale by us of any of the asphalt assets transferred to us in connection
      with the Settlement that occurs prior to December 31,
  2009;





·
            the
      Private Company rejected the Amended Omnibus
  Agreement;





·
            we
      and the Private Company entered into the Shared Services Agreement (as
      defined below) pursuant to which the Private Company provides certain
      operational services for us;





·
            other
      than as provided above, we and the Private Company entered into mutual
      releases of claims relating to the rejection of the Terminalling
      Agreement, the Throughput Agreement and the Amended Omnibus
      Agreement;





·
            certain
      pre-petition claims by the Private Company and us were netted and
      waived;





·
            we
      and the Private Company resolved certain remaining issues related to the
      contribution of crude oil assets to us in connection with our initial
      public offering, our acquisition of the Acquired Asphalt Assets, our
      acquisition of the Acquired Pipeline Assets and our acquisition of the
      Acquired Storage Assets, including the release of claims relating to such
      acquisitions; and





·
            we
      and the Private Company entered into the Trademark Agreement (as defined
      below) which provides us with a non-exclusive, worldwide license to use
      certain trade names, including the name “SemGroup”, and the corresponding
      mark until December 31, 2009, and the Private Company waived claims for
      infringement relating to such trade names and mark prior to the date of
      such license agreement.





Management
is currently evaluating the accounting for the Settlement, and is obtaining
independent valuations of the assets transferred.  Certain terms of the
transaction documents relating to the Settlement are discussed in more detail
below.





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Shared
Services Agreement





In
connection with the Settlement, we entered into a Shared Services Agreement,
dated April 7, 2009 to be effective as of 11:59 PM CDT March 31, 2009 (the
“Shared Services Agreement”), with the Private Company.  Pursuant to
the Shared Services Agreement, the Private Company will provide certain general
shared services, Cushing shared services (as described below), and SCADA
services (as described below) to us.





The
general shared services include crude oil movement services, Department of
Transportation services, right-of-way services, environmental services, pipeline
and civil structural maintenance services, safety services, pipeline truck
station maintenance services, project support services and truck dispatch
services.  The fees for such general shared services are fixed at
$125,000 for the month of April 2009 and such fixed fee may be extended by
mutual agreement of the parties for one additional month.  Thereafter
the fees will be calculated in accordance with the formulas contained
therein.  The Private Company has agreed to provide the general shared
services for three years (subject to earlier termination as provided therein)
and the term may be extended an additional year by mutual agreement of the
parties.





The
Cushing shared services include operational and maintenance services related to
terminals at Cushing, Oklahoma.  The fees for such Cushing shared
services are fixed at $20,000 for the month of April 2009 and such fixed
fee may be extended by mutual agreement of the parties for one additional
month.  Thereafter the fees will be calculated in accordance with the
formulas contained therein.  The Private Company has agreed to provide
the Cushing shared services for three years (subject to earlier termination as
provided therein) and the term may be extended an additional year by mutual
agreement of the parties.





The SCADA
services include services related to the operation of the SCADA system which is
used in connection with our crude oil operations.  The fees for such
SCADA services are fixed at $15,000 for the month of April 2009 and such
fixed fee may be extended by mutual agreement of the parties for one additional
month.  Thereafter the fees will be calculated in accordance with the
formulas contained therein.  The Private Company has agreed to provide
the SCADA services for five years (subject to earlier termination as provided
therein) and we may elect to extend the term for two subsequent five year
periods.





Transition
Services Agreement





In
connection with the Settlement, we entered into a Transition Services Agreement,
dated April 7, 2009 to be effective as of 11:59 PM CDT March 31, 2009 (the
“Transition Services Agreement”), with the Private Company.  Pursuant
to the Transition Services Agreement, the Private Company will provide certain
corporate, crude oil and asphalt transition services, in each case for a limited
amount of time, to us.





Transfer
of Crude Oil Assets





In
connection with the Settlement, we transferred certain crude oil assets located
in Kansas and northern Oklahoma to the Private Company.  These
transfers included real property and associated personal property at locations
where the Private Company owned the pipeline.  We retained certain
access and connection rights to enable us to continue to operate our crude oil
trucking business in such areas.  In addition, we transferred our
interests in the SCADA System, a crude oil inventory tracking system, to the
Private Company.





In
addition, the Private Company transferred to us (i) 355,000 barrels of crude oil
line fill and tank bottoms, which are necessary for us to operate our crude oil
tank storage operations and our Oklahoma and Texas crude oil pipeline systems,
(ii) certain personal property located in Oklahoma, Texas and Kansas used in
connection with our crude oil trucking business and (iii) certain real property
located in Oklahoma, Kansas, Texas and New Mexico that was intended to be
transferred in connection with our initial public offering.





Transfer
of Asphalt Assets





In
connection with the Settlement, the Private Company transferred certain asphalt
processing assets that were connected to, adjacent to, or otherwise
contiguous with our existing asphalt facilities and associated real property
interests to us.  The transfer of the Private Company’s asphalt assets
in connection with the Settlement provides us with outbound logistics for our
existing asphalt assets and, therefore, allows us to provide asphalt
terminalling and storage services to third parties.





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New
Throughput Agreement





In
connection with the Settlement, we and the Private Company entered into a
Throughput Agreement, dated as of April 7, 2009 to be effective as of 11:59 PM
CDT March 31, 2009 (the “New Throughput Agreement”), pursuant to which we
provide certain crude oil gathering, transportation, terminalling and storage
services to the Private Company.





Under the
New Throughput Agreement, we charge the following fees: (i) barrels gathered via
gathering lines will be charged a gathering rate of $0.75 per barrel, (ii)
barrels transported within Oklahoma will be charged $1.00 per barrel while
barrels transported on the Masterson Mainline will be charged $0.55 per barrel,
(iii) barrels transported by truck will be charged in accordance with the
schedule contained therein, including a fuel surcharge, (iv) storage fees shall
equal $0.50 per barrel per month for product located in storage tanks located in
Cushing, Oklahoma and $0.44 per barrel per month for product not located in
dedicated Cushing storage tanks, and (v) a delivery charge of $0.08 per barrel
will be charged for deliveries out of the Cushing Interchange Terminal. The
New Throughput Agreement has an initial term of one year with additional
automatic one-month renewals unless either party terminates the agreement upon
thirty-days prior notice.





New
Terminalling and Storage Agreement





In
connection with the Settlement, we and the Private Company entered into a
Terminalling and Storage Agreement, dated as of April 7, 2009 to be effective as
of 11:59 PM CDT March 31, 2009 (the “New Terminalling Agreement”), pursuant to
which we provide certain asphalt terminalling and storage services for the
remaining asphalt inventory of the Private Company.  Storage services
under the New Terminalling Agreement are equal to $0.565 per barrel per month
multiplied by the total shell capacity in barrels for each storage tank where
the Private Company and its affiliates have product; provided that if the
Private Company removes all product from a storage tank prior to the end of the
month, then the storage service fees shall be pro-rated for such month based on
the number of calendar days storage was actually used.  Throughput
fees under the New Terminalling Agreement are equal to $9.25 per ton; provided
that no fees are payable for transfers of product between storage tanks located
at the same or different terminals.  The New Terminalling Agreement
has an initial term that expires on October 31, 2009, which may be extended for
one month by mutual agreement of the parties.





New
Access and Use Agreement





In
connection with the Settlement, we and the Private Company entered into an
Access and Use Agreement, dated as of April 7, 2009 to be effective as of 11:59
PM CDT March 31, 2009 (the “New Access and Use Agreement”), pursuant to which we
will allow the Private Company access rights to our asphalt facilities relating
to its existing asphalt inventory.  The term of the Access and Use
Agreement will end separately for each terminal upon the earlier of October 31,
2009 or until all of the existing asphalt inventory of the Private Company is
removed from such terminal.





Trademark
Agreement





In
connection with the Settlement, we and the Private Company entered into a
Trademark License Agreement, dated as of April 7, 2009 to be effective as of
11:59 PM CDT March 31, 2009 (the “Trademark Agreement”), pursuant to which the
Private Company granted us a non-exclusive, worldwide license to use certain
trade names, including the name “SemGroup”, and the corresponding mark until
December 31, 2009, and the Private Company waived claims for infringement
relating to such trade names and mark prior to the effective date of the
Trademark Agreement.





Building
and Office Leases





In
connection with the Settlement, we leased office space in Oklahoma City,
Oklahoma and certain facilities in Cushing, Oklahoma to the Private
Company.  The term for the leases expires on March 31,
2014.





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Easements





In
connection with the Settlement, we and the Private Company granted mutual
easements relating to access, facility improvements, existing and future
pipeline rights and corresponding rights of ingress and egress for properties
owned by the parties at Cushing, Oklahoma.  In addition, we granted
the Private Company certain pipeline easements at Cushing, Oklahoma, together
with the corresponding rights of ingress and egress.




Partnership
Revenues




For the
nine months ended September 30, 2008 and the year ended December 31, 2008, we
derived approximately 81% and approximately 73%, respectively, of our revenues,
excluding fuel surcharge revenues related to fuel and power consumed to operate
our liquid asphalt cement storage tanks, from services we provided to the
Private Company and its subsidiaries.  Prior to the Order and the
Settlement, the Private Company was obligated to pay us minimum monthly fees
totaling $76.1 million annually and $58.9 million annually in respect of the
minimum commitments under the Throughput Agreement and the Terminalling
Agreement, respectively, regardless of whether such services were actually
utilized by the Private Company.  As described above, the Order
required the Private Company to make certain payments under the Throughput
Agreement and Terminalling Agreement during a portion of the third quarter of
2008, including the contractual minimum payments under the Terminalling
Agreement.  In connection with the Settlement, we waived the fees due
under the Terminalling Agreement during March 2009.  In addition, the
Private Company rejected the Throughput Agreement and the Terminalling Agreement
and we and the Private Company entered into the New Throughput Agreement and the
New Terminalling Agreement.  We expect revenues from services provided
to the Private Company under the New Throughput Agreement and New Terminalling
Agreement to be substantially less than prior revenues from services provided to
the Private Company as the new agreements are based upon actual volumes
gathered, transported, terminalled and stored instead of certain minimum volumes
and are at reduced rates when compared to the Throughput Agreement and
Terminalling Agreement.




We have
been pursuing opportunities to provide crude oil terminalling and storage
services and crude oil gathering and transportation services to third
parties.  As a result of new crude oil third-party storage contracts,
we increased our third-party terminalling and storage revenue (excluding fuel
surcharge revenues related to fuel and power consumed to operate our liquid
asphalt cement storage tanks) from approximately $1.0 million, or
approximately 4% of total terminalling and storage revenue during the
second quarter of 2008, to approximately $4.6 million and $8.4 million, or
approximately 17% and 34% of total terminalling and storage revenue for the
third quarter of 2008 and the fourth quarter of 2008,
respectively.




In
addition, as a result of new third-party crude oil transportation contracts and
reduced commitments of usage by the Private Company under the Throughput
Agreement, we increased our third-party gathering and transportation revenue
from approximately $5.0 million, or approximately 21% of total gathering and
transportation revenue during the second quarter of 2008, to approximately $10.9
million and $13.6 million, or approximately 51% and 85% of total gathering and
transportation revenue for the third quarter of 2008 and the fourth quarter
of 2008, respectively.





The
significant majority of the increase in third party revenues results from an
increase in third-party crude oil services provided and a corresponding decrease
in the Private Company’s crude oil services provided due to the termination of
the monthly contract minimum revenues under the Throughput Agreement in
September 2008.  Average rates for the new third-party crude oil
terminalling and storage and transportation and gathering contracts are
comparable with those previously received from the Private
Company.  However, the volumes being terminalled, stored, transported
and gathered have decreased as compared to periods prior to the Bankruptcy
Filings, which has negatively impacted total revenues.  As an example,
fourth quarter 2008 total revenues are approximately $8.2 million less than
third quarter 2008 total revenues, in each case excluding fuel surcharge
revenues related to fuel and power consumed to operate our liquid asphalt cement
storage tanks.




In addition,
we have recently entered into leases and storage agreements with third parties
relating to 39 of our 46 asphalt facilities.


We have
entered into various crude oil transportation and storage contracts with third
parties and are continuing to pursue additional contracts with third parties;
however, there can be no assurance that any of these additional efforts will be
successful.  In addition, certain third parties may be less likely to
enter into business transactions with us due to the Bankruptcy
Filings.  The Private Company may also choose to curtail its
operations or liquidate its assets as part of the Bankruptcy
Cases.  As a result, unless we are able to generate additional third
party revenues, we will continue to experience lower volumes in our system which
could have a material adverse effect on our results of operations and cash
flows.




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Asphalt
Operations




Historically,
we provided liquid asphalt cement terminalling and storage services to the
Private Company pursuant to the Terminalling Agreement.  In connection
with the Settlement, the Private Company rejected the Terminalling Agreement and
we and the Private Company entered into the New Terminalling Agreement whereby
we provide liquid asphalt cement terminalling and storage services to the
Private Company in connection with its remaining asphalt
inventory.  The New Terminalling Agreement has an initial term that
ends on October 31, 2009 and the Private Company has agreed to remove all of its
existing asphalt inventory no later than such date, and we expect that the
Private Company may remove it much earlier than such date.  Also in
connection with the Settlement, the Private Company transferred certain asphalt
assets to us that were connected to our existing asphalt assets.  The
transfer of the Private Company’s asphalt assets in connection with the
Settlement provides us with outbound logistics for our existing asphalt assets
and, therefore, allows us to provide asphalt terminalling and storage services
for third parties.




The
asphalt industry in the United States is characterized by a high degree of
seasonality. Much of this seasonality is due to the impact that weather
conditions have on road construction schedules, particularly in cold weather
states. Refineries produce liquid asphalt cement year round, but the peak
asphalt demand season is during the warm weather months when most of the road
construction activity in the United States takes place. As a result, liquid
asphalt cement is typically purchased from refineries at low prices in the low
demand winter months and then processed and sold at higher prices in the peak
summer demand season.  Any significant decrease in the amount of
revenues that we receive from our liquid asphalt cement terminalling and storage
operations could have a material adverse effect on our cash flows, financial
condition and results of operations.




We have recently entered
into leases and storage agreements with third parties relating to 39 of
our 46 asphalt facilities.  The revenues that we will receive
pursuant to these leases and storage agreements will be less than the revenues
received under the Terminalling Agreement with the Private Company.Without sufficient
revenues from our asphalt assets, we may be unable to meet the covenants,
including the minimum liquidity, minimum EBITDA and minimum receipt
requirements, under our credit agreement.




Operation
and General Administration of the Partnership




As is the
case with many publicly traded partnerships, we have not historically directly
employed any persons responsible for managing or operating us or for providing
services relating to day-to-day business affairs.  Pursuant to the
Amended Omnibus Agreement, the Private Company operated our assets and performed
other administrative services for us such as accounting, legal, regulatory,
development, finance, land and engineering.  The events related to the
Bankruptcy Filings terminated the Private Company’s obligations to provide
services to us under the Amended Omnibus Agreement.  The Private
Company continued to provide such services to us until the effective date of the
Settlement at which time the Private Company rejected the Amended Omnibus
Agreement and we and the Private Company entered into the Shared Services
Agreement and the Transition Services Agreement relating to the provision of
such services.  In addition, in connection with the Settlement, we
made offers of employment to certain individuals associated with our crude oil
operations and expect to make additional offers of employment to certain
individuals associated with our asphalt operations.  The costs to
directly employ these individuals as well as the costs under the Shared Services
Agreement and the Transition Services Agreement may be higher than those
previously paid by us under the Amended Omnibus Agreement, which could have a
material adverse effect on our business, financial condition, results of
operations, cash flows, ability to make distributions to our unitholders, the
trading price of our common units and our ability to conduct our
business.




In
addition, in connection with the Settlement, we agreed to not solicit the
Private Company’s employees for a year from the time of the
Settlement.  In connection with the Bankruptcy Cases, the Private
Company may reduce a substantial number of its employees or some of the Private
Company’s employees may choose to terminate their employment with the Private
Company, some of whom may currently be providing general and administrative and
operating services to us under the Shared Services Agreement or the Transition
Services Agreement.  Any reductions in critical personnel who provide
services to us and any increased costs to replace such personnel could have a
material adverse effect on our ability to conduct our business and our results
of operations.




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Intellectual
Property Rights




Pursuant
to the Amended Omnibus Agreement, we licensed the use of certain trade names and
marks, including the name “SemGroup.”  This license terminated
automatically upon the Change of Control.  In connection with the
Settlement, we and the Private Company entered into the Trademark Agreement,
pursuant to which the Private Company granted us a non-exclusive, worldwide
license to use certain trade names, including the name “SemGroup” and the
corresponding mark, until December 31, 2009, and the Private Company waived
claims for infringement relating to such trade names and mark prior to the
effective date of such Trademark Agreement (see “—Settlement with the Private
Company”).  As such, we will be required to change our name and
trademark upon or prior to the expiration of the Trademark
Agreement.  The expenses associated with such a change may be
significant, which could have a material adverse effect on our business,
financial condition, results of operations, cash flows, ability to make
distributions to our unitholders, the trading price of our common units and our
ability to conduct our business.




Credit
Facility




As
described below under “—Liquidity and Capital Resources”, in connection with the
events related to the Bankruptcy Filings, certain events of default occurred
under our credit agreement.  On September 18, 2008, we and the
requisite lenders under our credit facility entered into the Forbearance
Agreement relating to such events of default.  On April 7, 2009, we
and the requisite lenders entered into the Credit Agreement Amendment, under
which the lenders consented to the Settlement and waived all existing defaults
and events of default described in the Forbearance Agreement and amendments
thereto.  See “—Liquidity and Capital Resources” for more information
regarding our credit facility, the Forbearance Agreement and the Credit
Agreement Amendment.





Distributions
to Our Unitholders




We did
not make a distribution to our common unitholders, subordinated unitholders or
general partner attributable to the results of operations for the quarters ended
June 30, 2008, September 30, 2008, December 31, 2008 or March 31, 2009 due to
the events of default under our credit agreement and the uncertainty of our
future cash flows relating to the Bankruptcy Filings.  Our unitholders
will be required to pay taxes on their share of our taxable income even though
they did not receive a cash distribution for such periods.  In
addition, we do not currently expect to make a distribution relating to the
second quarter of 2009.  We distributed approximately $14.3 million to
our unitholders for the three months ended March 31, 2008.  Pursuant
to the Credit Agreement Amendment, we are prohibited from making distributions
to our unitholders if our leverage ratio (as defined in the credit agreement)
exceeds 3.50 to 1.00.  As of September 30, 2008 and December 31, 2008,
our leverage ratio was 4.34 to 1.00 and 4.83 to 1.00, respectively. If our
leverage ratio does not improve, we may not make quarterly distributions to our
unitholders in the future.





Our
partnership agreement provides that, during the subordination period, which we
are currently in, our common units have the right to receive distributions of
available cash from operating surplus in an amount equal to the minimum
quarterly distribution of $0.3125 per common unit per quarter, plus any
arrearages in the payment of the minimum quarterly distribution on the common
units from prior quarters, before any distributions of available cash from
operating surplus may be made on the subordinated units.





Nasdaq
Delisting




Effective
at the opening of business on February 20, 2009, our common units were delisted
from the Nasdaq Global Market (“Nasdaq”) due to our failure to timely file this
Quarterly Report as well as our Quarterly Report on Form 10-Q for the quarter
ended June 30, 2008.  We filed our Quarterly Report on Form 10-Q for
the quarter ended June 30, 2008 on March 23, 2009.  Our common units
are currently traded on the Pink Sheets, which is an over-the-counter securities
market, under the symbol SGLP.PK.  The fact that our common units are
not listed on a national securities exchange is likely to make trading such
common units more difficult for broker-dealers, unitholders and investors,
potentially leading to further declines in the price of our common
units.  In addition, it may limit the number of institutional and
other investors that will consider investing in our common units, which may have
an adverse effect on the price of our common units.  It may also make
it more difficult for us to raise capital in the future.




We
continue to work to become compliant with our SEC reporting obligations and
intend to promptly seek the relisting of our common units on Nasdaq as soon as
practicable after we have become compliant with such reporting
obligations.  However, there can be no assurances that we will be able
to relist our common units on Nasdaq or any other national securities exchange
and we may face a lengthy process to relist our common units if we are able to
relist them at all.




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Claims
Against and By The Private Company’s Bankruptcy Estate




In
connection with the Settlement, we and the Private Company entered into mutual
releases regarding certain claims.  In addition, the Settlement
provided that we have a $35 million unsecured claim against the Private Company
relating to rejection of the Terminalling Agreement and a $20 million unsecured
claim against the Private Company relating to rejection of the Throughput
Agreement.  On May
15, 2009, the Private Company filed a joint plan of
reorganization.  If such plan is confirmed without material amendment,
our claims will be impaired.  We may also have additional claims
against the Private Company that were not released in connection with the
Settlement, and the Private Company may also have additional claims against us
that were not released in connection with the Settlement.  Any claims
asserted by us against the Private Company in the Bankruptcy Cases will be
subject to the claim allowance procedure provided in the Bankruptcy Code and
Bankruptcy Rules.  If an objection is filed, the Bankruptcy Court will
determine the extent to which any such claim that has been objected to is
allowed and the priority of such claims.




Governmental
Investigations




On July
21, 2008, we received a letter from the staff of the SEC giving notice that the
SEC is conducting an inquiry relating to us and requesting, among other things,
that we voluntarily preserve, retain and produce to the SEC certain documents
and information relating primarily to our disclosures respecting the Private
Company’s liquidity issues, which were the subject of our July 17, 2008 press
release.  On October 22, 2008, we received a subpoena from the SEC
pursuant to a formal order of investigation requesting certain documents
relating to, among other things, the Private Company’s liquidity
issues.  We have been cooperating, and intend to continue cooperating,
with the SEC in its investigation.




On July
23, 2008, we and our general partner each received a Grand Jury subpoena from
the United States Attorney’s Office in Oklahoma City, Oklahoma, requiring, among
other things, that we and our general partner produce financial and other
records related to our July 17, 2008 press release.  We have been
informed that the U.S. Attorneys’ Offices for the Western District of Oklahoma
and the Northern District of Oklahoma are in discussions regarding the
subpoenas, and no date has been set for a response to the
subpoenas.  We and our general partner intend to cooperate fully with
this investigation if and when it proceeds.




Securities
and Other Litigation




Please
see “Part II—Item I. Legal Proceedings” for a discussion of certain securities
and other litigation to which we are a party.




Examiner




On August
12, 2008, a motion was filed by the United States Trustee asking the Bankruptcy
Court to appoint an examiner to investigate the Private Company’s trading
strategies as well as certain “insider transactions,” including the contribution
of the crude oil assets to us in connection with our initial public offering,
the sale of the asphalt assets to us in February 2008, the sale of the Eagle
North Pipeline System to us in May 2008, the sale of certain crude oil storage
assets to us in May 2008, and the entering into the Holdings Credit Agreements
by SemGroup Holdings.  On September 10, 2008, the Bankruptcy Court
approved the appointment of an examiner, and on October 14, 2008, the United
States Trustee appointed Louis J. Freeh, former director of the Federal Bureau
of Investigation, as the examiner.  On April
15, 2009, the examiner filed a report summarizing the findings of his
investigation with the Bankruptcy Court (the “Examiner’s Report”).  The examiner
was directed by the Bankruptcy Court to (i) investigate the circumstances
surrounding the Private Company’s trading strategy, the transfer of the New York
Mercantile Exchange account, certain insider transactions, the formation of us,
the potential improper use of borrowed funds and funds generated from the
Private Company’s operations and the liquidation of their assets to satisfy
margin calls related to the trading strategy for the Private Company and certain
entities owned or controlled by the Private Company’s officers and directors and
(ii) determine whether any directors, officers or employees of the Private
Company participated in fraud, dishonesty, incompetence, misconduct,
mismanagement, or irregularity in the management of the affairs of the Private
Company and whether the Private Company’s estates have causes of action against
such persons arising from any such participation.
  The
Examiner’s Report identified potential claims or causes of action against
current officers of our general partner who were former officers of the Private
Company, including, without limitation, (i) against Kevin L. Foxx for his
failure to develop a suitable risk management policy or integrate a suitable
risk management policy into the Private Company’s business controls, and for his
failure to comply with the risk management policy that did exist, thereby
subjecting the Private Company to increased risk and (ii) against Alex Stallings
for his failure to stop Thomas L. Kivisto from engaging in trading activity on
his own behalf through Westback Purchasing Company, L.L.C., a limited liability
trading partnership which Mr. Kivisto owned and controlled, thereby subjecting
the Private Company to increased risk and losses.  In
addition, the Examiner’s Report criticized Mr. Foxx for certain conflicts of
interest with entities that he or his family invested in and which had a
business relationship with the Private Company.  Additionally, the
Examiner’s Report identified a number of potential claims or causes of action
against Mr. Kivisto and Gregory C. Wallace, who are former directors of our
general partner and former officers of the Private Company, including, without
limitation, for negligence and mismanagement, fraud and false statements,
conversion and corporate waste, unjust enrichment, breach of fiduciary duties
and breach of contract.
  The
Examiner’s Report and related exhibits are publicly available at
www.kccllc.net/SemGroup.






42
 Table of Contents




Internal
Review




As
previously announced, in July 2008 the Board created an internal review
subcommittee of the Board comprised of directors who are independent of
management and the Private Company to determine whether we participate in
businesses other than as described in our filings with the SEC and to conduct
investigations into other such specific items as are deemed to be appropriate by
the subcommittee.  The subcommittee retained independent legal counsel
to assist it in its investigations.




The
subcommittee has investigated a short-term financing transaction involving two
subsidiaries of the Private Company.  This transaction was identified
as a potential source of concern in a whistleblower report made after the
Private Company filed for bankruptcy.  Although the transaction did
not involve us or our subsidiaries, it was investigated because it did involve
certain senior executive officers of our general partner who were also senior
executive officers of the Private Company at the time of the
transaction.  Based upon its investigation, counsel for the
subcommittee found that, subject to the subcommittee’s lack of access to Private
Company documents and electronic records and witnesses, although certain
irregularities occurred in the transactions, the transaction did not appear to
cause the relevant officers to understand or believe that the Private Company
had a lack of liquidity that imperiled the Private Company’s ability to meet its
obligations to us and that certain aspects of the documentation of the
transaction that were out of the ordinary did not call into question the
integrity of any of the relevant officers.




The
subcommittee also investigated whether certain senior executive officers of our
general partner who were also senior executive officers of the Private Company
knew and understood, beginning as early as July 2007 and at various times
thereafter, about a lack of liquidity at the Private Company that imperiled the
Private Company’s ability to meet its obligations to us.  Based upon
this investigation, and subject to the subcommittee’s lack of access to Private
Company documents and electronic records and witnesses, counsel for the
subcommittee found that each of the officers had access to and reviewed Private
Company financial information, including information regarding the Private
Company’s commodity trading activities, from which they could have developed an
understanding of the nature and significance of the trading activities that led
to liquidity problems at the Private Company well before they say they
did.  While the officers each stated sincerely that they did not
understand the nature or extent of the Private Company’s trading-related
problems until the first week of July 2008 or later, objective evidence suggests
that they showed at least some indifference to known or easily discoverable
facts and that they failed to adhere to procedures under the Private Company’s
Risk Management Policy created expressly to ensure that the Private Company’s
trading activities were properly monitored.  Nonetheless, counsel for
the subcommittee was not persuaded by the documents and other evidence it was
able to access that the officers in fact knew and understood that the Private
Company’s liquidity or capital needs were a significant cause for alarm until,
at the earliest, the second quarter of 2008.  Moreover, while it
appeared to counsel that the officers developed a growing awareness of the
nature and severity of the Private Company’s liquidity issues over the second
quarter of 2008, counsel was unable to identify with any more precision the
specific level of concern or understanding these individuals had prior to July
2008.  While not within the scope of such counsel’s investigation,
counsel was requested by the subcommittee to note any information that came to
counsel’s attention during its investigation that suggested that the officers
intended to deceive or mislead any third party.  Subject to
limitations described in its report, no information came to counsel’s attention
during its investigation that suggested to counsel that the officers intended to
deceive or to mislead any third parties.  In addition, in connection
with the investigation, counsel for the subcommittee did not express any
findings of intentional misconduct or fraud on the part of any officer or
employee of us.




After
completion of the internal review, a plan was developed with the advice of the
Audit Committee of the Board to further strengthen our processes and
procedures.  This plan includes, among other things, reevaluating
executive officers and accounting and finance personnel (including a realignment
of officers as described elsewhere in this report) and hiring, as deemed
necessary, additional accounting and finance personnel or consultants;
reevaluating our internal audit function and determining whether to expand the
duties and responsibilities of such group; evaluating the comprehensive training
programs for all management personnel covering, among other things, compliance
with controls and procedures, revising the reporting structure so that the Chief
Financial Officer reports directly to the Audit Committee, and increasing the
business and operational oversight role of the Audit Committee.




43
 Table of Contents




Equity
Awards and Employment Agreements




The
Change of Control constituted a change of control under the Plan, which resulted
in the early vesting of all awards under the Plan.  As such, the
phantom units awarded to Messrs. Kevin L. Foxx, Michael J. Brochetti, Alex G.
Stallings, Peter L. Schwiering and Jerry A. Parsons in the amounts of 150,000
units, 90,000 units, 75,000 units, 45,000 units and 20,000 units, respectively,
are fully vested.   The common units underlying such awards were
issued to such individuals in August 2008.  In addition, the 5,000
restricted units awarded to each of Messrs. Billings, Kosnik and Bishop for
their service as independent members of the Board are fully vested.




The
Change of Control also resulted in a change of control under the employment
agreements of Messrs. Foxx, Brochetti, Stallings, Schwiering and
Parsons.  If within one year after the Change of Control any such
officer is terminated by our general partner without Cause (as defined below) or
such officer terminates the agreement for Good Reason (as defined below), he
will be entitled to payment of any unpaid base salary and vested benefits under
any incentive plans, a lump sum payment equal to 24 months of base salary and
continued participation in the our general partner’s welfare benefit programs
for one year after termination. Upon such an event, Messrs Foxx, Brochetti,
Stallings, Schwiering and Parsons would be entitled to lump sum payments of
$900,000, $600,000, $550,000, $500,000 and $500,000, respectively, in addition
to continued participation in our general partner’s welfare benefit
programs.  As of the date of the filing of this report, none of these
officers is entitled to these benefits as none of them has been terminated by
our general partner without Cause or has terminated his agreement for Good
Reason.




For
purposes of the employment agreements:




“Cause”
means (i) conviction of the executive officer by a court of competent
jurisdiction of any felony or a crime involving moral turpitude; (ii) the
executive officer’s willful and intentional failure or willful intentional
refusal to follow reasonable and lawful instructions of the Board;
(iii) the executive officer’s material breach or default in the performance
of his obligations under the employment agreement; or (iv) the executive
officer’s act of misappropriation, embezzlement, intentional fraud or similar
conduct involving our general partner.




“Good
Reason” means (i) a material reduction in the executive officer’s base
salary; (ii) a material diminution of the executive officer’s duties,
authority or responsibilities as in effect immediately prior to such diminution;
or (iii) the relocation of the named executive officer’s principal work
location to a location more than 50 miles from its current
location.




Internal
Controls




SemGroup
Energy Partners G.P., L.L.C., our general partner, has sole responsibility for
conducting our business and for managing our operations. Effective internal
controls are necessary for our general partner, on our behalf, to provide
reliable financial reports, prevent fraud and operate us successfully as a
public company. If our general partner’s efforts to develop and maintain its
internal controls are not successful, it is unable to maintain adequate controls
over our financial processes and reporting in the future or it is unable to
assist us in complying with our obligations under Section 404 of the
Sarbanes-Oxley Act of 2002, our operating results could be harmed or we may fail
to meet our reporting obligations.





We and
our general partner rely upon the Private Company for their personnel, including
those related to the implementation of internal controls and disclosure controls
and procedures.  Staff reductions by the Private Company or other
departures by the Private Company’s employees that provide services to us could
have a material adverse effect on internal controls and the effectiveness of
disclosure controls and procedures.  Ineffective internal controls
could cause us to report inaccurate financial information or cause investors to
lose confidence in our reported financial information, which would likely have a
negative effect on the trading price of our common units.






44
 Table of Contents


Taxation
as a Corporation




The
anticipated after-tax economic benefit of an investment in our common units
depends largely on us being treated as a partnership for federal income tax
purposes.  If less than 90% of the gross income of a publicly traded
partnership, such as us, for any taxable year is “qualifying income” from
sources such as the transportation, marketing (other than to end users), or
processing of crude oil, natural gas or products thereof, interest, dividends or
similar sources, that partnership will be taxable as a corporation under Section
7704 of the Internal Revenue Code for federal income tax purposes for that
taxable year and all subsequent years.  In this regard, because the
income we earn from the Throughput Agreement and the Terminalling Agreement with
the Private Company is “qualifying income” any material reduction or elimination
of that income, or any amendment to the Throughput Agreement or the Terminalling
Agreement which changes the nature of the services provided or the income
generated thereunder, may cause our remaining “qualifying income” to constitute
less than 90% of our gross income.  As a result, we could become
taxable as a corporation for federal income tax purposes, unless we were to
transfer the businesses that generate non-qualifying income to one or more
subsidiaries taxed as corporations and pay entity level income taxes on such
non-qualifying income.  The IRS has not provided any ruling to us on
this matter.




If we
were treated as a corporation for federal income tax purposes, then we would pay
federal income tax on our income at the corporate tax rate, which is currently a
maximum of 35%, and would likely pay state income tax at varying
rates.  Distributions would generally be taxed again to unitholders as
corporate distributions and none of our income, gains, losses, deductions or
credits would flow through to our unitholders.  Because a tax would be
imposed upon us as an entity, cash available for distribution to our unitholders
would be substantially reduced.  Treatment of us as a corporation
would result in a material reduction in the anticipated cash flow and after-tax
return to unitholders and thus would likely result in a substantial reduction in
the value of our common units.




Other
Effects




The
Bankruptcy Filings have had and may in the future continue to have a number of
other impacts on our business and management.  In the Amended Omnibus
Agreement and other agreements with the Private Company, the Private Company
agreed to indemnify us for certain environmental and other claims relating to
the crude oil and liquid asphalt cement assets that have been contributed to
us.  In connection with the Settlement, we waived these claims and the
Amended Omnibus Agreement and other relevant agreements, including the
indemnification provisions therein, were rejected as part of the Bankruptcy
Proceedings.  If we experience an environmental or other loss, we
would experience increased losses which may have a material adverse effect on
our business, financial condition, results of operations, cash flows, ability to
make distributions to our unitholders, the trading price of our common units and
the ability to conduct our business.




We are
currently pursuing various strategic alternatives for our business and assets
including the possibility of entering into additional storage contracts with
third party customers and the sale of all or a portion of our
assets.  The uncertainty relating to the Bankruptcy Filings and the
recent global market and economic conditions may make it more difficult to
pursue merger opportunities or enter into storage contracts with third party
customers.




In
addition, events related to the Bankruptcy Filings, the securities litigation
and governmental investigations, and our efforts to enter into storage contracts
with third party customers and pursue merger opportunities has resulted in
increased expense beginning in the third quarter of 2008 due to the costs
related to legal and financial advisors as well as other related
costs.  General and administrative expenses (exclusive of non-cash
compensation expense related to the vesting of the units under the Plan)
increased by approximately $6.9 million and $7.5 million, or approximately 300%
and 326%, to approximately $9.2 million for the third quarter of 2008 and $9.8
million for the fourth quarter of 2008, respectively, compared to $2.3 million
in the second quarter of 2008.  We expect this increased level of
general and administrative expenses to continue into 2009.




Items
Impacting the Comparability of Our Financial Results




·
            There
      are differences in the way our predecessor recorded revenues and the way
      we record revenues.




o
            Historically,
      a substantial portion of our revenues were derived from services provided
      to the crude oil purchasing, marketing and distribution operations of the
      Private Company pursuant to the Throughput Agreement. Under the Throughput
      Agreement, the Private Company paid us a fee for gathering,
      transportation, terminalling and storage services based on volume and
      throughput. In rendering these services, we did not take title to, or
      marketing responsibility for, the crude oil that we gathered, transported,
      terminalled or stored and, therefore, we had minimal direct exposure to
      changes in crude oil prices.




o
            The
      Crude Oil Business had historically been a part of the integrated
      operations of the Private Company, and neither the Private Company nor our
      predecessor recorded revenue associated with the gathering,
      transportation, terminalling and storage services provided on an
      intercompany basis. The Private Company and our predecessor recognized
      only the costs associated with providing such services. As such, the
      revenues we received under the Throughput Agreement are not reflected in
      the historical financial statements of our
  predecessor.




o
            Our
      predecessor recognized revenues from third parties for (1) crude oil
      storage services, (2) crude oil transportation services and
      (3) crude oil producer field services. Although a substantial
      majority of our revenues are derived from services provided to the Private
      Company, we also recognize revenue for gathering, transportation,
      terminalling and storage services provided to third
    parties.




·
            There
      are differences in the way general and administrative expenses were
      allocated to our predecessor and the way we recognize general and
      administrative expenses.




o
            General
      and administrative expenses include office personnel and benefit expenses,
      costs related to our administration facilities, and insurance, accounting
      and legal expenses, including costs allocated by the Private Company for
      centralized general and administrative services performed by the Private
      Company. Such costs were allocated to our predecessor based on the nature
      of the respective expenses and its proportionate share of the Private
      Company’s head count, compensation expense, net revenues or square footage
      as appropriate.




o
            We
      were party to an Omnibus Agreement with the Private
      Company.  The Omnibus Agreement was amended (the "Amended
      Omnibus Agreement") in connection with the purchase of the Acquired
      Asphalt Assets to, among other things, increase the fixed administrative
      fee payable under such agreement from $5.0 million per year to $7.0
      million per year. Pursuant to the Amended Omnibus Agreement, we were
      required to pay our general partner and the Private Company this fixed
      administrative fee for the provision by our general partner and the
      Private Company of various general and administrative services to us for
      three years following the acquisition of our asphalt
      assets.  The events related to the Bankruptcy Filings terminated
      the Private Company’s obligations to provide services to us under the
      Amended Omnibus Agreement.  The Private Company continued to
      provide such services to us until the effective date of the Settlement at
      which time the Private Company rejected the Amended Omnibus Agreement and
      we and the Private Company entered into the Shared Services Agreement and
      the Transition Services Agreement relating to the provision of such
      services (see “Item 2. Management’s Discussion and Analysis of Financial
      Condition and Results of Operations—Impact
      of the Bankruptcy of the Private Company and Certain of its Subsidiaries
      and Related Events—Settlement with the Private
      Company”).  In addition, in connection with the Settlement, we
      made offers of employment to certain individuals associated with our crude
      oil operations and expect to make additional offers of employment to
      certain individuals associated with our asphalt operations.  The
      costs to directly employ these individuals as well as the costs under the
      Shared Services Agreement and the Transition Services Agreement may
      be higher than those previously paid by us under the Amended Omnibus
      Agreement, which could have a material adverse effect on our business,
      financial condition, results of operations, cash flows, ability to make
      distributions to our unitholders, the trading price of our common units
      and our ability to conduct our business.  For a more complete
      description of the Omnibus Agreement, see “Item 13—Certain Relationships
      and Related Party Transactions, and Director Independence—Agreements
      Related to Our Acquisition of the Asphalt Assets —Amended Omnibus
      Agreement” in our 2007 Form 10-K.




o
            We
      incur incremental general and administrative expenses as a result of being
      a publicly traded limited partnership, including costs associated with
      annual and quarterly reports to unitholders, financial statement audit,
      tax return and Schedule K-1 preparation and distribution, investor
      relations activities, registrar and transfer agent fees, incremental
      director and officer liability insurance costs and independent director
      compensation. These incremental general and administrative expenditures
      are not reflected in the historical financial statements of our
      predecessor.




·
            With
      the exception of capital lease obligations and prepaid insurance, no
      working capital was contributed to us in connection with our initial
      public offering.




·
            Our
      predecessor had $31.2 million in debt payable to the Private Company which
      was not assumed by us in our initial public offering. We entered into a
      $250.0 million five-year credit facility and borrowed $137.5 million under
      that facility and used net proceeds of approximately $38.7 million from
      the issuance of 1,875,000 common units pursuant to the underwriters’
      exercise of their over-allotment option in our initial public offering to
      reduce outstanding borrowings under our credit facility.  In
      connection with the purchase of our Acquired Asphalt Assets, we amended
      our credit facility to increase our borrowing capacity to $600.0
      million.  This borrowing capacity has subsequently been reduced
      as described in “—Liquidity and Capital Resources.”  Our credit
      facility matures in June 2011.  As of May
      22, 2009, we had $423.4 million in outstanding borrowings under
      our credit facility (including $23.4 million under our revolving credit
      facility and $400.0 million under our term loan facility) with an
      aggregate unused credit availability under our revolving credit facility
      and cash on hand of approximately $27.2 million. Pursuant to the Credit
      Agreement Amendment, our revolving credit facility is limited
      to $50.0 million.Please see “—Liquidity and
      Capital Resources.”




45
 Table of Contents


Results
of Operations




The table
below summarizes the financial results of the Partnership for the three and nine
months ended September 30, 2007 and 2008.  These financial results
reflect a $0.4 million allowance for doubtful accounts related to amounts
collectible from third parties as of September 30, 2008.  The
allowance related to amounts collectible from third parties was established as a
result of certain third party customers netting amounts due them from the
Private Company with amounts due to us.  Also, due to the change of
control of our general partner related to the Private Company’s liquidity
issues, all outstanding awards under our general partner’s long-term incentive
plan vested on July 18, 2008, resulting in an incremental $18.0 million in
non-cash compensation expense for the three months ended September 30,
2008.  In addition to the allowance for doubtful accounts and non-cash
compensation expense described above, the results of operations for the three
and nine months ended September 30, 2008 included in this quarterly report were
affected by the Bankruptcy Filings and related events, which resulted in
decreased revenues and increased general and administrative expenses (see “Item
2. Management’s Discussion and Analysis of Financial Condition and results of
Operations—Impact
of the Bankruptcy of the Private Company and Certain of its Subsidiaries and
Related Events—Our Revenues,” and “Item 2. Management’s Discussion and
Analysis of Financial Condition and results of Operations—Impact
of the Bankruptcy of the Private Company and Certain of its Subsidiaries and
Related Events—Other Effects,” respectively).Due to the events
related to the Bankruptcy Filings, including uncertainties related to future
revenues and cash flows, we do not expect our financial results for the three
and nine months ended September 30, 2008 to be indicative of our future
financial results.  For example, since the Bankruptcy Filings we have
experienced increased general and administrative expenses related to the costs
of legal and financial advisors and increased interest expense related to the
events of default under our credit facility and the associated Forbearance
Agreement (as defined below) and amendments thereto.  In addition, the
volumes being terminalled, stored, transported and gathered have decreased as
compared to periods prior to the Bankruptcy Filings, which has negatively
impacted total revenues.  As an example, fourth quarter 2008 total
revenues are approximately $8.2 million less than third quarter 2008 total
revenues, in each case excluding fuel surcharge revenues related to fuel and
power consumed to operate our liquid asphalt cement storage
tanks.  Our future total revenues will be further impacted because,
pursuant to the Settlement, the Private Company rejected the Terminalling
Agreement and the Throughput Agreement.  We entered into the New
Terminalling Agreement and the New Throughput Agreement on the terms described
elsewhere herein (see “Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations—Impact
of the Bankruptcy of the Private Company and Certain of its Subsidiaries and
Related Events—Settlement with the Private Company”).




Three
      Months ended September 30,
                      
                      
                      Nine
      Months ended September 30,2007
                      
                      
                      2008
                      
                      
                      2007
                      
                      
                      2008(in
      thousands)Service
      revenues:Terminalling
      and storage revenues:Third
      party
                      
                      $
                      691
                      
                      
                      $
                      4,661
                      
                      
                      $
                      7,836
                      
                      
                      $
                      5,674Related
      party
                      
                      
                      7,245
                      
                      
                      
                      27,555
                      
                      
                      
                      7,245
                      
                      
                      
                      75,434Total
      terminalling and storage
                      
                      
                      7,936
                      
                      
                      
                      32,216
                      
                      
                      
                      15,081
                      
                      
                      
                      81,108Gathering
      and transportation revenues:Third
      party
                      
                      
                      4,181
                      
                      
                      
                      10,910
                      
                      
                      
                      16,011
                      
                      
                      
                      20,548Related
      party
                      
                      
                      13,163
                      
                      
                      
                      10,668
                      
                      
                      
                      13,286
                      
                      
                      
                      47,628Total
      gathering and transportation
                      
                      
                      17,344
                      
                      
                      
                      21,578
                      
                      
                      
                      29,297
                      
                      
                      
                      68,176Total
      revenues
                      
                      
                      25,280
                      
                      
                      
                      53,794
                      
                      
                      
                      44,378
                      
                      
                      
                      149,284Operating
      expenses:Terminalling
      and storage
                      
                      
                      1,078
                      
                      
                      
                      11,975
                      
                      
                      
                      3,408
                      
                      
                      
                      29,071Gathering
      and transportation
                      
                      
                      14,874
                      
                      
                      
                      16,212
                      
                      
                      
                      46,702
                      
                      
                      
                      50,887Allowance
      for doubtful accounts
                      
                      
                      -
                      
                      
                      
                      (819
                      )
                      
                      
                      -
                      
                      
                      
                      447Total
      operating expenses
                      
                      
                      15,952
                      
                      
                      
                      27,368
                      
                      
                      
                      50,110
                      
                      
                      
                      80,405General
      and administrative expenses:
                      
                      
                      2,525
                      
                      
                      
                      27,177
                      
                      
                      
                      11,015
                      
                      
                      
                      33,244Operating
      income (loss)
                      
                      
                      6,803
                      
                      
                      
                      (751
                      )
                      
                      
                      (16,747
                      )
                      
                      
                      35,635Interest
      expense
                      
                      
                      2,424
                      
                      
                      
                      11,041
                      
                      
                      
                      3,369
                      
                      
                      
                      15,905Income
      tax expense
                      
                      
                      62
                      
                      
                      
                      59
                      
                      
                      
                      62
                      
                      
                      
                      227Net
      income (loss)
                      
                      $
                      4,317
                      
                      
                      $
                      (11,851
                      )
                      
                      $
                      (20,178
                      )
                      
                      $
                      19,503





46
 Table of Contents




Three
Months Ended September 30, 2008 Compared to the Three Months Ended September 30,
2007




Service revenues. Service
revenues were $53.8 million for the three months ended September 30, 2008
compared to $25.3 million for the three months ended September 30, 2007, an
increase of $28.5 million, or 113%. Service revenues include revenues from
terminalling and storage services and gathering and transportation services.
Terminalling and storage revenues increased by $24.3 million to $32.2 million
for the three months ended September 30, 2008 compared to $7.9 million for the
three months ended September 30, 2007, primarily due to revenues generated under
the Terminalling Agreement (revenues of $20.9 million for the three months ended
September 30, 2008).  The Terminalling Agreement was entered into in
February 2008 in conjunction with the purchase of the Acquired Asphalt Assets
therefore it was not present in the three months ended September 30,
2007.  In addition, our third party terminalling and storage revenue
increased by $4.0 million due to additional volume from third party crude
oil storage agreements during the three months ended September 30,
2008.




Our
gathering and transportation services revenue increased by $4.3 million to $21.6
million for the three months ended September 30, 2008 compared to $17.3 million
for the three months ended September 30, 2007.  The increase is
primarily due to third party customer revenues increasing for the three months
ended September 30, 2008 compared to the three months ended September 30,
2007.  The increase in third party revenues is primarily due to the
replacement of services previously provided to the Private Company with third
party gathering and transportation customers due to an order of the Bankruptcy
Court entered on September 9, 2008, that stated the Private Company would no
longer make minimum payments under the Throughput Agreement but instead pay a
market rate based upon the Private Company’s actual
usage.  Historically, our Predecessor was a part of the integrated
operations of the Private Company, and neither the Private Company nor the
Predecessor recorded revenue associated with the terminalling and storage and
gathering and transportation services provided on an intercompany basis.
Accordingly, revenues reflected for all periods prior to the contribution of the
assets, liabilities and operations to the Partnership by the Private Company on
July 20, 2007 are substantially services provided to third
parties.




Operating expenses. 
Operating expenses increased by $11.4 million, or 71%, to $27.4 million for the
three months ended September 30, 2008 compared to $16.0 million for the three
months ended September 30, 2007. Our fuel expenses increased by $5.5 million to
$8.0 million for the three months ended September 30, 2008 compared to $2.5
million for the three months ended September 30, 2007. The increase in our fuel
costs is attributable to the increase in number of transport trucks we operated
for the respective periods and the rising price of diesel fuel during the
comparative periods.   The Throughput Agreement provides for a
fuel surcharge, recorded in revenue, which offsets increases in fuel expenses
related to either rising diesel prices or force majeure events.  Also
included in fuel expense for the three months ended September 30, 2008 is $4.7
million of fuel and power expense associated with the boiler systems utilized to
heat our liquid asphalt cement storage tanks that were acquired in February
2008.  Under the Terminalling Agreement, this component of fuel
expense is passed through to the Private Company.  As a result of this
agreement, we have recorded $4.7 million in fuel surcharge revenues in relation
to fuel and power consumed to operate our liquid asphalt cement storage tanks
for the three months ended September 30, 2008.




Compensation
expense increased by $1.8 million to $7.3 million for the three months ended
September 30, 2008 primarily as a result of the purchase of our Acquired Asphalt
Assets in February 2008.  Our repair and maintenance expenses
decreased by $0.8 million to $1.2 million for the three months ended September
30, 2008 compared to $2.0 million for the three months ended September 30, 2007,
primarily due to the timing of routine maintenance in our gathering and
transportation segment. Lease expense related to crude oil tanker trucks
increased by $0.3 million to $0.8 million for the three months ended September
30, 2008. This increase is attributable to the replacement of crude oil
transport vehicles that were historically financed through capital
leases.  As a result of the growth in our property and equipment, our
property taxes increased by $0.7 million to $0.9 million for the three months
ended September 30, 2008 compared to $0.2 million for the three months ended
September 30, 2007.




Outside
services expenses increased by $0.2 million to $0.8 million for the three months
ended September 30, 2008 compared to $0.6 million for the three months ended
September 30, 2007, primarily due to an increase in third party transportation
costs resulting from increased volumes gathered in our gathering and
transportation segment.




Depreciation
expense increased by $3.4 million to $5.7 million for the three months ended
September 30, 2008 compared to $2.3 million for the three months ended September
30, 2007, primarily as a result of capital expenditures in our terminalling and
storage segment and as a result of the purchase of our Acquired Asphalt Assets
in February 2008.


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The three
months ended September 30, 2008 includes a decrease of $0.9 million in our
allowance for doubtful accounts for amounts due from the Private Company that
had been reserved as of June 30, 2008.  Pursuant to the
Settlement, our pre-petition claims have been netted against pre-petition
claims by the Private Company and waived.  The three months ended
September 30, 2008 also includes an allowance for doubtful accounts increase of
$0.1 million for services provided to certain third parties as of September 30,
2008.  The allowance related to amounts due from third parties
increased as a result of certain third party customers netting amounts due them
from the Private Company with amounts due to us.





General and administrative
expenses. General and administrative expenses increased by $24.7
million, or 988%, to $27.2 million for the three months ended September 30, 2008
compared to $2.5 million for the three months ended September 30, 2007. Due to
the change of control of our general partner related to the Private Company’s
liquidity issues, all awards outstanding under our long-term incentive plan as
of June 30, 2008 vested on July 18, 2008.  As a result, general and
administrative expenses for the three months ended September 30, 2008 included
$18.0 million in non-cash, equity-based compensation recognized under our
long-term incentive plan.  General and administrative expenses
(exclusive of non-cash compensation expense related to the vesting of the units
under the Plan) increased by approximately $6.9 million and $7.5 million, or
approximately 300% and 326%, to approximately $9.2 million for the third quarter
of 2008 and $9.8 million for the fourth quarter of 2008, respectively, compared
to $2.3 million in the second quarter of 2008.  We expect this
increased level of general and administrative expenses to continue into
2009.  This increase is due to increased costs related to legal and
financial advisors as well as other related costs in connection with events
related to the Bankruptcy Filings, the securities litigation and governmental
investigations, and our efforts to enter into storage contracts with third party
customers and pursue other strategic opportunities.  We expect
this increased level of general and administrative expenses to continue into
2009.





Interest expense. 
Interest expense represents interest on capital lease obligations and long-term
borrowings under our credit facility and the impact of our interest rate swap
agreements. Interest expense increased by $8.6 million to $11.0 million interest
expense for the three months ended September 30, 2008 compared to $2.4 million
interest expense for the three months ended September 30, 2007.  The
increase was primarily due to an increase in the average long-term borrowings
outstanding during the three months ended September 30, 2008 compared to the
three months ended September 30, 2007, which accounted for approximately $7.8
million of an increase in interest expense, net of capitalized
interest.  In addition, the two interest rate swap agreements entered
into during the third quarter of 2007 and the three additional interest rate
swap agreements entered into in February 2008 resulted in $0.6 million in
interest expense for the three months ended September 30, 2008.  Due
to events related to the Bankruptcy Filings, all of these interest rate swap
positions were terminated in the third quarter of 2008, and we have recorded a
$1.5 million liability as of September 30, 2008 with respect to these
positions.




Nine
months Ended September 30, 2008 Compared to the Nine months Ended September 30,
2007




Service revenues. Service revenues were $149.3 million for the nine months ended
September 30, 2008 compared to $44.4 million for the nine months ended September
30, 2007, an increase of $104.9 million, or 236%. Service revenues include
revenues from terminalling and storage services and gathering and transportation
services. Terminalling and storage revenues increased by $66.0 million to $81.1
million for the nine months ended September 30, 2008 compared to $15.1 million
for the nine months ended September 30, 2007, primarily due to revenues
generated under both the Throughput Agreement (revenues of $26.3 million for the
nine months ended September 30, 2008 compared to revenues of $7.2 million for
the nine months ended September 30, 2007) and the Terminalling Agreement
(revenues of $49.1 million for the nine months ended September 30,
2008).  The Terminalling Agreement was entered into in February 2008
in conjunction with the purchase of the Acquired Asphalt Assets therefore it was
not present in the nine months ended September 30,
2007.  Historically, our Predecessor was a part of the integrated
operations of the Private Company, and neither the Private Company nor the
Predecessor recorded revenue associated with the terminalling and storage and
gathering and transportation services provided on an intercompany basis.
Accordingly, revenues reflected for all periods prior to the contribution of the
crude oil assets, liabilities and operations to the Partnership by the Private
Company on July 20, 2007 are substantially services provided to third
parties.




Our
gathering and transportation services revenue increased by $38.9 million to
$68.2 million for the nine months ended September 30, 2008 compared to $29.3
million for the nine months ended September 30, 2007. This increase is primarily
due to revenues generated under the Throughput Agreement subsequent to the
closing of our initial public offering.  Historically, our Predecessor
was a part of the integrated operations of the Private Company, and neither the
Private Company nor the Predecessor recorded revenue associated with the
terminalling and storage and gathering and transportation services provided on
an intercompany basis. Accordingly, revenues reflected for all periods prior to
the contribution of the crude oil assets, liabilities and operations to the
Partnership by the Private Company on July 20, 2007 are substantially
services provided to third parties.


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Operating expenses. 
Operating expenses increased by $30.3 million, or 60%, to $80.4 million for the
nine months ended September 30, 2008 compared to $50.1 million for the nine
months ended September 30, 2007. Our fuel expenses increased by $13.1 million to
$20.5 million for the nine months ended September 30, 2008 compared to $7.4
million for the nine months ended September 30, 2007. The increase in our fuel
costs is attributable to the increase in number of transport trucks we operated
for the respective periods and the rising price of diesel fuel during the
comparative periods.   The Throughput Agreement provides for a
fuel surcharge, recorded in revenue, which offsets increases in fuel expenses
related to either rising diesel prices or force majeure events.  Also
included in fuel expense for the nine months ended September 30, 2008 is $10.8
million of fuel and power expense associated with the boiler systems utilized to
heat our liquid asphalt cement storage tanks that were acquired in February
2008.  Under the Terminalling Agreement, this component of fuel
expense is passed through to the Private Company.  As a result of this
agreement, we have recorded $10.8 million in fuel surcharge revenues in relation
to fuel and power consumed to operate our liquid asphalt cement storage tanks
for the nine months ended September 30, 2008.




Compensation
expense increased by $4.7 million to $21.6 million for the nine months ended
September 30, 2008 primarily as a result of the purchase of our Acquired Asphalt
Assets in February 2008.  Our repair and maintenance expenses
decreased by $1.5 million to $5.0 million for the nine months ended September
30, 2008 compared to $6.5 million for the nine months ended September 30, 2007,
primarily due to the timing of routine maintenance in our gathering and
transportation segment. Lease expense related to crude oil tanker trucks
increased by $0.9 million to $2.0 million for the nine months ended September
30, 2008. This increase is attributable to the replacement of crude oil
transport vehicles that were historically financed through capital
leases.  As a result of the growth in our property and equipment, our
property taxes increased by $1.7 million to $2.3 million for the nine months
ended September 30, 2008 compared to $0.6 million for the nine months ended
September 30, 2007.




Outside
services expenses increased by $1.6 million to $3.2 million for the nine months
ended September 30, 2008 compared to $1.6 million for the nine months ended
September 30, 2007, primarily due to an increase in third party transportation
costs resulting from increased volumes gathered in our gathering and
transportation segment.  In addition, our utilities expenses increased
by $0.4 million to $1.7 million for the nine months ended September 30, 2008
compared to $1.3 million for the nine months ended September 30, 2007, primarily
due to growth in our gathering and transportation segment.




Depreciation
expense increased by $8.8 million to $15.3 million for the nine months ended
September 30, 2008 compared to $6.5 million for the nine months ended September
30, 2007, primarily as a result of capital expenditures in our terminalling and
storage segment and as a result of the purchase of our Acquired Asphalt Assets
in February 2008.




The nine
months ended September 30, 2008 reflects a $0.4 million allowance for doubtful
accounts related to amounts due from third parties as of September 30,
2008.  The allowance related to amounts due from third parties was
established as a result of certain third party customers netting amounts due
them from the Private Company with amounts due to us.





General and administrative
expenses. General and administrative expenses increased by $22.2
million, or 202%, to $33.2 million for the nine months ended September 30, 2008
compared to $11.0 million for the nine months ended September 30,
2007.  Due to the change of control of our general partner related to
the Private Company’s liquidity issues, all awards outstanding under our
long-term incentive plan as of June 30, 2008 vested on July 18,
2008.  As a result, general and administrative expenses for the nine
months ended September 30, 2008 included $19.4 million in non-cash, equity-based
incentive compensation recognized under our long-term incentive
plan.  General and administrative expenses (exclusive of non-cash
compensation expense related to the vesting of the units under the Plan)
increased by approximately $6.9 million and $7.5 million, or approximately 300%
and 326%, to approximately $9.2 million for the third quarter of 2008 and $9.8
million for the fourth quarter of 2008, respectively, compared to $2.3 million
in the second quarter of 2008.  This increase is due to increased
costs related to legal and financial advisors as well as other related costs in
connection with events related to the Bankruptcy Filings, the securities
litigation and governmental investigations, and our efforts to enter into
storage contracts with third party customers and pursue other
strategic opportunities.  We expect this increased level of
general and administrative expenses to continue into 2009.


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Interest expense. 
Interest expense represents interest on capital lease obligations and long-term
borrowings under our credit facility and the impact of our interest rate swap
agreements.  Interest expense increased by $12.5 million to $15.9
million for the nine months ended September 30, 2008 compared to $3.4 million
for the nine months ended September 30, 2007. The increase was primarily due to
an increase in the average long-term borrowings outstanding during the nine
months ended September 30, 2008 compared to the nine months ended September 30,
2007, which accounted for approximately $14.1 million of an increase in interest
expense, net of capitalized interest.  This increase was partially
offset by the two interest rate swap agreements entered into during the third
quarter of 2007 and three additional interest rate swap agreements entered into
in February 2008, the fair value accounting of which resulted in $2.1 million in
interest income for the nine months ended September 30, 2008.  Due to
events related to the Bankruptcy Filings, all of these interest rate swap
positions were terminated in the third quarter of 2008, and we have recorded a
$1.5 million liability as of September 30, 2008 with respect to these
positions.




Effects
of Inflation




In recent
years, inflation has been modest and has not had a material impact upon the
results of the Partnership’s operations.




Off
Balance Sheet Arrangements




We do not
have any off-balance sheet arrangements.




Liquidity
and Capital Resources




Cash
Flows and Capital Expenditures




Cash
generated from operations and borrowings under our credit facility have
historically been the primary sources of our liquidity. Due to the events
related to the Bankruptcy Filings, including uncertainties related to future
revenues and cash flows, we do not expect our historical cash flows to be
indicative of our future financial cash flows.As of May 22, 2009, we
had $423.4 million in outstanding borrowings under our credit facility
(including $23.4 million under our revolving credit facility and $400.0 million
under our term loan facility) with an aggregate unused credit availability under
our revolving credit facility and cash on hand of approximately $27.2 million.
Pursuant to the Credit Agreement Amendment (as defined below), our revolving
credit facility is limited to $50.0 million.  If we
are unable to sustain our sources of revenue generation and reestablish
our relationships within the credit markets, this cash position may not be
sufficient to operate our business over the long-term.




Historically,
our predecessor’s sources of liquidity included cash generated from operations
and funding from the Private Company.  The following table summarizes
our sources and uses of cash for the nine months ended September 30, 2007 and
2008:




Nine
      Months EndedSeptember
      30,2007
                                    
                                    
                                    2008(in
      millions)Net
      cash provided by (used in) operating activities
                                    
                                    
                                    (11.7
                                    )
                                    
                                    
                                    42.9Net
      cash used in investing activities
                                    
                                    
                                    (18.6
                                    )
                                    
                                    
                                    (519.8
                                    )Net
      cash provided by financing activities
                                    
                                    
                                    31.5
                                    
                                    
                                    
                                    493.0


Operating
Activities. Net cash provided by operating activities was $42.9
million for the nine months ended September 30, 2008 as compared to the $11.7
million used in operating activities for the nine months ended September 30,
2007.  The increase in net cash provided by operating activities is
primarily due to a $39.7 million increase in our net income for the nine months
ended September 30, 2008 compared to the nine months ended September 30,
2007.  In addition, cash provided by our operating activities
increased due to a $8.8 million increase in depreciation and amortization, a
$17.4 million increase in equity based incentive compensation and a $0.5 million
increase in allowance for doubtful accounts.  The increase was offset
by a decrease in our cash provided by changes in working capital of $9.4
million, a decrease in our interest rate swap liability of $2.2 million and a
decrease in our unrealized loss related to interest rate swap agreements of $0.6
million.


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Investing
Activities. Net cash used in investing activities was $519.8 million
for the nine months ended September 30, 2008 compared to $18.6 million for the
nine months ended September 30, 2007. This increase is primarily attributable to
the purchase of our Acquired Asphalt Assets in February 2008 for approximately
$380 million, our purchase of our Acquired Storage Assets in May 2008 for
approximately $90 million, and our purchase of our Acquired Pipeline Assets in
May 2008 for approximately $45 million.  The increase due to the above
mentioned purchases were offset by a reduction in capital expenditures primarily
resulting from the timing of construction projects in our terminalling and
storage segment and gathering and transportation segment.




Financing
Activities. Net cash provided by financing activities was $493.0
million for the nine months ended September 30, 2008 as compared to $31.5
million for the nine months ended September 30, 2007.  Net cash
provided by financing activities for the nine months ended September 30, 2008 is
primarily comprised of the change in our net borrowings under our credit
facility of $266.0 million and proceeds from the February 2008 public offering,
net of offering fees, of $161.2 million, and is offset by distributions paid of
$23.7 million for the nine months ended September 30, 2008.  Prior to
our initial public offering our net cash provided by financing activities
primarily comprised of capital contributions received from the Private
Company.  The capital contributions served to fund our working capital
needs and both maintenance and expansion capital expenditure projects that are
reflected in net cash used in investing activities for the nine months ended
September 30, 2007.





Our
Liquidity and Capital Resources




Cash flow
from operations and our credit facility are our primary sources of liquidity. At
September 30, 2008, we had approximately $101.9 million of availability under
our revolving credit facility.  As of May 22, 2009, we had
an aggregate unused credit availability under our revolving credit facility and
cash on hand of approximately $27.2 million.Usage of
our revolving credit facility is subject to ongoing compliance with covenants.
If we are unable to sustain our sources of revenue generation and reestablish
our relationships within the credit markets, this cash position may not be
sufficient to operate our business over the long-term. Historically, we have
derived a substantial majority of our revenues from services provided to the
Private Company, and as such, our liquidity was affected by the liquidity and
credit risk of the Private Company.  Due to the events related to the
Bankruptcy Filings described herein, including the uncertainty relating to
future cash flows, we face substantial doubt as to our ability to continue
as a going concern.




Capital Requirements. Our
operations are capital intensive, requiring significant investment to maintain
and upgrade existing operations. Our capital requirements consist of the
following:




·
            maintenance
      capital expenditures, which are capital expenditures made to maintain the
      existing integrity and operating capacity of our assets and related cash
      flows further extending the useful lives of the assets;
  and




·
            expansion
      capital expenditures, which are capital expenditures made to expand or to
      replace partially or fully depreciated assets or to expand the operating
      capacity or revenue of existing or new assets, whether through
      construction, acquisition or
modification.




No
assurance can be given that we will not be required to restrict our operations
because of possible limitations on our ability to obtain financing for our
maintenance capital expenditures and our expansion capital expenditures due to
restrictions under our credit agreement and the uncertainty related to the
Bankruptcy Filings.  For example, due to the continuing impact of the
Bankruptcy Filing discussed below, we have suspended capital expenditures
related to Acquired Pipeline Assets and are evaluating future use of such
pipeline.




Our Ability to Grow Depends on Our
Ability to Access External Expansion Capital. Our partnership agreement
provides that we distribute all of our available cash to our unitholders.
Available cash is reduced by cash reserves established by our general partner to
provide for the proper conduct of our business (including for future capital
expenditures) and to comply with the provisions of our credit facility. However,
we expect that we will continue to rely primarily upon external financing
sources, including commercial bank borrowings and the issuance of debt and
equity securities, rather than cash reserves established by our general partner,
to fund our acquisitions and expansion capital expenditures that we may make in
the future.  We do not expect to make acquisitions or expansion
capital expenditures in the near term.  Capital expenditures are
limited under our credit agreement to $12.5 million in 2009, $8.0 million in
2010 and $4.0 million in 2011.  To the extent we are unable to finance
growth externally and we are unwilling to establish cash reserves to fund future
acquisitions, our cash distribution policy will significantly impair our ability
to grow. In addition, because we distribute all of our available cash, we may
not grow as quickly as businesses that reinvest their available cash to expand
ongoing operations.  Pursuant to the Credit Agreement Amendment, we
are prohibited from making distributions to our unitholders if our leverage
ratio (as defined in the credit agreement) exceeds 3.50 to 1.00.  As
of September 30, 2008 and December 31, 2008, our leverage ratio was 4.34 to 1.00
and 4.83 to 1.00, respectively. If our leverage ratio does not improve, we
may not make quarterly distributions to our unitholders in the
future.  To the extent we issue additional units in connection with
any acquisitions or expansion capital expenditures, the payment of distributions
on those additional units may increase the risk that we will be unable to
maintain or increase our per unit distribution level, which in turn may impact
the available cash that we have to distribute on each unit. There are no
limitations in our partnership agreement on our ability to issue additional
units, including units ranking senior to the common units.


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Description of Credit
Facility. In July 2007 we entered into a $250.0 million five-year
credit facility with a syndicate of financial institutions. In connection with
our acquisition of our asphalt assets, we amended this credit facility to
increase the total amount we may borrow to $600.0 million.




The
credit facility is available for general partnership purposes, including working
capital, capital expenditures, distributions and repayment of indebtedness that
is assumed in connection with acquisitions. Due to events related to the
Bankruptcy Filings, events of default occurred under our credit
agreement.  Effective on September 18, 2008, we and the requisite
lenders under our credit facility entered into a Forbearance Agreement and
Amendment to Credit Agreement (the “Forbearance Agreement”) under which the
lenders agreed, subject to specified limitations and conditions, to forbear from
exercising their rights and remedies arising from the defaults and events of
default described therein for the period commencing on September 18, 2008 and
ending on the earliest of (i) December 11, 2008, (ii) the occurrence of any
default or event of default under the credit agreement other than certain
defaults and events of default indicated in the Forbearance Agreement, or (iii)
the failure of us to comply with any of the terms of the Forbearance Agreement
(the “Forbearance Period”).  On December 11, 2008, the lenders agreed
to extend the Forbearance Period until December 18, 2008 pursuant to a First
Amendment to Forbearance Agreement and Amendment to Credit Agreement (the “First
Forbearance Amendment”), on December 18, 2008, the lenders agreed to extend the
Forbearance Period until March 18, 2009 pursuant to a Second Amendment to
Forbearance Agreement and Amendment to Credit Agreement (the “Second Forbearance
Amendment”), and on March 18, 2009, the lenders agreed to further extend the
Forbearance Period until April 8, 2009 pursuant to a Third Amendment to
Forbearance Agreement and Amendment to Credit Agreement (the “Third Forbearance
Amendment”).




We, our
subsidiaries that are guarantors of the obligations under the credit facility,
Wachovia Bank, National Association, as Administrative Agent, and the requisite
lenders under our credit agreement entered into the Consent, Waiver and
Amendment to Credit Agreement (the “Credit Agreement Amendment”), dated as of
April 7, 2009, under which, among other things, the lenders consented to
the Settlement and waived all existing defaults and events of default described
in the Forbearance Agreement and amendments thereto.




Prior to
the execution of the Forbearance Agreement, the credit agreement was comprised
of a $350 million revolving credit facility and a $250 million term loan
facility.  The Forbearance Agreement permanently reduced our revolving
credit facility under the credit agreement from $350 million to $300 million and
prohibited us from borrowing additional funds under our revolving credit
facility during the Forbearance Period.   Under the Forbearance
Agreement, we agreed to pay the lenders executing the Forbearance Agreement a
fee equal to 0.25% of the aggregate commitments under the credit agreement after
giving effect to the above described commitment reduction.  The Second
Forbearance Amendment further permanently reduced our revolving credit facility
under the credit agreement from $300 million to $220 million.  In
addition, under the Second Forbearance Amendment, we agreed to pay the lenders
executing the Second Forbearance Amendment a fee equal to 0.375% of the
aggregate commitments under the credit agreement after the above described
commitment reduction.  Under the Third Forbearance Amendment, we
agreed to pay a fee equal to 0.25% of the aggregate commitments under the credit
agreement after the above described commitment reduction.  The amendments
to the Forbearance Agreement prohibited us from borrowing additional funds under
our revolving credit facility during the extended Forbearance
Period.




The
Credit Agreement Amendment subsequently further permanently reduced our
revolving credit facility under the credit agreement from $220 million to $50
million, and increased the term loan facility from $250 million to $400
million.  Upon the execution of the Credit Agreement Amendment, $150
million of our outstanding revolving loans were converted to term loans and we
became able to borrow additional funds under our revolving credit
facility.  Pursuant to the Credit Agreement Amendment, the credit
facility and all obligatinos thereunder will mature on June 30,
2011.  Under the Credit Agreement Amendment, we agreed to pay the
lenders executing the Credit Agreement Amendment a fee equal to 2.00% of the
aggregate commitments under the credit agreement after the above described
commitment reduction, offset by the fee paid pursuant to the Third Forbearance
Amendment. As of May 22, 2009, we
had $423.4 million in outstanding borrowings under our credit facility
(including $23.4 million under our revolving credit facility and $400.0 million
under our term loan facility) with an aggregate unused credit availability under
our revolving credit facility and cash on hand of approximately $27.2 million.
Pursuant to the Credit Agreement Amendment, our revolving credit facility
is limited to $50.0 million.  If any of
the financial institutions that support our revolving credit facility were to
fail, we may not be able to find a replacement lender, which could negatively
impact our ability to borrow under our revolving credit facility.  For
instance, Lehman Brothers Commercial Bank is one of the lenders under our $50.0
million revolving credit facility, and Lehman Brothers Commercial Bank has
agreed to fund approximately $2.5 million (approximately 5%) of the revolving
credit facility.  On several occasions Lehman Brothers Commercial Bank has
failed to fund revolving loan requests under our revolving credit facility,
effectively limiting the aggregate amount of our revolving credit facility to
$47.5 million.




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Prior to
the events of default, indebtedness under the credit agreement bore interest at
our option, at either (i) the higher of the administrative agent’s prime
rate or the federal funds rate plus 0.5% (the "Base rate"), plus an applicable
margin that ranges from 0.50% to 1.75%, depending on our total leverage ratio
and senior secured leverage ratio, or (ii) LIBOR plus an applicable margin
that ranges from 1.50% to 2.75%, depending upon our total leverage ratio and
senior secured leverage ratio.  During the Forbearance Period
indebtedness under the credit agreement bore interest at our option, at either
(i) the Base rate, plus an applicable margin that ranges from 2.75% to
3.75%, depending upon our total leverage ratio, or (ii) LIBOR plus an
applicable margin that ranges from 4.25% to 5.25%, depending upon our total
leverage ratio.  Pursuant to the Second Forbearance Amendment,
commencing on December 12, 2008, indebtedness under the credit agreement bore
interest at our option, at either (i) the Base rate plus 5.0% per annum,
with a Base rate floor of 4.0% per annum, or (ii) LIBOR plus 6.0% per
annum, with a LIBOR floor of 3.0% per annum.




After
giving effect to the Credit Agreement Amendment, amounts outstanding under our
credit facility bear interest at either the LIBOR rate plus 6.50% per annum,
with a LIBOR floor of 3.00%, or the Base rate plus 5.50% per annum, with a Base
rate floor of 4.00% per annum.  We now pay a fee of 1.50% on unused
commitments under our revolving credit facility.  After giving effect
to the Credit Agreement Amendment, interest on amounts outstanding under our
credit facility must be paid monthly.  Our credit facility, as amended
by the Credit Agreement Amendment, now requires us to pay additional interest on
October 6, 2009, April 6, 2010, October 6, 2010 and April 6, 2011, equal to the
product of (i) the sum of the total amount of term loans then outstanding plus
the aggregate commitments under the revolving credit facility and (ii) 0.50%,
0.50%, 1.00% and 1.00%, respectively.




During
the three months ended September 30, 2008, the weighted average interest rate
incurred by us was 7.04% resulting in interest expense of approximately $8.2
million.  During the three months ended December 31, 2008, the
weighted average interest rate incurred by us was 7.72% resulting in interest
expense of approximately $8.9 million.




Among
other things, our credit facility, as amended by the Credit Agreement Amendment,
now requires us to make (i) minimum quarterly amortization payments on March 31,
2010 in the amount of $2.0 million, June 30, 2010 in the amount of $2.0 million,
September 30, 2010 in the amount of $2.5 million, December 31, 2010 in the
amount of $2.5 million and March 31, 2011 in the amount of $2.5 million, (ii)
mandatory prepayments of amounts outstanding under the revolving credit facility
(with no commitment reduction) whenever cash on hand exceeds $15.0 million,
(iii) mandatory prepayments with 100% of asset sale proceeds, (iv) mandatory
prepayment with 50% of the proceeds raised through equity sales and (v)
annual prepayments with 50% of excess cash flow (as defined in the Credit
Agreement Amendment).  Our credit facility, as amended by the Credit
Agreement Amendment, prohibits us from making draws under the revolving credit
facility if we would have more than $15.0 million of cash on hand after making
the draw and applying the proceeds thereof.




Under the
credit agreement, we are subject to certain limitations, including limitations
on our ability to grant liens, incur additional indebtedness, engage in a
merger, consolidation or dissolution, enter into transactions with affiliates,
sell or otherwise dispose of our assets (other than the sale or other
disposition of the assets of the asphalt business, provided that such
disposition is at arm’s length to a non-affiliate for fair market value in
exchange for cash and the proceeds of the disposition are used to pay down
outstanding loans), businesses and operations, materially alter the character of
our business, and make acquisitions, investments and capital
expenditures.  The credit agreement prohibits us from making
distributions of available cash to our unitholders if any default or event of
default (as defined in the credit agreement) exists.  The credit
agreement, as amended by the Credit Agreement Amendment, requires us to maintain
a leverage ratio (the ratio of our consolidated funded indebtedness to our
consolidated adjusted EBITDA, in each case as defined in the credit agreement),
determined as of the last day of eachmonth for the twelve
month period ending on the date of determination, that ranges on a monthly
basis from not more than 5.50 to 1.00 to not more than 9.75 to
1.00.  In addition, pursuant to the Credit Agreement Amendment, our
ability to make acquisitions and investments in unrestricted subsidiaries is
limited and we may only make distributions if our leverage ratio is less than
3.50 to 1.00 and certain other conditions are met.  As of September
30, 2008 and December 31, 2008, our leverage ratio was 4.34 to 1.00 and 4.83 to
1.00, respectively. If our leverage ratio does not improve, we may not make
quarterly distributions to our unitholders in the future.




The
credit agreement, as amended by the Credit Agreement Amendment, also requires us
to maintain an interest coverage ratio (the ratio of our consolidated EBITDA to
our consolidated interest expense, in each case as defined in the credit
agreement) that ranges on a monthly basis from not less than 2.50 to 1.00 to not
less than 1.00 to 1.00. As of September 30, 2008 and December 31, 2008, our
interest coverage ratio was 4.95 to 1.00 and 3.60 to 1.00,
respectively.


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Further,
we are required to maintain a minimum monthly consolidated adjusted EBITDA for
the prior twelve months ranging from $45.4 million to $82.9 million as
determined at the end of each month.  In addition, capital
expenditures are limited to $12.5 million in 2009, $8.0 million in 2010 and $4.0
million in the six months ending June 30, 2011.




The
credit agreement specifies a number of events of default (many of which are
subject to applicable cure periods), including, among others, failure to pay any
principal when due or any interest or fees within three business days of the due
date, failure to perform or otherwise comply with the covenants in the credit
agreement, failure of any representation or warranty to be true and correct in
any material respect, failure to pay debt, a change of control of us or our
general partner, and other customary defaults.  In
addition, it is an event of default under the credit agreement if we do not file
our delinquent quarterly and annual reports with the SEC by September 30, 2009,
unless we retain new auditors, in which case such deadline is extended to
December 31, 2009.If an event of default exists under the credit
agreement, the lenders will be able to accelerate the maturity of the credit
agreement and exercise other rights and remedies, including taking available
cash in our bank accounts.  If an event of default exists and we are
unable to obtain forbearance from our lenders or a waiver of the events of
default under our credit agreement, we may be forced to sell assets, make a
bankruptcy filing or take other action that could have a material adverse effect
on our business, the price of our common units and our results of
operations.  We are also prohibited from making cash distributions to
our unitholders while the events of default exist.




Contractual
Obligations. In addition to the credit facility described above, we
entered into the Amended Omnibus Agreement with the Private Company pursuant to
which the Private Company provided all employees and support services necessary
to run our business prior to the Settlement. The services included, without
limitation, operations, marketing, maintenance and repair, legal, accounting,
treasury, insurance administration and claims processing, risk management,
health, safety and environmental, information technology, human resources,
credit, payroll, internal audit, taxes and engineering.  The events
related to the Bankruptcy Filings terminated the Private Company’s obligations
to provide services to us under the Amended Omnibus Agreement.  The
Private Company continued to provide such services to us until the effective
date of the Settlement at which time the Private Company rejected the Amended
Omnibus Agreement and we and the Private Company entered into the Shared
Services Agreement and the Transition Services Agreement relating to the
provision of such services (see “Item 2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations—Impact
of the Bankruptcy of the Private Company and Certain of its Subsidiaries and
Related Events—Settlement with the Private Company”).  In
addition, in connection with the Settlement, we made offers of employment to
certain individuals associated with our crude oil operations and expect to make
additional offers of employment to certain individuals associated with our
asphalt operations.  The costs to directly employ these individuals as
well as the costs under the Shared Services Agreement, the Transition Services
Agreement may be higher than those previously paid by us under the Amended
Omnibus Agreement, which could have a material adverse effect on our business,
financial condition, results of operations, cash flows, ability to make
distributions to our unitholders, the trading price of our common units and our
ability to conduct our business.




A summary
of our contractual cash obligations over the next several fiscal years, as of
September 30, 2008, was as follows:




Payments
      Due by PeriodContractual
      Obligations
                        
                        Total
                        
                        
                        Less
      than 1 year
                        
                        
                        1-3
      years
                        
                        
                        4-5
      years
                        
                        
                        More
      than 5 years(in
      millions)Omnibus
      Agreement obligations (1)
                        
                        $
                        1.2
                        
                        
                        $
                        1.2
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        -Debt
      obligations (2)
                        
                        
                        448.1
                        
                        
                        
                        -
                        
                        
                        
                        448.1
                        
                        
                        
                        -
                        
                        
                        
                        -Capital
      lease obligations
                        
                        
                        1.4
                        
                        
                        
                        1.0
                        
                        
                        
                        0.4
                        
                        
                        
                        -
                        
                        
                        
                        -Operating
      lease obligations
                        
                        
                        13.4
                        
                        
                        
                        3.9
                        
                        
                        
                        6.5
                        
                        
                        
                        2.7
                        
                        
                        
                        0.3


(1)
            As
      of September 30, 2008, the Private Company still provided services to us
      under the Amended Omnibus Agreement and we still paid our general partner
      and the Private Company a fixed administrative fee, in the amount of $7.0
      million per year, for the provision by our general partner and the Private
      Company of various general and administrative services pursuant to the
      Amended Omnibus Agreement.  The events related to the Bankruptcy
      Filings terminated the Private Company’s obligations to provide services
      to us under the Amended Omnibus Agreement.  The Private Company
      continued to provide such services to us until the effective date of the
      Settlement at which time the Private Company rejected the Amended Omnibus
      Agreement and we and the Private Company entered into the Shared Services
      Agreement and the Transition Services Agreement relating to the provision
      of such services (see “Item 2. Management’s Discussion and Analysis of
      Financial Condition and Results of Operations—Impact
      of the Bankruptcy of the Private Company and Certain of its Subsidiaries
      and Related Events—Settlement with the Private
      Company”).(2)
            Represents
      required future principal repayments of borrowings under our credit
      facility, all of which is variable rate debt. All amounts outstanding
      under the credit facility mature in June 2011.  See Note 4 of
      the Notes to the Consolidated Financial Statements included in Item 1 of
      this Quarterly Report.







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Recent
Accounting Pronouncements




For
information regarding recent accounting developments that may affect our future
financial statements, see Note 12 of the Notes to the Consolidated Financial
Statements included in Item 1 of this Quarterly Report.





Item 3.
            Quantitative
      and Qualitative Disclosures about Market
Risk




We are
exposed to market risk due to variable interest rates under our credit
facility.




As of May 22, 2009 we had
$423.4 million outstanding under our credit facility that was subject to a
variable interest rate.  Interest rate swap agreements
were used to manage a portion of the exposure related to changing interest rates
by converting floating-rate debt to fixed-rate debt. In August 2007 we entered
into interest rate swap agreements with an aggregate notional value of $80.0
million that mature on August 20, 2010. Under the terms of the interest
rate swap agreements, we were to pay fixed rates of 4.9% and receive three-month
LIBOR with quarterly settlement.  In March 2008 we entered into
interest rate swap agreements with an aggregate notional value of $100.0 million
that mature on March 31, 2011.  Under the terms of the interest rate
swap agreements, we were to pay fixed rates of 2.6% to 2.7% and receive
three-month LIBOR with quarterly settlement.  The interest rate swaps
do not receive hedge accounting treatment under Statement of Financial
Accounting Standard (“SFAS”) SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities” (“SFAS 133”). Changes in the fair
value of the interest rate swaps are recorded in interest expense in the
statements of operations.  In addition, the interest rate swap
agreements contain cross-default provisions to events of default under the
credit agreement.  Due to events related to the Bankruptcy Filings,
all of these interest rate swap positions were terminated in the third quarter
of 2008, and we have recorded a $1.5 million liability as of September 30, 2008
with respect to these positions.




Prior to
the events of default, indebtedness under the credit agreement bore interest at
our option, at either (i) the Base rate, plus an applicable
margin that ranges from 0.50% to 1.75%, depending on our total leverage ratio
and senior secured leverage ratio, or (ii) LIBOR plus an applicable margin
that ranges from 1.50% to 2.75%, depending upon our total leverage ratio and
senior secured leverage ratio.  During the Forbearance Period
indebtedness under the credit agreement bore interest at our option, at either
(i) the Base rate, plus an applicable margin that ranges from 2.75% to
3.75%, depending upon our total leverage ratio, or (ii) LIBOR plus an
applicable margin that ranges from 4.25% to 5.25%, depending upon our total
leverage ratio.  Pursuant to the Second Forbearance Amendment,
commencing on December 12, 2008, indebtedness under the credit agreement bore
interest at our option, at either (i) the Base rate plus 5.0% per
annum, with a Base rate floor of 4.0% per annum, or (ii) LIBOR plus 6.0%
per annum, with a LIBOR floor of 3.0% per annum.




After
giving effect to the Credit Agreement Amendment, amounts outstanding under our
credit facility bear interest at either the LIBOR rate plus 6.50% per annum,
with a LIBOR floor of 3.00%, or the Base rate plus 5.50% per annum, with a Base
rate floor of 4.00% per annum.  We now pay a fee of 1.50% on unused
commitments under our revolving credit facility.  After giving effect
to the Credit Agreement Amendment, interest on amounts outstanding under our
credit facility must be paid monthly.  Our credit facility, as amended
by the Credit Agreement Amendment, now requires us to pay additional interest on
October 6, 2009, April 6, 2010, October 6, 2010 and April 6, 2011, equal to the
product of (i) the sum of the total amount of term loans then outstanding plus
the aggregate commitments under the revolving credit facility and (ii) 0.50%,
0.50%, 1.00% and 1.00%, respectively.




During
the three months ended September 30, 2008, the weighted average interest rate
incurred by us was 7.04% resulting in interest expense of approximately $8.2
million.  During the three months ended December 31, 2008, the
weighted average interest rate incurred by us was 7.72% resulting in interest
expense of approximately $8.9 million.




Due to
the Forbearance Agreement, the Second Forbearance Amendment and the Credit
Agreement Amendment, we expect our interest expense to continue to increase as
compared to our interest expense prior to the Bankruptcy
Filings.  Changes in economic conditions could result in higher
interest rates, thereby increasing our interest expense and reducing our funds
available for capital investment, operations or distributions to our
unitholders. Additionally, if domestic interest rates continue to increase, the
interest rates on any of our future credit facilities and debt offerings could
be higher than current levels, causing our financing costs to increase
accordingly. Based
on current borrowings, an increase or decrease of 100 basis points in the
interest rate will result in increased or decreased, respectively, annual
interest expenses of $4.2 million.




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 Table of Contents




Item 4T.
            Controls
      and Procedures




Evaluation of disclosure controls
and procedures. Our general partner’s management, including the Chief
Executive Officer and Chief Financial Officer of our general partner, evaluated
as of the end of the period covered by this report, the effectiveness of our
disclosure controls and procedures as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer of our general partner concluded
that our disclosure controls and procedures, as of September 30, 2008, were
effective.




Changes in internal control over
financial reporting. There were no changes in our internal control over
financial reporting that occurred during the quarter ended September 30, 2008
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.  However, since the
beginning of the third quarter of 2008, the Private Company has made the
Bankruptcy Filings, and a subcommittee of our Board conducted an internal
review, both as discussed elsewhere in this report.  One of the
findings by counsel for such subcommittee was that certain senior executive
officers of our general partner, who were also senior executive officers of the
Private Company, showed at least some indifference to known or easily
discoverable facts and had access to and reviewed financial information from
which they could have developed an earlier understanding of the nature and
significance of the trading activities that led to the Private Company’s
liquidity problems.  For a discussion of the internal review, please
see “Item 2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations − Impact of the Bankruptcy of the Private Company and
Certain of its Subsidiaries and Related Events − Internal Review.”




After
completion of the internal review, a plan was developed with the advice of the
Audit Committee of the Board to further strengthen our processes and
procedures.  This plan includes, among other things, reevaluating
executive officers and accounting and finance personnel (including a realignment
of officers as described elsewhere in this report) and hiring, as deemed
necessary, additional accounting and finance personnel or consultants;
reevaluating our internal audit function and determining whether to expand the
duties and responsibilities of such group; evaluating the comprehensive training
programs for all management personnel covering, among other things, compliance
with controls and procedures, revising the reporting structure so that the Chief
Financial Officer reports directly to the Audit Committee, and increasing the
business and operational oversight role of the Audit Committee.




We and
our general partner rely upon the Private Company for our personnel, including
those related to designing and implementing internal controls and disclosure
controls and procedures.  Staff reductions by the Private Company or
other departures by the Private Company’s employees that provide services to us
could have a material adverse effect on internal controls and the effectiveness
of disclosure controls and procedures.  Management is in the process
of evaluating any such potential impact and is preparing a transition plan that
may include, among other items, hiring additional personnel and the redesign and
implementation of internal controls and disclosure controls and procedures as
needed.




Pursuant
to the Amended Omnibus Agreement with the Private Company, the Private Company
operated our assets and performed other administrative services for us such as
accounting, legal, regulatory, development, finance, land and
engineering.  The events related to the Bankruptcy Filings terminated
the Private Company’s obligations to provide services to us under the Amended
Omnibus Agreement.  The Private Company continued to provide such
services to us until the effective date of the Settlement at which time the
Private Company rejected the Amended Omnibus Agreement and we and the Private
Company entered into the Shared Services Agreement and the Transition Services
Agreement relating to the provision of such services.  If the Private
Company stops providing these services we may incur increased costs to replace
these services and our financial results may suffer.  In addition, in
connection with the Settlement, we made offers of employment to certain
individuals associated with our crude oil operations and expect to make
additional offers of employment to certain individuals associated with our
asphalt operations.  The costs to directly employ these individuals as
well as the costs under the Shared Services Agreement and the Transition
Services Agreement may be higher than those previously paid by us under the
Amended Omnibus Agreement, which could have a material adverse effect on our
business, financial condition, results of operations, cash flows, ability to
make distributions to our unitholders, the trading price of our common units and
our ability to conduct our business.


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 Table of Contents


PART II.OTHER INFORMATION


Item 1.
            Legal
      Proceedings




On July 21, 2008, we received a letter
from the staff of the SEC giving notice that the SEC is conducting an inquiry
relating to us and requesting, among other things, that we voluntarily preserve,
retain and produce to the SEC certain documents and information relating
primarily to our disclosures respecting the Private Company’s liquidity issues,
which were the subject of our July 17, 2008 press release.  On October
22, 2008, we received a subpoena from the SEC pursuant to a formal order of
investigation requesting certain documents relating to, among other things, the
Private Company’s liquidity issues.  We have been cooperating, and
intend to continue cooperating, with the SEC in its investigation.




On July
23, 2008, we and our general partner each received a Grand Jury subpoena from
the United States Attorney’s Office in Oklahoma City, Oklahoma, requiring, among
other things, that we and our general partner produce financial and other
records related to our July 17, 2008 press release.  We have been
informed that the U.S. Attorneys’ Offices for the Western District of Oklahoma
and the Northern District of Oklahoma are in discussions regarding the
subpoenas, and no date has been set for a response to the
subpoenas.  We and our general partner intend to cooperate fully with
this investigation if and when it proceeds.




Between
July 21, 2008 and September 4, 2008, the following class action complaints were
filed:




1.     Poelman v. SemGroup Energy
Partners, L.P., et al., Civil Action No. 08-CV-6477, in the United States
District Court for the Southern District of New York (filed July 21,
2008).  The plaintiff voluntarily dismissed this case on August 26,
2008;




2.     Carson v. SemGroup Energy Partners,
L.P. et al.,
Civil Action No. 08-cv-425, in the Northern District of Oklahoma (filed July 22,
2008);




3.      Charles D. Maurer SIMP Profit
Sharing Plan f/b/o Charles D. Maurer v. SemGroup Energy Partners, L.P. et
al., Civil Action No. 08-cv-6598, in the United States District Court for
the Southern District of New York (filed July 25, 2008);




4.     Michael Rubin v. SemGroup Energy
Partners, L.P. et al., Civil Action No. 08-cv-7063, in the United States
District Court for the Southern District of New York (filed August 8,
2008);




5.     Dharam V. Jain v. SemGroup Energy
Partners, L.P. et al., Civil Action No. 08-cv-7510, in the United States
District Court for the Southern District of New York  (filed August 25,
2008); and




6.     William L. Hickman v. SemGroup
Energy Partners, L.P. et al., Civil Action No. 08-cv-7749, in the United
States District Court for the Southern District of New York (filed September 4,
2008).












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 Table of Contents




Pursuant
to a motion filed with the MDL Panel, theMaurer case has been transferred to the Northern District of Oklahoma and
consolidated with theCarson case.  TheRubin, Jain, andHickman cases have also been transferred to the Northern District of
Oklahoma.




A hearing on motions for appointment as lead plaintiff was held in theCarson case on October 17, 2008.  At that hearing, the court granted
a motion to consolidate the Carson
and Maurer
cases for pretrial proceedings, and the consolidated litigation is now pending
asIn Re: SemGroup Energy Partners, L.P. Securities Litigation, Case No.
08-CV-425-GKF-PJC. The court entered an order on October 27, 2008, granting the
motion of Harvest Fund Advisors LLC to be appointed lead plaintiff in the
consolidated litigation.  On January 23, 2009, the court entered a
Scheduling Order providing, among other things, that the lead plaintiff may file
a consolidated amended complaint within 70 days of the date of the order, and
that defendants may answer or otherwise respond within 60 days of the date of
the filing of a consolidated amended complaint.  On
January 30, 2009, the lead plaintiff filed a motion to modify the stay of
discovery provided for under the Private Securities Litigation Reform Act. The
court granted Plaintiff's motion, and we and certain other defendants filed a
Petition for Writ of Mandamus in the Tenth Circuit Court of Appeals
that was denied after oral argument on April 24,
2009.




The
lead plaintiff obtained an extension to file its consolidated amended complaint
until May 4, 2009; defendants have 60 days from that date to answer or otherwise
respond to the complaint.




The
lead plaintiff filed a consolidated amended complaint on May 4, 2009.  In
that complaint, filed as a putative class action on behalf of all purchasers of
our units from July 17, 2007 to July 17, 2008 (the “class period”), lead
plaintiff asserts claims under the federal securities laws against us, our
general partner, certain of our current and former officers and directors,
certain underwriters in our initial and secondary public offerings, and certain
entities who were investors in the Private Company and their individual
representatives who served on the Private Company’s management committee. Among
other allegations, the amended complaint alleges that our financial condition
throughout the class period was dependent upon speculative commodities trading
by the Private Company and its Chief Executive Officer, Thomas L. Kivisto, and
that Defendants negligently and intentionally failed to disclose this
speculative trading in our public filings during the class period. Specifically,
the amended complaint alleges claims for violations of sections 11, 12(a)(2),
and 15 of the Securities Act of 1933 for damages and rescission with respect to
all persons who purchased our units in the initial and secondary offerings, and
also asserts claims under section 10b, Rule 10b-5, and section 20(a) of the
Securities and Exchange Act of 1934. The amended complaint seeks certification
as a class action under the Federal Rules of Civil Procedure, compensatory and
rescissory damages for class members, pre-judgment interest, costs of court, and
attorneys’ fees.




We intend to vigorously defend these actions.  There can be no assurance
regarding the outcome of the litigation.  An estimate of possible
loss, if any, or the range of loss cannot be made and therefore we have not
accrued a loss contingency related to these actions.  However, the
ultimate resolution of these actions could have a material adverse effect on our
business, financial condition, results of operations, cash flows, ability to
make distributions to our unitholders, the trading price of the our common units
and our ability to conduct our business.




In March
and April 2009, nine current or former executives of the Private Company and
certain of its affiliates filed wage claims with the Oklahoma Department of
Labor against our general partner.  Their claims arise from our
general partner’s Long-Term Incentive Plan, Employee Phantom Unit Agreement
(“Phantom Unit Agreement”).  Most claimants allege that phantom
units previously awarded to them vested upon the Change of Control that
occurred in July 2008.  One claimant alleges that his phantom units
vested upon his termination.  The claimants contend our general
partner’s failure to deliver certificates for the phantom units within 60 days
after vesting has caused them to be damaged, and they seek recovery of
approximately $2 million in damages and penalties.  On April 30, 2009,
all of the wage claims were dismissed on jurisdictional grounds by the
Department of Labor.Our general partner intends to vigorously
defend these claims.




We may
become the subject of additional private or government actions regarding these
matters in the future.  Litigation may be time-consuming, expensive
and disruptive to normal business operations, and the outcome of litigation is
difficult to predict.  The defense of these lawsuits may result in the
incurrence of significant legal expense, both directly and as the result of our
indemnification obligations.  The litigation may also divert
management’s attention from our operations which may cause our business to
suffer.  An unfavorable outcome in any of these matters may have a
material adverse effect on our business, financial condition, results of
operations, cash flows, ability to make distributions to our unitholders, the
trading price of the our common units and our ability to conduct our business.
All or a portion of the defense costs and any amount we may be required to pay
to satisfy a judgment or settlement of these claims may not be covered by
insurance.




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 Table of Contents




Item 1A.
            Risk
      Factors





Limited
partner interests are inherently different from the capital stock of a
corporation, although many of the business risks to which we are subject are
similar to those that would be faced by a corporation engaged in a similar
business. You should carefully consider the following risk factors together with
all of the other information included in this report. If any of the following
risks were actually to occur, our business, financial condition, or results of
operations could be materially adversely affected. In that case, we might not be
able to pay distributions on our common units, the trading price of our common
units could decline and our unitholders could lose all or part of their
investment.





Risks
Related to the Bankruptcy Filings





The
Bankruptcy Filings may have a material adverse effect on our results of
operations and our ability to make distributions to our
unitholders.





On July
22, 2008, the Private Company made the Bankruptcy Filings.  The
Private Company and its subsidiaries continue to operate their businesses and
own and manage their properties as debtors-in-possession under the jurisdiction
of the Bankruptcy Court and in accordance with the applicable provisions of the
Bankruptcy Code.  None of we, our general partner, our subsidiaries
nor our general partner’s subsidiaries are debtors in the Bankruptcy
Cases.





As of the
date of the Bankruptcy Filings, we were party to various agreements with the
Private Company and its subsidiaries, including subsidiaries that are debtors in
the Bankruptcy Cases.  Under the Throughput Agreement, we provided
certain crude oil gathering, transportation, terminalling and storage services
to a subsidiary of the Private Company that is a debtor in the Bankruptcy
Cases.  Under the Terminalling Agreement, we provided certain liquid
asphalt cement terminalling and storage services to a subsidiary of the Private
Company that is a debtor in the Bankruptcy Cases.  For the nine months
ended September 30, 2008 and the year ended December 31, 2008, we derived
approximately 81% and approximately 73%, respectively, of our revenues,
excluding fuel surcharge revenues related to fuel and power consumed to operate
our liquid asphalt cement storage tanks, from services we provided to the
Private Company and its subsidiaries.  Prior to the Order and the
Settlement, the Private Company was obligated to pay us minimum monthly fees
totaling $76.1 million annually and $58.9 million annually in respect of the
minimum commitments under the Throughput Agreement and the Terminalling
Agreement, respectively, regardless of whether such services were actually used
by the Private Company.  The Order required the Private Company to
make certain payments under the Throughput Agreement and Terminalling Agreement
during a portion of the third quarter of 2008,  including the contractual
minimum payments under the Terminalling Agreement.  In connection with
the Settlement, we waived the fees due under the Terminalling Agreement during
March 2009.  In addition, the Private Company rejected the Throughput
Agreement and the Terminalling Agreement and we and the Private Company entered
into the New Throughput Agreement and the New Terminalling
Agreement.  We expect revenues from services provided to the Private
Company under the New Throughput Agreement and New Terminalling Agreement to be
substantially less than prior revenues from services provided to the Private
Company as the new agreements are based upon actual volumes gathered,
transported, terminalled and stored instead of certain minimum volumes and are
at reduced rates when compared to the Throughput Agreement and Terminalling
Agreement.  See “─The Private Company has rejected certain contracts
it has with us as part of the Bankruptcy Cases, which could have a material
adverse effect on our results of operations, cash flows and ability to make
distributions to our unitholders.”





We have
been pursuing opportunities to provide crude oil terminalling and storage
services and crude oil gathering and transportation services to third
parties.  Although average rates for the new third-party crude oil
terminalling and storage and transportation and gathering contracts are
comparable with those previously received from the Private Company, the volumes
being terminalled, stored, transported and gathered have decreased as compared
to periods prior to the Bankruptcy Filings, which has negatively impacted total
revenues.  As an example, fourth quarter 2008 total revenues are
approximately $8.2 million less than third quarter 2008 total revenues, in each
case excluding fuel surcharge revenues related to fuel and power consumed to
operate our liquid asphalt cement storage tanks.  In
addition, we have recently entered into leases and storage agreements with third
parties relating to certain of our asphalt facilities.  The revenues
that we will receive pursuant to these leases and storage agreements will be
less than the revenues received under the Terminalling Agreement with the
Private Company.




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 Table of Contents


There can
be no assurance that our efforts to increase the third party revenue will
be successful.  In addition, certain third parties may be less likely
to enter into business transactions with us due to the Bankruptcy
Filings.  The Private Company may also choose to curtail its
operations or liquidate its assets as part of the Bankruptcy
Cases.  As a result, unless we are able to generate additional third
party revenues, we will continue to experience lower volumes in our system
which could have a material adverse effect on our results of operations and cash
flows.




We
may not be able to continue as a going concern.





The
financial statements included in this Form 10-Q have been prepared assuming we
will continue as a going concern, though such an assumption may not be
true.  We earned 81% of our revenues, excluding fuel surcharge
revenues related to fuel and power consumed to operate our liquid asphalt cement
storage tanks, for the nine months ended September 30, 2008 from the Private
Company, which commenced the Bankruptcy Cases in July 2008, the effects of which
are more fully described herein.  The Bankruptcy Cases, as well as
other events and uncertainties related to the Bankruptcy Filings, raise
substantial doubt about our ability to continue as a going
concern.  While it is not feasible to predict the ultimate outcome of
the events surrounding the Bankruptcy Cases, we have been and could continue to
be materially and adversely affected by such events and we may be forced to make
a bankruptcy filing or take other action that could have a material adverse
effect on our business, the price of our common units and our results of
operations.  See “Item 2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and Note 2 to the unaudited
consolidated financial statements.





The
Private Company has rejected certain contracts it has with us as part of the
Bankruptcy Cases, which could have a material adverse effect on our results of
operations, cash flows and ability to make distributions to our
unitholders.




In
connection with the Settlement, among other things, the Private Company rejected
certain agreements, including the Terminalling Agreement, the Throughput
Agreement and the Amended Omnibus Agreement (see “Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of Operations—Impact
of the Bankruptcy of the Private Company and Certain of its Subsidiaries and
Related Events—Settlement with the Private Company”).  We may not be
able to replace the volumes provided by the Private Company under these
agreements and any contracts we make with third parties may be for prices that
are less than those charged the Private Company under the Throughput Agreement
and the Terminalling Agreement, which could have a material adverse effect on
our results of operations, cash flows and ability to make distributions to our
unitholders.




We have
recently entered into leases and storage agreements with third parties relating
to 39 of our 46 asphalt facilities.  The revenues that we will
receive pursuant to these leases and storage agreements will be less than the
revenues received under the Terminalling Agreement with the Private
Company.Without sufficient revenues from our asphalt assets,
we may be unable to meet the covenants, including the minimum liquidity, minimum
EBITDA and minimum receipt requirements, under our credit
agreement.  Any significant decrease in the amount of revenues that we
receive from our liquid asphalt cement terminalling and storage operations could
have a material adverse effect on our cash flows, financial condition and
results of operations.




The
Private Company may assert claims against us in the Bankruptcy Cases which could
have a material adverse effect on our cash flows and ability to make
distributions to our unitholders.




Pursuant
to the Settlement, the Private Company released certain of its claims against
us.  However, there may be other claims against us, that have not been
released in connection with the Settlement.  If claims are identified,
such claims may prompt the filing of lawsuits in the Bankruptcy Cases to seek
monetary damages or to challenge or to seek to unwind transactions with us under
the bankruptcy laws.  Such litigation may be expensive and, if
successful, would have a material adverse effect on our business, financial
condition, results of operations, ability to make distributions to our
unitholders and the trading price of our common units.




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We
did not make a distribution for the second quarter, third quarter or fourth
quarter of 2008 and the first quarter of 2009, do not expect to make a
distribution for the second quarter of 2009 at this time and may not make
distributions in the future.





We did
not make a distribution to our common unitholders, subordinated unitholders or
general partner attributable to the results of operations for the quarters ended
June 30, 2008, September 30, 2008, December 31, 2008 or March 31, 2009 due to
the events of default under our credit agreement and the uncertainty of our
future cash flows relating to the Bankruptcy Filings.  Our unitholders
will be required to pay taxes on their share of our taxable income even though
they did not receive a cash distribution for such periods.  In
addition, we do not currently expect to make a distribution relating to the
second quarter of 2009.  See “—Tax Risks to Common Unitholders—Our
unitholders have been and will be required to pay taxes on their share of our
taxable income even if they have not or do not receive any cash distributions
from us.”  We distributed approximately $14.3 million to our unitholders
for the three months ended March 31, 2008.  Pursuant to the Credit
Agreement Amendment, we are prohibited from making distributions to our
unitholders if our leverage ratio (as defined in the credit agreement) exceeds
3.50 to 1.00.  As of September 30, 2008 and December 31, 2008, our
leverage ratio was 4.34 to 1.00 and 4.83 to 1.00, respectively.  We
are uncertain as to when, if ever, our leverage ratio will be below 3.50 to 1.00
and therefore we are uncertain as to when or if we may again make
distributions to our unitholders.  Our partnership agreement provides
that, during the subordination period, which we are currently in, our common
units have the right to receive distributions of available cash from operating
surplus in an amount equal to the minimum quarterly distribution of $0.3125 per
common unit per quarter, plus any arrearages in the payment of the minimum
quarterly distribution on the common units from prior quarters, before any
distributions of available cash from operating surplus may be made on the
subordinated units.





We
are exposed to the credit risk of the Private Company and the material
nonperformance by the Private Company could reduce our ability to make
distributions to our unitholders.





In
connection with the Settlement we entered into the New Terminalling Agreement,
the New Throughput Agreement, the Shared Services Agreement and the Transition
Services Agreement.  Pursuant to such agreements we continue to rely
upon the Private Company for a portion of our revenues and to perform certain
operational and administrative services for us.  The Private Company
has defaulted under its credit facilities and its indenture relating to its
senior notes.  Moody’s and Fitch Ratings have withdrawn their ratings
of the Private Company due to the Bankruptcy Filings.  Any material
nonperformance under the New Throughput Agreement, the New Terminalling
Agreement, the Shared Services Agreement or the Transition Services Agreement by
the Private Company could materially and adversely impact our results of
operations and our ability to operate and make distributions to our
unitholders. See “─The Private Company has rejected certain contracts
it has with us as part of the Bankruptcy Cases, which could have a material
adverse effect on our results of operations, cash flows and ability to make
distributions to our unitholders.”





Though we
have no indebtedness rated by any credit rating agency, we may have rated debt
in the future. Credit rating agencies such as Moody’s and Fitch Ratings may
consider the Private Company’s debt ratings when assigning ours, because of the
Private Company’s ownership interest in us, the strong operational links between
the Private Company and us, and our reliance on the Private Company for a
portion of our revenues. Due to the Private Company’s default of its
indebtedness and the uncertainty related to the Bankruptcy Filings, we could
experience an increase in our borrowing costs or difficulty accessing capital
markets if we are able to access them at all. Such a development could adversely
affect our ability to grow our business and to make distributions to
unitholders.





Prior
to the Settlement, we did not have employees and relied solely on the employees
of the Private Company.  We continue to rely upon the Private Company
for certain operational and administrative services and may experience increased
costs as we begin employing individuals directly associated with our
operations.





As is the
case with many publicly traded partnerships, we have not historically directly
employed any persons responsible for managing or operating us or for providing
services relating to day-to-day business affairs.  Pursuant to the
Amended Omnibus Agreement, the Private Company operated our assets and performed
other administrative services for us such as accounting, legal, regulatory,
development, finance, land and engineering.  The events related to the
Bankruptcy Filings terminated the Private Company’s obligations to provide
services to us under the Amended Omnibus Agreement.  The Private
Company continued to provide such services to us until the effective date of the
Settlement at which time the Private Company rejected the Amended Omnibus
Agreement and we and the Private Company entered into the Shared Services
Agreement and the Transition Services Agreement relating to the provision of
such services.  In addition, in connection with the Settlement, we
made offers of employment to certain individuals associated with our crude oil
operations and expect to make additional offers of employment to certain
individuals associated with our asphalt operations.  The costs to
directly employ these individuals as well as the costs under the Shared Services
Agreement and the Transition Services Agreement may be higher than those
previously paid by us under the Amended Omnibus Agreement, which could have a
material adverse effect on our business, financial condition, results of
operations, cash flows, ability to make distributions to our unitholders, the
trading price of our common units and our ability to conduct our
business.




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In
addition, in connection with the Settlement, we agreed to not solicit the
Private Company’s employees for a year from the time of the
Settlement.  In connection with the Bankruptcy Cases, the Private
Company may reduce a substantial number of its employees or some of the Private
Company’s employees may choose to terminate their employment with the Private
Company, some of whom may currently be providing general and administrative and
operating services to us under the Shared Services Agreement or the Transition
Services Agreement.  Any reductions in critical personnel who provide
services to us and any increased costs to replace such personnel could have a
material adverse effect on our ability to conduct our business and our results
of operations.




Certain
of our officers are also officers of the Private Company.





Prior to
the events surrounding the Bankruptcy Filings, the officers of our general
partner were also employees and officers or directors of the Private
Company.  Messrs. Foxx and Stallings resigned the positions each
officer held with SemGroup, L.P. in July 2008.  Mr. Brochetti had
previously resigned from his position with SemGroup, L.P. in March
2008.  Mr. Parsons left the employment of SemGroup, L.P. in March
2009.  Messrs. Foxx, Brochetti, Stallings, and Parsons remain as
officers of our general partner.  Mr. Schwiering continues to serve as
an officer of the Private Company and may have conflicts of interest and may
favor the Private Company’s interests over our interests when conducting our
operations.




Our
interests may be adverse to the Private Company’s interests due to the
Bankruptcy Filings.




If the
Private Company fails to make its payments under the New Throughput Agreement or
the New Terminalling Agreement or otherwise fails to perform under the contracts
we have with the Private Company, we may have potential claims against the
Private Company’s bankruptcy estate.  In addition, we may also have
additional claims against the Private Company that were not released in
connection with the Settlement.  Any claims made by us against the
Private Company in the Bankruptcy Cases will be subject to the claim allowance
procedure provided in the Bankruptcy Code and Bankruptcy Rules.  If an
objection is filed, the Bankruptcy Court would determine the extent to which any
claim that is objected to is allowed and the priority of such
claims.  We are uncertain regarding the ultimate amount of any
potential damages for breaches of contract or other claims that we may be able
to establish in the bankruptcy proceedings and we cannot predict the amounts, if
any, that we will collect or the timing of any such collection, but such losses
could be substantial and could have a material adverse effect on our ability to
conduct our business and our results of operations.




In
connection with the Settlement, the Private Company has rejected the
Terminalling Agreement and the Throughput Agreement.  We have a $35
million unsecured claim relating to rejection of the Terminalling Agreement in
the Bankruptcy Cases.  In addition, we have a $20 million unsecured
claim against the Private Company relating to rejection of the Throughput
Agreement (see “Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations—Impact of the Bankruptcy of the Private
Company and Certain of its Subsidiaries and Related Events—Settlement with the
Private Company”).




As a
result of these items, our interests may be adverse to the Private Company’s
interests.  The Private Company provides various administrative and
operational services for us pursuant to the Shared Services Agreement and the
Transition Services Agreement.  In addition, we rely upon the Private
Company’s personnel for the implementation of certain of our internal
controls.  The progress of the Bankruptcy Cases may influence the
Private Company’s decision to continue providing any of these services, which
could have a material adverse effect on our ability to conduct our business and
results of operations.




We
may experience significant costs in changing our name and
trademark.





In
connection with the Settlement, we and the Private Company entered into the
Trademark Agreement, pursuant to which the Private Company granted us a
non-exclusive, worldwide license to use certain trade names, including the name
“SemGroup” and the corresponding mark, until December 31, 2009, and the Private
Company waived claims for infringement relating to such trade names and mark
prior to the effective date of such Trademark Agreement (see “Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Impact of the Bankruptcy of the Private Company and Certain of its
Subsidiaries and Related Events—Settlement with the Private
Company”).  As such, we will be required to change our name and
trademark upon or prior to the expiration of the Trademark
Agreement.  The expenses associated with such a change may be
significant, which could have a material adverse effect on our business,
financial condition, results of operations, cash flows, ability to make
distributions to our unitholders, the trading price of our common units and our
ability to conduct our business.





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Without
sufficient revenues from our asphalt assets, we may be unable to meet the
covenants under our credit agreement.




Historically,
we provided liquid asphalt cement terminalling and storage services to the
Private Company pursuant to the Terminalling Agreement.  In connection
with the Settlement, the Private Company rejected the Terminalling Agreement and
we and the Private Company entered into the New Terminalling Agreement whereby
we provide liquid asphalt cement terminalling and storage services to the
Private Company in connection with its remaining asphalt
inventory.  The New Terminalling Agreement has an initial term that
ends on October 31, 2009 and the Private Company has agreed to remove all of its
existing asphalt inventory no later than such date, and we expect that the
Private Company may remove it much earlier than such date.  Also in
connection with the Settlement, the Private Company transferred certain asphalt
assets to us that were connected to our existing asphalt
assets.




The
asphalt industry in the United States is characterized by a high degree of
seasonality. Much of this seasonality is due to the impact that weather
conditions have on road construction schedules, particularly in cold weather
states. Refineries produce liquid asphalt cement year round, but the peak
asphalt demand season is during the warm weather months when most of the road
construction activity in the United States takes place. As a result, liquid
asphalt cement is typically purchased from refineries at low prices in the low
demand winter months and then processed and sold at higher prices in the peak
summer demand season.  Any significant decrease in the amount of
revenues that we receive from our liquid asphalt cement terminalling and storage
operations could have a material adverse effect on our cash flows, financial
condition and results of operations.




We
have recently entered into leases and storage agreements with third parties
relating to certain of our asphalt facilities.  The revenues that we
will receive pursuant to these leases and storage agreements will be less than
the revenues received under the Terminalling Agreement with the Private
Company.Without sufficient revenues from our asphalt assets, we
may be unable to meet the covenants, including the minimum liquidity, minimum
EBITDA and minimum receipt requirements, under our credit agreement (see “Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Impact of the Bankruptcy of the Private Company and Certain of its
Subsidiaries and Related Events—Settlement with the Private
Company”).




Our
future operations and cash flows are uncertain and may cause events of default
under our credit agreement.




Our future operations and
cash flows, especially those related to our asphalt operations, are
uncertain.  The covenants and other requirements under our credit
facility were designed using certain projections and assumptions relating to
revenues, EBITDA and cash flows.  In addition, our interest expense
has increased due to our entering into the Forbearance Agreement, as amended,
and the Credit Agreement Amendment.  For example, the weighted average
interest rate incurred by us during the three months ended September 30, 2008
was 7.04% resulting in interest expense of approximately $8.2 million as
compared to a weighted average interest rate incurred by us of 7.72% during the
three months ended December 31, 2008 resulting in interest expense of
approximately $8.9 million.  This increased interest expense may have
a material adverse effect on our cash flows and results of operations. 
In
addition, it is an event of default under the credit agreement if we do not file
our delinquent quarterly and annual reports with the SEC by September 30, 2009,
unless we retain new auditors, in which case such deadline is extended to
December 31, 2009.




If an
event of default exists under the credit agreement, the lenders will be able to
accelerate the maturity of the credit agreement and exercise other rights and
remedies, including taking the available cash in our bank
accounts.  If an event of default exists and we are unable to obtain
forbearance from our lenders or a waiver of the events of default under our
credit agreement, we may be forced to sell assets, make a bankruptcy filing or
take other action that could have a material adverse effect on our business, the
price of our common units and our results of operations.  We are also
prohibited from making cash distributions to our unitholders while the events of
default exist.  Certain lenders under our credit facility are also
lenders under the Private Company’s credit facility.  The progress of
the Private Company’s bankruptcy proceedings may influence the decisions of
these lenders relating to our credit facility which could adversely affect
us.




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We
are subject to an SEC inquiry and a Federal Grand Jury subpoena.





On July
21, 2008, we received a letter from the staff of the SEC giving notice that the
SEC is conducting an inquiry relating to us and requesting, among other things,
that we voluntarily preserve, retain and produce to the SEC certain documents
and information relating primarily to our disclosures respecting the Private
Company’s liquidity issues, which were the subject of our July 17, 2008 press
release.  On October 22, 2008, we received a subpoena from the SEC
pursuant to a formal order of investigation requesting certain documents
relating to, among other things, the Private Company’s liquidity
issues.  We have been cooperating, and intend to continue cooperating,
with the SEC in its investigation.




On July
23, 2008, we and our general partner each received a Grand Jury subpoena from
the United States Attorney’s Office in Oklahoma City, Oklahoma, requiring, among
other things, that we and our general partner produce financial and other
records related to our July 17, 2008 press release.  We have been
informed that the U.S. Attorneys’ Offices for the Western District of Oklahoma
and the Northern District of Oklahoma are in discussions regarding the
subpoenas, and no date has been set for a response to the
subpoenas.  We and our general partner intend to cooperate fully with
this investigation if and when it proceeds.




In the
event that either the SEC inquiry or the Grand Jury investigation leads to
action against any of our current or former directors or officers, or the
Partnership itself, the trading price of our common units may be adversely
impacted.  In addition, the SEC inquiry and the Grand Jury
investigation may result in the incurrence of significant legal expense, both
directly and as the result of our indemnification
obligations.   These matters may also divert management’s
attention from our operations which may cause our business to
suffer.  If we are subject to adverse findings in either of these
matters, we could be required to pay damages or penalties or have other remedies
imposed upon us which could have a material adverse effect on our business,
financial condition, results of operations, cash flows and ability to make
distributions to our unitholders.  All or a portion of the defense
costs and any amount we may be required to pay in connection with the resolution
of these matters may not be covered by insurance.




We
have been named as a party in lawsuits and may be named in additional litigation
in the future, all of which could result in an unfavorable outcome and have a
material adverse effect on our business, financial condition, results of
operations, cash flows, ability to make distributions to our unitholders, the
trading price of our common units and our ability to conduct our
business.




Between
July 21, 2008 and September 4, 2008, the following class action complaints were
filed:




1.     Poelman v. SemGroup Energy
Partners, L.P., et al., Civil Action No. 08-CV-6477, in the United States
District Court for the Southern District of New York (filed July 21,
2008).  The plaintiff voluntarily dismissed this case on August 26,
2008;




2.     Carson v. SemGroup Energy Partners,
L.P. et al.,
Civil Action No. 08-cv-425, in the Northern District of Oklahoma (filed July 22,
2008);




3.      Charles D. Maurer SIMP Profit
Sharing Plan f/b/o Charles D. Maurer v. SemGroup Energy Partners, L.P. et
al., Civil Action No. 08-cv-6598, in the United States District Court for
the Southern District of New York (filed July 25, 2008);




4.     Michael Rubin v. SemGroup Energy
Partners, L.P. et al., Civil Action No. 08-cv-7063, in the United States
District Court for the Southern District of New York (filed August 8,
2008);




5.     Dharam V. Jain v. SemGroup Energy
Partners, L.P. et al., Civil Action No. 08-cv-7510, in the United States
District Court for the Southern District of New York  (filed August 25,
2008); and




6.     William L. Hickman v. SemGroup
Energy Partners, L.P. et al., Civil Action No. 08-cv-7749, in the United
States District Court for the Southern District of New York (filed September 4,
2008).




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Pursuant
to a motion filed with the MDL Panel, theMaurer case has been
transferred to the Northern District of Oklahoma and consolidated with theCarson case.  TheRubin, Jain, andHickman cases have also been
transferred to the Northern District of Oklahoma.




A hearing
on motions for appointment as lead plaintiff was held in theCarson case on October 17,
2008.  At that hearing, the court granted a motion to consolidate the Carson and Maurer cases for pretrial
proceedings, and the consolidated litigation is now pending asIn Re: SemGroup Energy Partners,
L.P. Securities Litigation, Case No. 08-CV-425-GKF-PJC. The court entered
an order on October 27, 2008, granting the motion of Harvest Fund Advisors LLC
to be appointed lead plaintiff in the consolidated litigation.  On
January 23, 2009, the court entered a Scheduling Order providing, among other
things, that the lead plaintiff may file a consolidated amended complaint within
70 days of the date of the order, and that defendants may answer or otherwise
respond within 60 days of the date of the filing of a consolidated amended
complaint.  On
January 30, 2009, the lead plaintiff filed a motion to modify the stay of
discovery provided for under the Private Securities Litigation Reform Act. The
court granted Plaintiff's motion, and we and certain other defendants filed a
Petition for Writ of Mandamus in the Tenth Circuit Court of Appeals that was
denied after oral argument on April 24, 2009.




The lead
plaintiff obtained an extension to file its consolidated amended complaint until
May 4, 2009; defendants have 60 days from that date to answer or otherwise
respond to the complaint.






We intend
to vigorously defend these actions.  There can be no assurance regarding
the outcome of the litigation.




In March
and April 2009, nine current or former executives of the Private Company and
certain of its affiliates filed wage claims with the Oklahoma Department of
Labor against our general partner.  Their claims arise from our
general partner’s Long-Term Incentive Plan, Employee Phantom Unit Agreement
(“Phantom Unit
Agreement”).  Most claimants allege that phantom units previously
awarded to them vested upon the Change of Control that occurred in July
2008.  One claimant alleges that his phantom units vested upon his
termination.  The claimants contend our general partner’s failure to
deliver certificates for the phantom units within 60 days after vesting has
caused them to be damaged, and they seek recovery of approximately $2 million in
damages and penalties.On April 30, 2009, all of
the wage claims were dismissed on jurisdictional grounds by the Department of
Labor.Our general partner intends to vigorously defend these
claims.




We may
become the subject of additional private or government actions regarding these
matters in the future.  Litigation may be time-consuming, expensive
and disruptive to normal business operations, and the outcome of litigation is
difficult to predict.  The defense of these lawsuits may result in the
incurrence of significant legal expense, both directly and as the result of our
indemnification obligations.  The litigation may also divert
management’s attention from our operations which may cause our business to
suffer.  An unfavorable outcome in any of these matters may have a
material adverse effect on our business, financial condition, results of
operations, cash flows, ability to make distributions to our unitholders, the
trading price of the our common units and our ability to conduct our business.
All or a portion of the defense costs and any amount we may be required to pay
to satisfy a judgment or settlement of these claims may not be covered by
insurance.




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We
may experience increased losses as a result of waivers relating to the Private
Company’s indemnification obligations.




In the
Amended Omnibus Agreement and other agreements with the Private Company, the
Private Company agreed to indemnify us for certain environmental and other
claims relating to the crude oil and liquid asphalt cement assets that have been
contributed to us.  In connection with the Settlement, we waived these
claims and the Amended Omnibus Agreement and other relevant agreements,
including the indemnification provisions therein, were rejected as part of the
Bankruptcy Proceedings.  If we experience an environmental or other
loss, we would experience increased losses which may have a material adverse
effect on our business, financial condition, results of operations, cash flows,
ability to make distributions to our unitholders, the trading price of our
common units and the ability to conduct our business.





Our
common units were delisted from the Nasdaq and are currently quoted on the
Pink Sheets, which may make buying or selling our common units more
difficult.




Effective
at the opening of business on February 20, 2009, our common units were delisted
from Nasdaq due to our failure to timely file this Quarterly Report as well as
our Quarterly Report on Form 10-Q for the quarter ended June 30,
2008.  We filed our Quarterly Report on Form 10-Q for the quarter
ended June 30, 2008 on March 23, 2008.  Our common units are currently
traded on the Pink Sheets, which is an over-the-counter securities market, under
the symbol SGLP.PK.  The fact that our common units are not listed on
a national securities exchange is likely to make trading such common units more
difficult for broker-dealers, unitholders and investors, potentially leading to
further declines in the price of our common units.  In addition, it
may limit the number of institutional and other investors that will consider
investing in our common units, which may have an adverse effect on the price of
our common units.  It may also make it more difficult for us to raise
capital in the future.




We
continue to work to become compliant with our SEC reporting obligations and
intend to promptly seek the relisting of our common units on Nasdaq as soon as
practicable after we have become compliant with such reporting
obligations.  However, there can be no assurances that we will be able
to relist our common units on Nasdaq or any other national securities exchange
and we may face a lengthy process to relist our common units if we are able to
relist them at all.




If
our general partner fails to develop or maintain an effective system of internal
controls, then we may not be able to accurately report our financial results or
prevent fraud. As a result, current and potential unitholders could lose
confidence in our financial reporting, which would harm our business and the
trading price of our common units.




SemGroup
Energy Partners G.P., L.L.C., our general partner, has sole responsibility for
conducting our business and for managing our operations. Effective internal
controls are necessary for our general partner, on our behalf, to provide
reliable financial reports, prevent fraud and operate us successfully as a
public company. If our general partner’s efforts to develop and maintain its
internal controls are not successful, it is unable to maintain adequate controls
over our financial processes and reporting in the future or it is unable to
assist us in complying with our obligations under Section 404 of the
Sarbanes-Oxley Act of 2002, our operating results could be harmed or we may fail
to meet our reporting obligations.




We and
our general partner rely upon the Private Company for our personnel, including
those related to implementation of ceratin of our internal controls
and our disclosure controls and procedures.  Staff reductions by the
Private Company or other departures by the Private Company’s employees that
provide services to us could have a material adverse effect on
internal controls and the effectiveness of our disclosure controls and
procedures.  Ineffective internal controls could cause us to report
inaccurate financial information or cause investors to lose confidence in our
reported financial information, which would likely have a negative effect on the
trading price of our common units.





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We
may incur substantial costs as a result of events related to the Bankruptcy
Filings and we may be unsuccessful in our efforts in effecting a sale of all or
a portion of our assets.




Events
related to the Bankruptcy Filings, the securities litigation and governmental
investigations, and our efforts to enter into storage contracts with third party
customers and pursue other strategic opportunities has resulted in
increased expense and we expect it to continue to result in increased expense
due to the costs related to legal and financial advisors as well as other
related costs.  General and administrative expenses (exclusive of
non-cash compensation expense related to the vesting of the units under the
Plan) increased by approximately $6.9 million and $7.5 million, or approximately
300% and 326%, to approximately $9.2 million for the third quarter of 2008 and
$9.8 million for the fourth quarter of 2008, respectively, compared to $2.3
million in the second quarter of 2008.  We expect this increased level
of general and administrative expenses to continue into 2009.  These
increased costs may be substantial and could have a material adverse effect on
our cash flows and results of operations.




In
addition, we are currently pursuing various strategic alternatives for our
business and assets including the possibility of entering into storage contracts
with third party customers and the sale of all or a portion of our
assets.  The uncertainty relating to the Bankruptcy Filings and the
recent global market and economic conditions may make it more difficult to
pursue other strategic opportunities or enter into storage contracts
with third party customers.  If we are unable to contract with third
parties or if our efforts to sell all or a portion of our assets are
unsuccessful, it could have a material adverse effect on our cash flows, results
of operations and ability to conduct our business.





We may not be
able to raise sufficient capital to operate or grow our business.




As of May 22, 2009, we had
an aggregate unused credit availability under our revolving credit facility and
cash on hand of approximately $27.2million.
Pursuantto the Credit
Agreement Amendment, our revolving credit facility is limited to $50.0
million.  In
addition, if any of the financial institutions that support our revolving credit
facility were to fail, we may not be able to find a replacement lender, which
could negatively impact our ability to borrow under our revolving credit
facility.  For instance, Lehman Brothers Commercial Bank is one of the
lenders under our $50.0 million revolving credit facility, and Lehman Brothers
Commercial Bank has agreed to fund approximately $2.5 million (approximately 5%)
of the revolving credit facility.  On several occasions Lehman Brothers
Commercial Bank has failed to fund revolving loan requests under our revolving
credit facility, effectively limiting the aggregate amount of our revolving
credit facility to $47.5 million.Our ability to access capital
markets may also be limited due to the Bankruptcy Filings and the related
uncertainty of our future cash flows.  In addition, we may have
difficulty obtaining a credit rating or any credit rating that we do obtain may
be lower that it otherwise would be due to our relationships with the Private
Company.  The lack of a credit rating or a low credit rating may also
adversely impact our ability to access capital markets.  If we fail to
raise additional capital or an event of default exists under our credit
agreement, we may be forced to sell assets, make a bankruptcy filing or take
other action that could have a material adverse effect on our business, the
price of our common units and our results of operations.  In addition,
if we are unable to access the capital markets for acquisitions or expansion
projects, it will have a material adverse effect on our results of operations
and ability to conduct our business and may adversely effect the trading price
of our common units.





We
are not fully insured against all risks incident to our business, and could
incur substantial liabilities as a result.




We may
not be able to maintain or obtain insurance of the type and amount we desire at
reasonable rates. As a result of changing market conditions, premiums and
deductibles for certain of our insurance policies may increase substantially in
the future. In some instances, certain insurance could become unavailable or
available only for reduced amounts of coverage. If we were to incur a
significant liability for which we were not fully insured, it could have a
material adverse effect on our financial position and ability to make
distributions to unitholders.




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Risks
Related to Our Business





We
depend upon the Private Company for a portion of our revenues and are therefore
indirectly subject to the business risks of the Private Company.




Because
we depend upon the Private Company for a portion of our revenues, we are
indirectly subject to the business risks of the Private Company, many of which
are similar to the business risks we face. In particular, these business risks
include the following:





·
            the
      inability of the Private Company to generate adequate gross margins from
      the purchase, transportation, storage and marketing of petroleum
      products;





·
            material
      reductions in the supply of crude oil, liquid asphalt cement and petroleum
      products;





·
            a
      material decrease in the demand for crude oil, finished asphalt and
      petroleum products in the markets served by the Private
      Company;





·
            the
      inability of the Private Company to manage its commodity price risk
      resulting from its ownership of crude oil, liquid asphalt cement and
      petroleum products;





·
            contract
      non-performance by the Private Company’s customers;
  and





·
            various
      operational risks to which the Private Company’s business is
      subject.





In
addition, as a result of the Bankruptcy Filings, we are also currently subject
to the risks described above under “—Risks Related to the Bankruptcy
Filings.”





We
may not be able to obtain funding or obtain funding on acceptable terms because
of the deterioration of the credit and capital markets. This may hinder or
prevent us from meeting our future capital needs.




Global
financial markets and economic conditions have been, and continue to be,
disrupted and volatile. The debt and equity capital markets have been
exceedingly distressed. These issues, along with significant write-offs in the
financial services sector, the re-pricing of credit risk and the current weak
economic conditions have made, and will likely continue to make, it difficult to
obtain funding.




In
particular, the cost of raising money in the debt and equity capital markets has
increased substantially while the availability of funds from those markets
generally has diminished significantly. Also, as a result of concerns about the
stability of financial markets generally and the solvency of counterparties
specifically, the cost of obtaining money from the credit markets generally has
increased as many lenders and institutional investors have increased interest
rates, enacted tighter lending standards, refused to refinance existing debt at
maturity at all or on terms similar to our current debt and reduced and, in some
cases, ceased to provide funding to borrowers.  These factors may have
a material adverse effect on our ability to refinance our outstanding debt or,
in the event we fail to comply with the covenants of the credit facility, to
obtain a waiver of events of default under our credit agreement or to negotiate
forbearance with our lenders.




Due to
these factors, we cannot be certain that funding will be available if needed and
to the extent required, on acceptable terms or at all. If funding is not
available when needed, or is available only on unfavorable terms, we may be
unable to operate or grow our existing business, make future acquisitions, or
otherwise take advantage of business opportunities or respond to competitive
pressures any of which could have a material adverse effect on our financial
condition and results of operations.  In addition, such financing, if
available, may be at higher interest rates or result in substantial equity
dilution.





We
require a significant amount of cash to service our indebtedness. Our ability to
generate cash depends on many factors beyond our control.




Our
ability to make payments on and to refinance our indebtedness and to fund any
future capital expenditures depends on our ability to generate cash in the
future. This, to a certain extent, is subject to general economic, financial,
competitive, legislative, regulatory and other factors that are beyond our
control. We cannot assure you that we will generate sufficient cash flow from
operations or that future borrowings will be available to us under our credit
agreement or otherwise at all or in an amount sufficient to enable us to pay our
indebtedness or to fund our other liquidity needs.




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We
may not have sufficient cash from operations following the establishment of cash
reserves and payment of fees and expenses, including cost reimbursements to our
general partner, to enable us to make cash distributions to holders of our
common units and subordinated units.





Pursuant
to the Credit Agreement Amendment, we are prohibited from making distributions
to our unitholders if our leverage ratio (as defined in the credit agreement)
exceeds 3.50 to 1.00.  As of September 30, 2008 and December 31, 2008,
our leverage ratio was 4.34 to 1.00 and 4.83 to 1.00, respectively. If our
leverage ratio does not improve, we may not make quarterly distributions to our
unitholders in the future.  Even if we are permitted to make
distributions under our credit agreement, we may not have sufficient available
cash from operating surplus each quarter to enable us to make cash
distributions. The amount of cash we can distribute on our units principally
depends upon the amount of cash we generate from our operations, which will
fluctuate from quarter to quarter based on, among other things, the risks
described in this section, including the Bankruptcy Filings.





In
addition, the actual amount of cash we will have available for distribution will
depend on other factors, including:





·
            the
      level of capital expenditures we
make;





·
            the
      cost of acquisitions;





·
            our
      debt service requirements and other
liabilities;





·
            fluctuations
      in our working capital needs;





·
            our
      ability to borrow funds and access capital
  markets;





·
            restrictions
      contained in our credit facility or other debt agreements, including the
      ability to make distributions while events of default exist under our
      credit facility; and





·
            the
      amount of cash reserves established by our general
  partner.





The
amount of cash we have available for distribution to holders of our common units
and subordinated units depends primarily on our cash flow and not solely on
earnings reflected in our financial statements. Consequently, even if we are
profitable, we may not be able to make cash distributions to holders of our
common units and subordinated units.




Our
unitholders should be aware that the amount of cash we have available for
distribution depends primarily upon our cash flow and not solely on earnings
reflected in our financial statements, which will be affected by non-cash items.
As a result, we may make cash distributions during periods when we record losses
for financial accounting purposes and may not make cash distributions during
periods when we record net earnings for financial accounting
purposes.





A
significant decrease in demand for crude oil and/or finished asphalt products in
the areas served by our storage facilities and pipelines could reduce our
ability to make distributions to our unitholders.




A
sustained decrease in demand for crude oil and/or finished asphalt products in
the areas served by our storage facilities and pipelines could significantly
reduce our revenues and, therefore, reduce our ability to make or increase
distributions to our unitholders. Factors that could lead to a decrease in
market demand for crude oil and finished asphalt products include:





·
            lower
      demand by consumers for refined products, including finished asphalt
      products, as a result of recession or other adverse economic conditions or
      due to high prices caused by an increase in the market price of crude oil
      or higher fuel taxes or other governmental or regulatory actions that
      increase, directly or indirectly, the cost of gasolines or other refined
      products;





·
            a
      shift by consumers to more fuel-efficient or alternative fuel vehicles or
      an increase in fuel economy of vehicles, whether as a result of
      technological advances by manufacturers, governmental or regulatory
      actions or otherwise; and





·
            fluctuations
      in demand for crude oil, such as those caused by refinery downtime or
      shutdowns, could also significantly reduce our revenues and, therefore,
      reduce our ability to make distributions to our
    unitholders.





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Certain
of our field and pipeline operating costs and expenses are fixed and do not vary
with the volumes we gather and transport. These costs and expenses may not
decrease ratably or at all should we experience a reduction in our volumes
gathered or transmitted by our gathering and transportation operations. As a
result, we may experience declines in our margin and profitability if our
volumes decrease.  Due to events related to the Bankruptcy Filings,
the volumes being terminalled, stored, transported and gathered have decreased
as compared to periods prior to the Bankruptcy Filings, which has negatively
impacted total revenues.  As an example, fourth quarter 2008 total revenues
are approximately $8.2 million less than third quarter 2008 total
revenues, in each case excluding fuel surcharge revenues related to fuel and
power consumed to operate our liquid asphalt cement storage tanks.  Our
future total revenues may be further impacted because, in connection with the
Settlement, the Private Company rejected the Terminalling Agreement and the
Throughput Agreement and we and the Private Company entered into the New
Throughput Agreement and the New Terminalling Agreement.  We expect
revenues from services provided to the Private Company under the New Throughput
Agreement and New Terminalling Agreement to be substantially less than prior
revenues from services provided to the Private Company as the new agreements are
based upon actual volumes gathered, transported, terminalled and stored instead
of certain minimum volumes and are at reduced rates when compared to the
Throughput Agreement and Terminalling Agreement (see “Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of Operations—Impact
of the Bankruptcy of the Private Company and Certain of its Subsidiaries and
Related Events—Settlement with the Private Company”).





A
material decrease in the production of crude oil from the oil fields served by
our pipelines could materially reduce our ability to make distributions to our
unitholders.





The
throughput on our crude oil pipelines depends on the availability of
attractively priced crude oil produced from the oil fields served by such
pipelines, or through connections with pipelines owned by third parties. Crude
oil production may decline for a number of reasons, including natural declines
due to depleting wells, a material decrease in the price of crude oil, or the
inability of producers to obtain necessary drilling or other permits from
applicable governmental authorities. If we are unable to replace volumes lost
due to a temporary or permanent material decrease in production from the oil
fields served by our crude oil pipelines, our throughput could decline, reducing
our revenue and cash flow and adversely affecting our ability to make
distributions to our unitholders. The Private Company may also have difficulty
attracting producers while it is in bankruptcy.  In addition, it is
difficult to attract producers to a new gathering system if the producer is
already connected to an existing system. As a result, the Private Company or
third-party shippers on our pipeline systems may experience difficulty acquiring
crude oil at the wellhead in areas where there are existing relationships
between producers and other gatherers and purchasers of crude oil.





A
material decrease in the production of liquid asphalt cement could materially
reduce our ability to make distributions to our unitholders.





The
throughput at our liquid asphalt cement terminalling and storage facilities
depends on the availability of attractively priced liquid asphalt cement
produced from the various liquid asphalt cement producing refineries. Liquid
asphalt cement production may decline for a number of reasons, including
refiners processing more light, sweet crude oil or refiners installing coker
units that further refine heavy residual fuel oil bottoms such as liquid asphalt
cement. If we are unable to replace volumes lost due to a temporary or permanent
material decrease in production from the suppliers of liquid asphalt cement, our
throughput could decline, reducing our revenue and cash flow and adversely
affecting our ability to make distributions to our unitholders.





Our
debt levels under the credit agreement may limit our ability to make
distributions and our flexibility in obtaining additional financing and in
pursuing other business opportunities.





Our level
of debt under the credit facility could have important consequences for us,
including the following:





·
            our
      ability to obtain additional financing, if necessary, for working capital,
      capital expenditures, acquisitions or other purposes may be impaired or
      such financing may not be available on favorable
  terms;





·
            we
      will need a substantial portion of our cash flow to make principal and
      interest payments on our debt, reducing the funds that would otherwise be
      available for operations, future business opportunities and distributions
      to unitholders;





·
            our
      debt level will make us more vulnerable to competitive pressures or a
      downturn in our business or the economy generally;
  and





·
            our
      debt level may limit our flexibility in responding to changing business
      and economic conditions.





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Our
ability to service our debt will depend upon, among other things, our future
financial and operating performance, which will be affected by prevailing
economic conditions and financial, business, regulatory and other factors. Our
ability to service debt under our credit facility also will depend on market
interest rates, since the interest rates applicable to our borrowings will
fluctuate with the London Interbank Offered Rate, or LIBOR, or the prime rate,
and are higher due to the Forbearance Agreement, as amended, and the Credit
Agreement Amendment. If our operating results are not sufficient to service our
current or future indebtedness, we will be forced to take actions such as
reducing distributions, reducing or delaying our business activities,
acquisitions, investments or capital expenditures, selling assets, restructuring
or refinancing our debt, or seeking additional equity capital. We may not be
able to effect any of these actions on satisfactory terms, or at
all.





Restrictions
in our credit facility may prevent us from engaging in some beneficial
transactions or paying distributions to our unitholders.





Our
credit facility contains covenants limiting our ability to make distributions to
unitholders so long as an event of default exists under the credit agreement or
if our leverage ratio exceeds 3.50 to 1.00. In addition, our credit facility
contains various covenants that limit, among other things, our ability to incur
indebtedness, make capital expenditures, grant liens or enter into a merger,
consolidation or sale of assets. Furthermore, our credit facility contains
covenants requiring us to maintain certain financial ratios and tests. Any
subsequent refinancing of our current debt may have similar or greater
restrictions. Please see “—Risks Related to the Bankruptcy Filings—Our future operations and
cash flows are uncertain and may cause events of default under our credit
agreement” and “Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations—Liquidity and Capital
Resources.”





If we borrow funds to make our
quarterly distributions, our ability to pursue acquisitions and other business
opportunities may be limited and our operations may be materiallyandadverselyaffected.





Available
cash for the purpose of making distributions to unitholders includes working
capital borrowings. If we borrow funds to pay one or more quarterly
distributions, such amounts will incur interest and must be repaid in accordance
with the terms of our credit facility. Currently we are prohibited from paying
distributions to our unitholders due to our failure to maintain a leverage
ratio that is less than 3.50 to 1.00, as required by our credit
agreement.  In addition, any amounts borrowed for distributions to our
unitholders will reduce the funds available to us for other purposes under our
credit facility, including amounts available for use in connection with
acquisitions and other business opportunities.  If we are unable to
pursue our growth strategy due to our limited ability to borrow funds, our
operations may be materially and adversely affected.





We
face intense competition in our gathering, transportation, terminalling and
storage activities. Competition from other providers of crude oil gathering,
transportation, terminalling and storage services that are able to supply
our customers with those services at a lower price could reduce our ability
to make distributions to our unitholders.





We are
subject to competition from other crude oil gathering, transportation,
terminalling and storage operations that may be able to supply the Private
Company and our other customers with the same or comparable services on a more
competitive basis. We compete with national, regional and local gathering,
storage, terminalling and pipeline companies, including the major integrated oil
companies, of widely varying sizes, financial resources and experience. Some of
these competitors are substantially larger than us, have greater financial
resources, and control substantially greater storage capacity than we do. With
respect to our gathering and transportation services, these competitors include
TEPPCO Partners, L.P., Plains All American Pipeline, L.P., ConocoPhillips,
Sunoco Logistics Partners L.P. and National Cooperative Refinery Association,
among others. With respect to our storage and terminalling services, these
competitors include BP plc, Enbridge Energy Partners, L.P. and Plains All
American Pipeline, L.P.  Several of our competitors conduct portions of
their operations through publicly traded partnerships with structures similar to
ours, including Plains All American Pipeline, L.P., TEPPCO Partners, L.P.,
Sunoco Logistics Partners L.P. and Enbridge Energy Partners, L.P. Our ability to
compete could be harmed by numerous factors, including:





·
            price
      competition;





·
            the
      perception that another company can provide better
  service,





·
            the
      uncertainty relating to the Private Company having filed bankruptcy;
      and





·
            the
      availability of alternative supply points, or supply points located closer
      to the operations of the Private Company’s
  customers.





In
addition, the Private Company owns midstream assets and may engage in
competition with us. If we are unable to compete with services offered by other
midstream enterprises, including the Private Company, our ability to make
distributions to our unitholders may be adversely affected.





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Some
of our pipeline systems are dependent upon their interconnections with other
crude oil pipelines to reach end markets.





Some of
our pipeline systems are dependent upon their interconnections with other crude
oil pipelines to reach end markets. Reduced throughput onthese
interconnecting pipelines as a result of testing, line repair, reduced operating
pressures or other causes could result in reduced throughput on ourpipeline
systems that would adversely affect our revenue and cash flow and our ability to
make distributions to our unitholders.




Prior
to the Bankruptcy Filings, a principal focus of our business strategy was to
grow and expand our business through acquisitions. If we are able to pursue this
strategy in the future but are unable to make acquisitions on economically
acceptable terms, our future growth may be limited.





Prior to
the Bankruptcy Filings, a principal focus of our business strategy was to grow
and expand our business through acquisitions.  If we are able to
stabilize our business, we may be able to again pursue this
strategy.  Our ability to grow depends, in part, on our ability to
make acquisitions that result in an increase in the cash generated per unit from
operations. If we are unable to make these accretive acquisitions, either
because we are (1) unable to identify attractive acquisition candidates or
negotiate acceptable purchase contracts with them, (2) unable to obtain
financing for these acquisitions on economically acceptable terms or (3) outbid
by competitors, then our future growth and ability to increase distributions
will be limited. Furthermore, even if we do make acquisitions that we believe
will be accretive, these acquisitions may nevertheless result in a decrease in
the cash generated from operations per unit.





Any
acquisition involves potential risks, including, among other
things:





·
            mistaken
      assumptions about volumes, revenues and costs, including
      synergies;





·
            an
      inability to integrate successfully the businesses we
    acquire;





·
            an
      inability to hire, train or retain qualified personnel to manage and
      operate our business and assets;





·
            the
      assumption of unknown liabilities;





·
            limitations
      on rights to indemnity from the
seller;





·
            mistaken
      assumptions about the overall costs of equity or
  debt;





·
            the
      diversion of management’s and employees’ attention from other business
      concerns;





·
            unforeseen
      difficulties operating in new product areas or new geographic areas;
      and





·
            customer
      or key employee losses at the acquired
  businesses.





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If we
consummate any future acquisitions, our capitalization and results of operations
may change significantly, and our unitholders will not have the opportunity to
evaluate the economic, financial and other relevant information that we will
consider in determining the application of these funds and other
resources.





Our
acquisition strategy is based, in part, on our expectation of ongoing
divestitures of energy assets by industry participants. A material decrease in
such divestitures would limit our opportunities for future acquisitions and
could adversely affect our operations and cash flows available for distribution
to our unitholders.





Prior
to the Bankruptcy Filings, our growth strategy included acquiring midstream
entities or assets that are distinct and separate from our existing
terminalling, storage, gathering and transportation operations.  If we
are able to pursue this strategy in the future, it could subject us to
additional business and operating risks.





We may
acquire midstream assets that have operations in new and distinct lines of
business from our crude oil or our liquid asphalt cement operations. Integration
of a new business is a complex, costly and time-consuming process. Failure to
timely and successfully integrate acquired entities’ new lines of business with
our existing operations may have a material adverse effect on our business,
financial condition or results of operations. The difficulties of integrating a
new business with our existing operations include, among other
things:





·
            operating
      distinct businesses that require different operating strategies and
      different managerial expertise;





·
            the
      necessity of coordinating organizations, systems and facilities in
      different locations;





·
            integrating
      personnel with diverse business backgrounds and organizational cultures;
      and





·
            consolidating
      corporate and administrative
functions.





In
addition, the diversion of our attention and any delays or difficulties
encountered in connection with the integration of a new business, such as
unanticipated liabilities or costs, could harm our existing business, results of
operations, financial conditions and prospects. Furthermore, new lines of
business will subject us to additional business and operating risks. For
example, we may in the future determine to acquire businesses that are subject
to significant risks due to fluctuations in commodity prices. These new business
and operating risks could have a material adverse effect on our financial
condition or results of operations.




Expanding
our business by constructing new assets subjects us to risks that projects may
not be completed on schedule, and that the costs associated with projects may
exceed our expectations, which could cause our cash available for distribution
to our unitholders to be less than anticipated.





The
construction of additions or modifications to our existing assets, and the
construction of new assets, involves numerous regulatory, environmental,
political, legal and operational uncertainties and requires the expenditure of
significant amounts of capital. If we undertake these types of projects, they
may not be completed on schedule or at all or at the budgeted cost. In addition,
our revenues may not increase immediately upon the expenditure of funds on a
particular project. Moreover, we may construct facilities to capture anticipated
future growth in demand in a market in which such growth does not
materialize.  We acquired certain pipeline and related assets,
including a 130-mile, 8-inch pipeline that originates in Ardmore, Oklahoma and
terminates in Drumright, Oklahoma from the Private Company in May
2008.  We have suspended capital expenditures on this pipeline due to
the continuing impact of the Bankruptcy Filings.  Management currently
intends to put the asset into service by late 2009 or early 2010 and is
exploring various alternatives to complete the project.





We
are exposed to the credit risks of our third-party customers in the ordinary
course of our gathering activities. Any material nonpayment or nonperformance by
our third-party customers could reduce our ability to make distributions to our
unitholders.





In
addition to our dependence on the Private Company, we are subject to risks of
loss resulting from nonpayment or nonperformance by our third-party customers.
Some of our customers may be highly leveraged and subject to their own operating
and regulatory risks. In addition, any material nonpayment or nonperformance by
our customers could require us to pursue substitute customers for our affected
assets or provide alternative services. Any such efforts may not be successful
or may not provide similar fees. These events could reduce our ability to make
distributions to our unitholders.





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Our
revenues from third-party customers are generated under contracts that must be
renegotiated periodically and that allow the customer to reduce or suspend
performance in some circumstances, which could cause our revenues from those
contracts to decline and reduce our ability to make distributions to our
unitholders.





Some of
our contract-based revenues from customers are generated under contracts with
terms which allow the customer to reduce or suspend performance under the
contract in specified circumstances, such as the occurrence of a catastrophic
event to our or the customer’s operations. The occurrence of an event which
results in a material reduction or suspension of our customer’s performance
could reduce our ability to make distributions to our unitholders.





Many of
our contracts with customers for producer field services have terms of one year
or less. As these contracts expire, they must be extended and renegotiated or
replaced. We may not be able to extend, renegotiate or replace these contracts
when they expire, and the terms of any renegotiated contracts may not be as
favorable as the contracts they replace. In particular, our ability to extend or
replace contracts could be harmed by numerous competitive factors, such as those
described above under “—We face intense competition in our gathering,
transportation, terminalling and storage activities. Competition from other
providers of crude oil gathering, transportation, terminalling and storage
services that are able to supply our customers with those services at a
lower price could reduce our ability to make distributions to our unitholders.”
Additionally, we may incur substantial costs if modifications to our terminals
are required in order to attract substitute customers or provide alternative
services. If we cannot successfully renew significant contracts or must renew
them on less favorable terms, or if we incur substantial costs in modifying our
terminals, our revenues from these arrangements could decline and our ability to
make distributions to our unitholders could suffer.





We
may incur significant costs and liabilities as a result of pipeline integrity
management program testing and any necessary pipeline repair, or preventative or
remedial measures, which could have a material adverse effect on our results of
operations.





The DOT
has adopted regulations requiring pipeline operators to develop integrity
management programs for transportation pipelines located where a leak or rupture
could do the most harm in “high consequence areas”, including high population
areas, areas that are sources of drinking water, ecological resource areas that
are unusually sensitive to environmental damage from a pipeline release and
commercially navigable waterways, unless the operator effectively demonstrates
by risk assessment that the pipeline could not affect the area. The regulations
require operators of covered pipelines to:





·
            perform
      ongoing assessments of pipeline
integrity;





·
            identify
      and characterize threats to pipeline segments that could impact a high
      consequence area;





·
            improve
      data collection, integration and
analysis;





·
            repair
      and remediate the pipeline as necessary;
and





·
            implement
      preventive and mitigating actions.





In
addition to these adopted regulations, in September 2006, the DOT proposed
amendment of existing pipeline safety standards including its integrity
management programs to broaden the scope of coverage to include certain rural
onshore hazardous liquid and low-stress pipeline systems found near “unusually
sensitive areas,” including non-populated areas requiring extra protection
because of the presence of sole source drinking water resources, endangered
species, or other ecological resources. Also, in December 2006, the Pipeline
Inspection, Protection, Enforcement and Safety Act of 2006 was enacted. This act
reauthorizes and amends the DOT’s pipeline safety programs and includes a
provision eliminating the regulatory exemption for hazardous liquid pipelines
operated at low stress. Adoption of new or more stringent pipeline safety
regulations affecting our gathering or low-stress pipelines could result in more
rigorous and costly integrity management planning requirements being imposed on
those lines, which could have a material adverse effect on our results of
operations. Please read “Item 1. Business—Regulation—Pipeline Safety” in
our 2007 Form 10-K for more information.





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Our
operations are subject to environmental and worker safety laws and regulations
that may expose us to significant costs and liabilities. Failure to comply with
these laws and regulations could adversely affect our ability to make
distributions to our unitholders.





Our
midstream crude oil gathering, transportation, terminalling and storage
operations, together with the liquid asphalt cement terminalling and storage
assets that we acquired from the Private Company, are subject to stringent
federal, state and local laws and regulations relating to the protection of the
environment. Various governmental authorities, including the EPA, have the power
to enforce compliance with these laws and regulations and the permits issued
under them, and violators are subject to administrative, civil and criminal
penalties, including civil fines, injunctions or both. Joint and several strict
liability may be incurred without regard to fault or the legality of the
original conduct under CERCLA, RCRA and analogous state laws for the remediation
of contaminated areas. Private parties, including the owners of properties
located near our terminalling and storage facilities or through which our
pipeline systems pass, also may have the right to pursue legal actions to
enforce compliance, as well as seek damages for non-compliance with
environmental laws and regulations or for personal injury or property damage.
Moreover, new stricter laws, regulations or enforcement policies could be
implemented that significantly increase our compliance costs and the cost of any
remediation that may become necessary, some of which may be
material.





In
performing midstream operations and liquid asphalt cement terminalling services,
we incur environmental costs and liabilities in connection with the handling of
hydrocarbons and solid wastes. We currently own, operate or lease properties
that for many years have been used for midstream activities, including
properties in and around the Cushing Interchange, and with respect to our
asphalt assets, for liquid asphalt cement terminalling and storage activities.
Activities by us or prior owners, lessees or users of these properties over whom
we had no control may have resulted in the spill or release of hydrocarbons or
solid wastes on or under them. Additionally, some sites we own or operate are
located near current or former storage, terminal and pipeline operations, and
there is a risk that contamination has migrated from those sites to ours.
Increasingly strict environmental laws, regulations and enforcement policies as
well as claims for damages and other similar developments could result in
significant costs and liabilities, and our ability to make distributions to our
unitholders could suffer as a result. Please see “Item
1—Business—Regulation” in our 2007 Form 10-K for more
information.





In
addition, the workplaces associated with the storage facilities and pipelines we
operate are subject to OSHA requirements and comparable state statutes that
regulate the protection of the health and safety of workers. The OSHA hazard
communication standard requires that we maintain information about hazardous
materials used or produced in our operations and that we provide this
information to employees, state and local government authorities, and local
residents. Failure to comply with OSHA requirements, including general industry
standards, recordkeeping requirements and monitoring of occupational exposure to
regulated substances, could subject us to fines or significant compliance costs
and adversely affect our ability to make distributions to our
unitholders.





Our
business involves many hazards and operational risks, including adverse weather
conditions, which could cause us to incur substantial liabilities.





Our
operations are subject to the many hazards inherent in the transportation and
storage of crude oil and the storage of liquid asphalt cement,
including:





·
            explosions,
      fires, accidents, including road and highway accidents involving our
      tanker trucks;





·
            extreme
      weather conditions, such as hurricanes which are common in the
      Gulf Coast and tornadoes and flooding which are common in the
      Midwest;





·
            damage
      to our pipelines, storage tanks, terminals and related
      equipment;





·
            leaks
      or releases of crude oil into the environment;
  and





·
            acts
      of terrorism or vandalism.





If any of
these events were to occur, we could suffer substantial losses because of
personal injury or loss of life, severe damage to and destruction of property
and equipment, and pollution or other environmental damage resulting in
curtailment or suspension of our related operations. In addition, mechanical
malfunctions, faulty measurement or other errors may result in significant costs
or lost revenues.




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We
do not own all of the land on which our pipelines and facilities are located,
which could disrupt our operations.





We do not
own all of the land on which our pipelines and facilities have been constructed,
and we are therefore subject to the possibility of more onerous terms and/or
increased costs to retain necessary land use if we do not have valid
rights-of-way or if such rights-of-way or any material real property leases
lapse or terminate. We obtain the rights to construct and operate our pipelines
and some of our terminals and storage facilities on land owned by third parties
and governmental agencies for a specific period of time. Our loss of these
rights, through our inability to renew leases, right-of-way contracts or
otherwise, could have a material adverse effect on our business, results of
operations and financial condition and our ability to make cash distributions to
you.




Terrorist
attacks, and the threat of terrorist attacks, have resulted in increased costs
to our business. Continued hostilities in the Middle East or other sustained
military campaigns may adversely impact our results of operations.





The
long-term impact of terrorist attacks, such as the attacks that occurred on
September 11, 2001, and the threat of future terrorist attacks on our industry
in general, and on us in particular, is not known at this time. Increased
security measures taken by us as a precaution against possible terrorist attacks
have resulted in increased costs to our business. Uncertainty surrounding
continued hostilities in the Middle East or other sustained military campaigns
may affect our operations in unpredictable ways, including disruptions of crude
oil supplies and markets for our services, and the possibility that
infrastructure facilities could be direct targets of, or indirect casualties of,
an act of terror.




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




Risks
Inherent in an Investment in Us





Some
of our general partner’s directors are affiliates of certain creditors of the
Private Company; therefore, such creditors may have different business interests
than the common unitholders.





Manchester
is a creditor under a loan agreement with SemGroup Holdings, which is a
subsidiary of the Private Company.  This loan is secured by our
subordinated units and incentive distribution rights and the membership
interests in our general partner, owned by SemGroup Holdings.  On July
18, 2008, Manchester and Alerian declared an event of default under the loan
agreement and exercised their right under a pledge agreement with SemGroup
Holdings to direct the vote of the membership interests of our general
partner.  Manchester and Alerian exercised these voting rights to
reconstitute our general partner’s board of directors.  On March 20,
2009, Alerian transferred its interest in the Holdings Credit Agreements to
Manchester.  Manchester may have business interests that are different
from the business interests of our common unitholders.





Our
general partner has sole responsibility for conducting our business and managing
our operations.  Our general partner has conflicts of interest with us
and limited fiduciary duties, which may permit it to favor its own interests to
the detriment of our unitholders.




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Conflicts
of interest may arise between our general partner, on the one hand, and us and
our unitholders, on the other hand.  In resolving those conflicts of
interest, our general partner may favor its own interests and the interests of
its affiliates over the interests of our unitholders. Although the conflicts
committee of our general partner’s board of directors may review such conflicts
of interest, our general partner’s board of directors is not required to submit
such matters to the conflicts committee. These conflicts include, among others,
the following situations:





·
            neither
      our partnership agreement nor any other agreement requires the general
      partner or any person who controls the general partner to pursue a
      business strategy that favors us.  Such persons may make these
      decisions in their best interest, which may be contrary to our
      interests;





·
            our
      general partner is allowed to take into account the interests of parties
      other than us, such as creditors and the Private Company and their
      affiliates, in resolving conflicts of
interest;





·
            if
      we do not have sufficient available cash from operating surplus, our
      general partner could cause us to use cash from non-operating sources,
      such as asset sales, issuances of securities and borrowings, to pay
      distributions, which means that we could make distributions that
      deteriorate our capital base and that our general partner could receive
      distributions on its subordinated units and incentive distribution rights
      to which it would not otherwise be entitled if we did not have sufficient
      available cash from operating surplus to make such
      distributions;





·
            our
      general partner has limited its liability and reduced its fiduciary
      duties, and has also restricted the remedies available to our unitholders
      for actions that, without the limitations, might constitute breaches of
      fiduciary duty;





·
            our
      general partner determines the amount and timing of asset purchases and
      sales, borrowings, issuance of additional partnership securities and
      reserves, each of which can affect the amount of cash that is distributed
      to unitholders;





·
            our
      general partner determines the amount and timing of any capital
      expenditures and whether a capital expenditure is a maintenance capital
      expenditure, which reduces operating surplus, or an expansion capital
      expenditure, which does not reduce operating surplus. This determination
      can affect the amount of cash that is distributed to our unitholders and
      the ability of the subordinated units to convert to common
      units;





·
            our
      general partner may make a determination to receive a quantity of our
      Class B units in exchange for resetting the target distribution levels
      related to its incentive distribution rights without the approval of the
      conflicts committee of our general partner or our
    unitholders;





·
            our
      general partner determines which costs incurred by it and its affiliates
      are reimbursable by us and the Private Company determines the allocation
      of shared overhead expenses;





·
            our
      partnership agreement does not restrict our general partner from causing
      us to pay it or its affiliates for any services rendered to us or entering
      into additional contractual arrangements with any of these entities on our
      behalf;





·
            our
      general partner intends to limit its liability regarding our contractual
      and other obligations and, in some circumstances, is entitled to be
      indemnified by us;





·
            our
      general partner may exercise its limited right to call and purchase common
      units if it and its affiliates own more than 80% of the common
      units;





·
            our
      general partner controls the enforcement of obligations owed to us by our
      general partner and its affiliates;
and





·
            our
      general partner decides whether to retain separate counsel, accountants or
      others to perform services for us.





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Our
partnership agreement limits our general partner’s fiduciary duties to holders
of our common units and subordinated units and restricts the remedies available
to holders of our common units and subordinated units for actions taken by our
general partner that might otherwise constitute breaches of fiduciary
duty.





Our
partnership agreement contains provisions that reduce the fiduciary standards to
which our general partner would otherwise be held by state fiduciary duty laws.
For example, our partnership agreement:





·
            permits
      our general partner to make a number of decisions in its individual
      capacity, as opposed to in its capacity as our general partner. This
      entitles our general partner to consider only the interests and factors
      that it desires, and it has no duty or obligation to give any
      consideration to any interest of, or factors affecting, us, our affiliates
      or any limited partner. Examples include the exercise of its right to
      receive a quantity of our Class B units in exchange for resetting the
      target distribution levels related to its incentive distribution rights,
      the exercise of its limited call right, the exercise of its rights to
      transfer or vote the units it owns, the exercise of its registration
      rights and its determination whether or not to consent to any merger or
      consolidation of the partnership or amendment to the partnership
      agreement;





·
            provides
      that our general partner will not have any liability to us or our
      unitholders for decisions made in its capacity as a general partner so
      long as it acted in good faith, meaning it believed the decision was in
      the best interests of our
partnership;





·
            generally
      provides that affiliated transactions and resolutions of conflicts of
      interest not approved by the conflicts committee of the board of directors
      of our general partner acting in good faith and not involving a vote of
      unitholders must be on terms no less favorable to us than those generally
      being provided to or available from unrelated third parties or must be
      “fair and reasonable” to us, as determined by our general partner in good
      faith. In determining whether a transaction or resolution is “fair and
      reasonable,” our general partner may consider the totality of the
      relationships between the parties involved, including other transactions
      that may be particularly advantageous or beneficial to
  us;





·
            provides
      that our general partner and its officers and directors will not be liable
      for monetary damages to us, our limited partners or assignees for any acts
      or omissions unless there has been a final and non-appealable judgment
      entered by a court of competent jurisdiction determining that the general
      partner or its officers and directors acted in bad faith or engaged in
      fraud or willful misconduct or, in the case of a criminal matter, acted
      with knowledge that the conduct was criminal;
  and





·
            provides
      that in resolving conflicts of interest, it will be presumed that in
      making its decision the general partner acted in good faith, and in any
      proceeding brought by or on behalf of any limited partner or us, the
      person bringing or prosecuting such proceeding will have the burden of
      overcoming such presumption.





By
purchasing a common unit, a common unitholder will become bound by the
provisions in the partnership agreement, including the provisions discussed
above.





The
Private Company may compete with us, which could adversely affect our existing
business and limit our ability to acquire additional assets or
businesses.





Neither
our partnership agreement nor any other agreement with the Private Company
prohibits the Private Company or any successor to the Private Company or
acquirer of its assets from owning assets or engaging in businesses that compete
directly or indirectly with us. In addition, the Private Company or any
successor to the Private Company or acquirer of its assets may acquire,
construct or dispose of additional midstream or other assets in the future,
without any obligation to offer us the opportunity to purchase or construct any
of those assets.  As a result, competition from the Private Company or
any successor to the Private Company or acquirer of its assets could adversely
impact our results of operations and cash available for
distribution.





Cost
reimbursements due to our general partner and its affiliates for services
provided, which are determined by our general partner, may be substantial and
will reduce our cash available for distribution to our unitholders.





Pursuant
to our partnership agreement, the Private Company receives reimbursement for the
payment of operating expenses related to our operations and for the provision of
various general and administrative services for our benefit. Payments for these
services may be substantial and reduce the amount of cash available for
distribution to unitholders. In addition, under Delaware partnership law, our
general partner has unlimited liability for our obligations, such as our debts
and environmental liabilities, except for our contractual obligations that are
expressly made without recourse to our general partner. To the extent our
general partner incurs obligations on our behalf, we are obligated under our
partnership agreement to reimburse or indemnify our general partner. If we are
unable or unwilling to reimburse or indemnify our general partner, our general
partner may take actions to cause us to make payments of these obligations and
liabilities. Any such payments would reduce the amount of cash otherwise
available for distribution to our unitholders. Please see “Item 13—Certain
Relationships and Related Party Transactions, and Director
Independence—Agreements Related to Our Acquisition of the Asphalt Assets—Amended
Omnibus Agreement” in our 2007 Form 10-K.





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Holders
of our common units have limited voting rights and are not entitled to elect our
general partner or its directors.





Unlike
the holders of common stock in a corporation, unitholders have only limited
voting rights on matters affecting our business and, therefore, limited ability
to influence management’s decisions regarding our business. Unitholders did not
elect our general partner or our general partner’s board of directors, and have
no right to elect our general partner or our general partner’s board of
directors on an annual or other continuing basis. The present board of directors
of our general partner was chosen by Manchester pursuant to its rights
under the Holdings Credit Agreements to direct the vote of the membership
interests of our general partner.  Furthermore, if the unitholders are
dissatisfied with the performance of our general partner, they have little
ability to remove our general partner. Amendments to our partnership agreement
may be proposed only by or with the consent of our general partner. As a result
of these limitations, the price at which the common units will trade could be
diminished because of the absence or reduction of a takeover premium in the
trading price.





Removal
of our general partner without its consent will dilute and adversely affect our
common unitholders.





If our
general partner is removed without cause during the subordination period and
units held by our general partner and its affiliates are not voted in favor of
that removal, all remaining subordinated units will automatically convert into
common units and any existing arrearages on our common units will be
extinguished. A removal of our general partner under these circumstances would
adversely affect our common units by prematurely eliminating their distribution
and liquidation preference over our subordinated units, which would otherwise
have continued until we had met certain distribution and performance tests.
Cause is narrowly defined to mean that a court of competent jurisdiction has
entered a final, non-appealable judgment finding the general partner liable for
actual fraud or willful or wanton misconduct in its capacity as our general
partner. Cause does not include most cases of charges of poor management of the
business, so the removal of the general partner because of the unitholders’
dissatisfaction with our general partner’s performance in managing our
partnership will most likely result in the termination of the subordination
period and conversion of all subordinated units to common units.





Control
of our general partner may be transferred to a third party without unitholder
consent.





Our
general partner may transfer its general partner interest to a third party in a
merger or in a sale of all or substantially all of its assets without the
consent of the unitholders. Furthermore, our partnership agreement does not
restrict the ability of the Private Company, the owner of our general partner,
from transferring all or a portion of its ownership interest in our general
partner to a third party, or Manchester from transferring all or a portion of
its loan interest voting rights in the general partner, to a third party. The
new owner of our general partner would then be in a position to replace the
board of directors and officers of our general partner with its own choices and
thereby influence the decisions made by the board of directors and
officers.





We
may issue additional units without approval of our unitholders, which would
dilute our unitholders’ ownership interests.





Our
partnership agreement does not limit the number or price of additional limited
partner interests (including any securities of equal or senior rank to our
common units, and options, rights, warrants and appreciation rights relating to
any such securities) that we may issue at any time without the approval of our
unitholders. In addition, because we are a limited partnership, we will not be
subject to the shareholder approval requirements relating to the issuance of
securities contained in Nasdaq Marketplace Rule 4350(i). The issuance by us of
additional common units or other equity securities of equal or senior rank will
have the following effects:





·
            our
      unitholders’ proportionate ownership interest in us will
      decrease;





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





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





·
            the
      ratio of taxable income to distributions may
  increase;





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





·
            the
      market price of the common units may
decline.





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Our
partnership agreement restricts the voting rights of unitholders, other than our
general partner and its affiliates, including the Private Company, owning 20% or
more of our common units.





Unitholders’
voting rights are further restricted by the partnership agreement provision
providing that any units held by a person that owns 20% or more of any class of
units then outstanding, other than our general partner, its affiliates, their
transferees and persons who acquired such units with the prior approval of the
board of directors of our general partner, cannot vote on any matter. Our
partnership agreement also contains provisions limiting the ability of
unitholders to call meetings or to acquire information about our operations, as
well as other provisions.





Affiliates
of our general partner may sell common units in the public markets, which sales
could have an adverse impact on the trading price of the common
units.





Executive
officers and directors of our general partner beneficially own an aggregate of
575,970 common units and the Private Company indirectly owns 12,570,504
subordinated units, although such units are collateral to a loan between
SemGroup Holdings and Manchester. All of the subordinated units will convert
into common units at the end of the subordination period and may convert
earlier. The sale of these units in the public markets could have an adverse
impact on the price of the common units or on any trading market that may
develop.





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





If at any
time our general partner and its affiliates own more than 80% of the common
units, our general partner will have the right, but not the obligation, which it
may assign to any of its affiliates or to us, to acquire all, but not less than
all, of the common units held by unaffiliated persons at a price not less than
their then-current market price. As a result, our unitholders may be required to
sell their common units at an undesirable time or price and may not receive any
return on their investment. Our unitholders also may incur a tax liability upon
a sale of their units. At the end of the subordination period, assuming no
additional issuances of common units and no sales of subordinated units, our
general partner and its affiliates will own 36.8% of the common
units.





Common
units held by persons who are not Eligible Holders will be subject to the
possibility of redemption.





The
Longview system is, and any additional interstate pipelines that we acquire or
construct may be, subject to the rate regulation of the FERC. Our general
partner has the right under our partnership agreement to institute procedures,
by giving notice to each of our unitholders, that would require transferees of
common units and, upon the request of our general partner, existing holders of
our common units to certify that they are Eligible Holders. The purpose of these
certification procedures would be to enable us to utilize a federal income tax
expense as a component of the pipeline’s cost of service upon which tariffs may
be established under FERC rate-making policies applicable to entities that pass
through their taxable income to their owners. Eligible Holders are individuals
or entities subject to United States federal income taxation on the income
generated by us or entities not subject to United States federal income taxation
on the income generated by us, so long as all of the entity’s owners are subject
to such taxation. If these tax certification procedures are implemented, we will
have the right to redeem the common units held by persons who are not Eligible
Holders at the lesser of the holder’s purchase price and the then-current market
price of the units. The redemption price would be paid in cash or by delivery of
a promissory note, as determined by our general partner.





Our
unitholders’ liability may not be limited if a court finds that unitholder
action constitutes control of our business.





A general
partner of a partnership generally has unlimited liability for the obligations
of the partnership, except for those contractual obligations of the partnership
that are expressly made without recourse to the general partner. Our partnership
is organized under Delaware law and we conduct business in a number of other
states. The limitations on the liability of holders of limited partner interests
for the obligations of a limited partnership have not been clearly established
in some of the other states in which we do business.





Our
unitholders could be liable for our obligations as if they were a general
partner if:





·
            a
      court or government agency determined that we were conducting business in
      a state but had not complied with that particular state’s partnership
      statute; or





·
            a
      unitholder’s right to act with other unitholders to remove or replace the
      general partner, to approve some amendments to our partnership agreement
      or to take other actions under our partnership agreement constitute
      “control” of our business.





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Unitholders
may have liability to repay distributions that were wrongfully distributed to
them.





Under
certain circumstances, unitholders may have to repay amounts wrongfully returned
or distributed to them. Under Section 17-607 and 17-804 of the Delaware Revised
Uniform Limited Partnership Act, we may not make a distribution to our
unitholders if the distribution would cause our liabilities to exceed the fair
value of our assets. Delaware law provides that for a period of three years from
the date of the impermissible distribution, limited partners who received the
distribution and who knew at the time of the distribution that it violated
Delaware law will be liable to the limited partnership for the distribution
amount. Substituted limited partners are liable for the obligations of the
assignor to make contributions to the partnership that are known to the
substituted limited partner at the time it became a limited partner and for
unknown obligations if the liabilities could be determined from the partnership
agreement. Liabilities to partners on account of their partnership interests and
liabilities that are non-recourse to the partnership are not counted for
purposes of determining whether a distribution is permitted.





Tax
Risks to Common Unitholders





Our
unitholders have been and will be required to pay taxes on their share of our
taxable income even if they have not or do not receive any cash distributions
from us.




Because
our unitholders are treated as partners to whom we will allocate taxable income
which could be different in amount than the cash we distribute, they will be
required to pay any federal income taxes and, in some cases, state and local
income taxes on their share of our taxable income, even if our unitholders
receive no cash distributions from us. In this regard, we did not pay a
distribution to our unitholders for the quarters ended June 30, 2008, September
30, 2008, December 31, 2008 or March 31, 2009.  In addition, we do not
expect to make a distribution relating to the second quarter of 2009 and may not
be able to make distributions in the future.  Thus, our unitholders
may not receive cash distributions from us equal to their share of our taxable
income or even equal to the actual tax liability that results from their share
of our taxable income.





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





The
anticipated after-tax economic benefit of an investment in our common units
depends largely on us being treated as a partnership for federal income tax
purposes.  If less than 90% of the gross income of a publicly traded
partnership, such as us, for any taxable year is “qualifying income” from
sources such as the transportation, marketing (other than to end users), or
processing of crude oil, natural gas or products thereof, interest, dividends or
similar sources, that partnership will be taxable as a corporation under Section
7704 of the Internal Revenue Code for federal income tax purposes for that
taxable year and all subsequent years.  In this regard, because the
income we earn from the Private Company is “qualifying income” any material
reduction or elimination of that income, or any amendment to certain contracts
with the Private Company which change the nature of the services provided or the
income generated thereunder, may cause our remaining “qualifying income” to
constitute less than 90% of our gross income.  As a result, we could
become taxable as a corporation for federal income tax purposes, unless we were
to transfer the businesses that generate non-qualifying income to one or more
subsidiaries taxed as corporations and pay entity level income taxes on such
non-qualifying income.  The IRS has not provided any ruling to us on
this matter.





If we
were treated as a corporation for federal income tax purposes, then we would pay
federal income tax on our income at the corporate tax rate, which is currently a
maximum of 35%, and would likely pay state income tax at varying
rates.  Distributions would generally be taxed again to unitholders as
corporate distributions and none of our income, gains, losses, deductions or
credits would flow through to our unitholders.  Because a tax would be
imposed upon us as an entity, cash available for distribution to our unitholders
would be substantially reduced.  Treatment of us as a corporation
would result in a material reduction in the anticipated cash flow and after-tax
return to unitholders and thus would likely result in a substantial reduction in
the value of our common units.





Current
law may change, so as to cause us to be treated as a corporation for federal
income tax purposes or otherwise subject us to entity-level taxation. In
addition, because of widespread state budget deficits and other reasons, several
states are evaluating ways  to subject partnerships to entity-level
taxation through the imposition of state income, franchise and other forms of
taxation. For example, beginning in 2008 we will be required to pay annually a
Texas franchise tax at a maximum effective rate of 0.7% of our gross income
apportioned to Texas with respect to the prior year.  As of September
30, 2008, we paid $141,000 representing our estimated tax liability related
to our 2007 gross income apportioned to Texas.  Imposition of such a
tax on us by Texas and, if applicable, by any other state will reduce the cash
available for distribution to our unitholders. The partnership agreement
provides that if a law is enacted or existing law is modified or interpreted in
a manner that subjects us to taxation as a corporation or otherwise subjects us
to entity-level taxation for federal, state or local income tax purposes, the
minimum quarterly distribution amount and the target distribution amounts will
be adjusted to reflect the impact of that law on us.





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The
tax treatment of publicly traded partnerships or an investment in our common
units could be subject to potential legislative, judicial or administrative
changes and differing interpretations, possibly on a retroactive
basis.





The
present federal income tax treatment of publicly traded partnerships, including
us, or an investment in our common units may be modified by administrative,
legislative or judicial interpretation at any time. For example, members of
Congress are considering substantive changes to the existing federal income tax
laws that affect certain publicly traded partnerships. Any modification to the
federal income tax laws and interpretations thereof may or may not be applied
retroactively. Although the currently proposed legislation would not appear to
affect our tax treatment as a partnership, we are unable to predict whether any
of these changes, or other proposals, will ultimately be enacted. Any such
changes could negatively impact the value of an investment in our common
units.





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





We have
not requested a ruling from the IRS with respect to our treatment as a
partnership for federal income tax purposes or any other matter affecting us.
The IRS may adopt positions that differ from the conclusions of our counsel. It
may be necessary to resort to administrative or court proceedings to sustain
some or all of our counsel’s conclusions or the positions we take. A court may
not agree with some or all of our counsel’s conclusions or the positions we
take. Any contest with the IRS may materially and adversely impact the market
for our common units and the price at which they trade. In addition, the costs
of any contest with the IRS will be borne indirectly by our unitholders and our
general partner because the costs will reduce our cash available for
distribution.





Tax
gain or loss on the disposition of our common units could be more or less than
expected.





If our
unitholders sell their common units, they will recognize a gain or loss equal to
the difference between the amount realized and their tax basis in those common
units. Prior distributions to our unitholders in excess of the total net taxable
income our unitholders were allocated for a common unit, which decreased their
tax basis in that common unit, will, in effect, become taxable income to our
unitholders if the common unit is sold at a price greater than their tax basis
in that common unit, even if the price our unitholders receive is less than
their original cost. A substantial portion of the amount realized, whether or
not representing gain, may be ordinary income. In addition, if our unitholders
sell their units, they may incur a tax liability in excess of the amount of cash
our unitholders receive from the sale.





Tax-exempt
entities, regulated investment companies and foreign persons face unique tax
issues from owning common units that may result in adverse tax consequences to
them.





Investment
in common units by tax-exempt entities, such as individual retirement accounts
(known as IRAs), regulated investment companies (known as mutual funds), and
non-U.S. persons raises issues unique to them. For example, virtually all of our
income allocated to organizations exempt from federal income tax, including
individual retirement accounts and other retirement plans, will be unrelated
business taxable income and will be taxable to them. Distributions to non-U.S.
persons will be reduced by withholding taxes at the highest applicable effective
tax rate, and non-U.S. persons will be required to file United States federal
income tax returns and pay tax on their share of our taxable income. If a
potential unitholder is a tax-exempt entity or a foreign person, it should
consult its tax advisor before investing in our common units.





We
will treat each purchaser of units as having the same tax benefits without
regard to the units purchased. The IRS may challenge this treatment, which could
adversely affect the value of the common units.





Because
we cannot match transferors and transferees of common units and because of other
reasons, we will adopt depreciation and/or amortization positions that may not
conform with all aspects of existing Treasury regulations and, as a result, our
counsel, Baker Botts L.L.P., is unable to opine as to the validity of these
positions. A successful IRS challenge to those positions could adversely affect
the amount of tax benefits available to our unitholders. It also could affect
the timing of these tax benefits or the amount of gain from their sale of common
units and could have a negative impact on the value of our common units or
result in audit adjustments to our unitholders’ tax returns.





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





We will
be considered to have terminated for federal income tax purposes if there are
one or more transfers of interests in our partnership that together represent a
sale or exchange of 50% or more of the total interests in our capital and
profits within a twelve-month period. For these purposes,





·
            multiple
      transfers of the same interest within a twelve month period will be
      counted only once;





·
            if
      the Private Company sells or exchanges its interests in SemGroup Holdings
      or our general partner, the interests held by SemGroup Holdings or our
      general partner, as the case may be, in us will be deemed to have been
      sold or exchanged; and





·
            if
      50% or more of the total interests in the Private Company’s capital and
      profits are sold or exchanged within a twelve month period, the Private
      Company, SemGroup Holdings and the general partner will be deemed to have
      sold or exchanged all of their interests in
us.





Our
termination would, among other things, result in the closing of our taxable year
for all unitholders, which would result in us filing two tax returns (and our
unitholders could receive two Schedules K-1) for one fiscal year and could
result in a deferral of depreciation deductions allowable in computing our
taxable income. In the case of a unitholder reporting on a taxable year other
than a fiscal year ending December 31, the closing of our taxable year may also
result in more than twelve months of our taxable income or loss being includable
in his taxable income for the year of termination. Our termination currently
would not affect our classification as a partnership for federal income tax
purposes, but instead, we would be treated as a new partnership for tax
purposes. If treated as a new partnership, we must make new tax elections and
could be subject to penalties if we are unable to determine that a termination
occurred.





Our
unitholders likely will be subject to state and local taxes and return filing or
withholding requirements as a result of investing in our common
units.





In
addition to federal income taxes, our unitholders will likely be subject to
other taxes, such as state and local income taxes, unincorporated business taxes
and estate, inheritance, or intangible taxes that are imposed by the various
jurisdictions in which we do business or own property. Our unitholders likely
will be required to file state and local income tax returns and pay state and
local income taxes in some or all of these various jurisdictions. Further, our
unitholders may be subject to penalties for failure to comply with those
requirements. We own property and conduct business in Texas, Oklahoma, Kansas,
Colorado, New Mexico, Arkansas, California, Georgia, Idaho, Illinois, Indiana,
Missouri, Michigan, Montana, Nebraska, Nevada, New Jersey, North Carolina, Ohio,
Pennsylvania, Tennessee, Utah, Virginia and Washington. Of these states, Texas
does not currently impose a state income tax on individuals. We may own property
or conduct business in other states or foreign countries in the future. It is
each unitholder’s responsibility to file all federal, state and local tax
returns. Under the tax laws of some states where we will conduct business, we
may be required to withhold a percentage from amounts to be distributed to a
unitholder who is not a resident of that state. For example, in the case of
Oklahoma, we are required to either report detailed tax information about our
non-Oklahoma resident unitholders with an income in Oklahoma in excess of $500
to the taxing authority, or withhold an amount equal to 5% of the portion of our
distributions to unitholders which is deemed to be the Oklahoma share of our
income. Similarly, we are required to withhold Kansas income tax at a rate of
6.45% on each non-Kansas resident unitholder’s share of our taxable income that
is attributable to Kansas (regardless of whether such income is distributed),
unless the non-Kansas resident unitholder files a tax reporting affidavit with
us which we, in turn, are required to file with the Kansas Department of
Revenue. Our counsel has not rendered an opinion on the state and local tax
consequences of an investment in our common units.





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We
prorate our items of income, gain, loss and deduction between transferors and
transferees of our units each month based upon the ownership of our units on the
first day of each month, instead of on the basis of the date a particular unit
is transferred. The IRS may challenge this treatment, which could change the
allocation of items of income, gain, loss and deduction among our
unitholders.





We
prorate our items of income, gain, loss and deduction between transferors and
transferees of our units each month based upon the ownership of our units on the
first day of each month, instead of on the basis of the date a particular unit
is transferred. The use of this proration method may not be permitted under
existing Treasury Regulations, and, accordingly, our counsel is unable to opine
as to the validity of this method. If the IRS were to challenge this method or
new Treasury regulations were issued, we may be required to change the
allocation of items of income, gain, loss and deduction among our
unitholders.





A
unitholder whose units are loaned to a “short seller” to cover a short sale of
units may be considered as having disposed of those units. If so, he would no
longer be treated for tax purposes as a partner with respect to those units
during the period of the loan and may recognize gain or loss from the
disposition.




Because a
unitholder whose units are loaned to a “short seller” to cover a short sale of
units may be considered as having disposed of the loaned units, he may no longer
be treated for tax purposes as a partner with respect to those units during the
period of the loan to the short seller and the unitholder may recognize gain or
loss from such disposition. Moreover, during the period of the loan to the short
seller, any of our income, gain, loss or deduction with respect to those units
may not be reportable by the unitholder and any cash distributions received by
the unitholder as to those units could be fully taxable as ordinary income. Our
counsel has not rendered an opinion regarding the treatment of a unitholder
where common units are loaned to a short seller to cover a short sale of common
units; therefore, unitholders desiring to assure their status as partners and
avoid the risk of gain recognition from a loan to a short seller are urged to
modify any applicable brokerage account agreements to prohibit their brokers
from borrowing their units.




We
will adopt certain valuation methodologies that may result in a shift of income,
gain, loss and deduction between the general partner and the unitholders. The
IRS may challenge this treatment, which could adversely affect the value of the
common units.




When we
issue additional units or engage in certain other transactions, we determine the
fair market value of our assets and allocate any unrealized gain or loss
attributable to our assets to the capital accounts of our unitholders and our
general partner. Our methodology may be viewed as understating the value of our
assets. In that case, there may be a shift of income, gain, loss and deduction
between certain unitholders and the general partner, which may be unfavorable to
such unitholders. Moreover, under our valuation methods, subsequent purchasers
of common units may have a greater portion of their Internal Revenue Code
Section 743(b) adjustment allocated to our tangible assets and a lesser portion
allocated to our intangible assets. Because the determination of value and the
allocation of value are factual matters, rather than legal matters, our counsel
is unable to opine as to these matters. The IRS may challenge our valuation
methods, or our allocation of the Section 743(b) adjustment attributable to our
tangible and intangible assets, and  allocations of income, gain, loss
and deduction between the general partner and certain of our
unitholders.




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





Item 3.
            Defaults
      Upon Senior Securities




Due to
events related to the Bankruptcy Filings, events of default occurred under our
credit agreement.  Effective on September 18, 2008, we and the
requisite lenders under our credit facility entered into the Forbearance under
which the lenders agreed, subject to specified limitations and conditions, to
forbear from exercising their rights and remedies arising from the defaults and
events of default described therein for the Forbearance Period, which was
subsequently extended pursuant to the First Forbearance Amendment, the Second
Forbearance Amendment and the Third Forbearance Amendment.


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We, our
subsidiaries that are guarantors of the obligations under the credit facility,
Wachovia Bank, National Association, as Administrative Agent, and the requisite
lenders under our credit agreement entered into the Credit Agreement Amendment
under which, among other things, the lenders consented to the Settlement
and waived all existing defaults and events of default described in the
Forbearance Agreement and amendments thereto.




Prior to
the execution of the Forbearance Agreement, the credit agreement was comprised
of a $350 million revolving credit facility and a $250 million term loan
facility.  The Forbearance Agreement permanently reduced our revolving
credit facility under the credit agreement from $350 million to $300 million and
prohibited us from borrowing additional funds under our revolving credit
facility during the Forbearance Period.   Under the Forbearance
Agreement, we agreed to pay the lenders executing the Forbearance Agreement a
fee equal to 0.25% of the aggregate commitments under the credit agreement after
giving effect to the above described commitment reduction.  The Second
Forbearance Amendment further permanently reduced our revolving credit facility
under the credit agreement from $300 million to $220 million.  In
addition, under the Second Forbearance Amendment, we agreed to pay the lenders
executing the Second Forbearance Amendment a fee equal to 0.375% of the
aggregate commitments under the credit agreement after the above described
commitment reduction.  Under the Third Forbearance Amendment, we
agreed to pay a fee equal to 0.25% of the aggregate commitments under the credit
agreement after the above described commitment reduction.  The amendments
to the Forbearance Agreement prohibited us from borrowing additional funds under
our revolving credit facility during the extended Forbearance
Period.




The
Credit Agreement Amendment subsequently further permanently reduced our
revolving credit facility under the credit agreement from $220 million to $50
million, and increased the term loan facility from $250 million to $400
million.  Upon the execution of the Credit Agreement Amendment, $150
million of our outstanding revolving loans were converted to term loans and we
became able to borrow additional funds under our revolving credit
facility.  Pursuant to the Credit Agreement Amendment, the credit
facility and all obligations thereunder will mature on June 30,
2011.  Under the Credit Agreement Amendment, we agreed to pay the
lenders executing the Credit Agreement Amendment a fee equal to 2.00% of the
aggregate commitments under the credit agreement after the above described
commitment reduction, offset by the fee paid pursuant to the Third Forbearance
Amendment.  As of May 22, 2009, we
had $423.4 million in outstanding borrowings under our credit facility
(including $23.4 million under our revolving credit facility and $400.0
million under our term loan facility) with an aggregate unused credit
availability under our revolving credit facility and cash on hand of
approximately $27.2 million. Pursuant to the Credit Agreement Amendment, our
revolving credit facility is limited to $50.0 million.  If any of
the financial institutions that support our revolving credit facility were to
fail, we may not be able to find a replacement lender, which could negatively
impact our ability to borrow under our revolving credit facility.  For
instance, Lehman Brothers Commercial Bank is one of the lenders under our $50.0
million revolving credit facility, and Lehman Brothers Commercial Bank has
agreed to fund approximately $2.5 million (approximately 5%) of the revolving
credit facility.  On several occasions Lehman Brothers Commercial Bank has
failed to fund revolving loan requests under our revolving credit facility,
effectively limiting the aggregate amount of our revolving credit facility to
$47.5 million.




Prior to
the events of default, indebtedness under the credit agreement bore interest at
our option, at either (i) the higher of the Base rate, plus an
applicable margin that ranges from 0.50% to 1.75%, depending on our total
leverage ratio and senior secured leverage ratio, or (ii) LIBOR plus an
applicable margin that ranges from 1.50% to 2.75%, depending upon our total
leverage ratio and senior secured leverage ratio.  During the
Forbearance Period indebtedness under the credit agreement bore interest at our
option, at either (i) the Base rate, plus an applicable margin that ranges
from 2.75% to 3.75%, depending upon our total leverage ratio, or (ii) LIBOR
plus an applicable margin that ranges from 4.25% to 5.25%, depending upon our
total leverage ratio.  Pursuant to the Second Forbearance Amendment,
commencing on December 12, 2008, indebtedness under the credit agreement bore
interest at our option, at either (i) the Base rate plus 5.0% per annum,
with a Base rate floor of 4.0% per annum, or (ii) LIBOR plus 6.0% per
annum, with a LIBOR floor of 3.0% per annum.




After
giving effect to the Credit Agreement Amendment, amounts outstanding under our
credit facility bear interest at either the LIBOR rate plus 6.50% per annum,
with a LIBOR floor of 3.00%, or the base rate plus 5.50% per annum, with a base
rate floor of 4.00% per annum.  We now pay a fee of 1.50% on unused
commitments under our revolving credit facility.  After giving effect
to the Credit Agreement Amendment, interest on amounts outstanding under our
credit facility must be paid monthly.  Our credit facility, as amended
by the Credit Agreement Amendment, now requires us to pay additional interest on
October 6, 2009, April 6, 2010, October 6, 2010 and April 6, 2011, equal to the
product of (i) the sum of the total amount of term loans then outstanding plus
the aggregate commitments under the revolving credit facility and (ii) 0.50%,
0.50%, 1.00% and 1.00%, respectively.




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During
the three months ended September 30, 2008, the weighted average interest rate
incurred by us was 7.04% resulting in interest expense of approximately $8.2
million.  During the three months ended December 31, 2008, the
weighted average interest rate incurred by us was 7.72% resulting in interest
expense of approximately $8.9 million.




Among
other things, our credit facility, as amended by the Credit Agreement Amendment,
now requires us to make (i) minimum quarterly amortization payments on March 31,
2010 in the amount of $2.0 million, June 30, 2010 in the amount of $2.0 million,
September 30, 2010 in the amount of $2.5 million, December 31, 2010 in the
amount of $2.5 million and March 31, 2011 in the amount of $2.5 million, (ii)
mandatory prepayments of amounts outstanding under the revolving credit facility
(with no commitment reduction) whenever cash on hand exceeds $15.0 million,
(iii) mandatory prepayments with 100% of asset sale proceeds, (iv) mandatory
prepayment with 50% of the proceeds raised through equity raises and (v) annual
prepayments with 50% of excess cash flow.  Our credit facility, as
amended by the Credit Agreement Amendment, prohibits us from making draws under
the revolving credit facility if we would have more than $15.0 million of cash
on hand after making the draw and applying the proceeds thereof.




Under the
credit agreement, we are subject to certain limitations, including limitations
on our ability to grant liens, incur additional indebtedness, engage in a
merger, consolidation or dissolution, enter into transactions with affiliates,
sell or otherwise dispose of our assets (other than the sale or other
disposition of the assets of the asphalt business, provided that such
disposition is at arm’s length to a non-affiliate for fair market value in
exchange for cash and the proceeds of the disposition are used to pay down
outstanding loans), businesses and operations, materially alter the character of
our business, and make acquisitions, investments and capital
expenditures.  The credit agreement prohibits us from making
distributions of available cash to our unitholders if any default or event of
default (as defined in the credit agreement) exists.  The credit
agreement, as amended by the Credit Agreement Amendment, requires us to maintain
a leverage ratio (the ratio of our consolidated funded indebtedness to our
consolidated adjusted EBITDA, in each case as defined in the credit agreement),
determined as of the last day of eachmonth for the twelve month
period ending on the date of determination, that ranges on a monthly basis from
not more than 5.50 to 1.00 to not more than 9.75 to 1.00.  In
addition, pursuant to the Credit Agreement Amendment, our ability to make
acquisitions and investments in unrestricted subsidiaries is limited and we may
only make distributions if our leverage ratio is less than 3.50 to 1.00 and
certain other conditions are met.  As of September 30, 2008 and
December 31, 2008, our leverage ratio was 4.34 to 1.00 and 4.83 to 1.00,
respectively. If our leverage ratio does not improve, we may not make
quarterly distributions to our unitholders in the
future.




The
credit agreement, as amended by the Credit Agreement Amendment, also requires us
to maintain an interest coverage ratio (the ratio of our consolidated EBITDA to
our consolidated interest expense, in each case as defined in the credit
agreement) that ranges on a monthly basis from not less than 2.50 to 1.00 to not
less than 1.00 to 1.00. As of September 30, 2008 and December 31, 2008, our
interest coverage ratio was 4.95 to 1.00 and 3.60 to 1.00,
respectively.




Further,
we are required to maintain a minimum monthly consolidated adjusted EBITDA for
the prior twelve months ranging from $45.4 million to $82.9 million as
determined at the end of each month.  In addition, capital
expenditures are limited to $12.5 million in 2009, $8.0 million in 2010 and $4.0
million in the six months ending June 30, 2011.




The
credit agreement specifies a number of events of default (many of which are
subject to applicable cure periods), including, among others, failure to pay any
principal when due or any interest or fees within three business days of the due
date, failure to perform or otherwise comply with the covenants in the credit
agreement, failure of any representation or warranty to be true and correct in
any material respect, failure to pay debt, a change of control of us or our
general partner, and other customary defaults.  In
addition, it is an event of default under the credit agreement if we do not file
our delinquent quarterly and annual reports with the SEC by September 30, 2009,
unless we retain new auditors, in which case such deadline is extended to
December 31, 2009.If an event of default exists under the credit
agreement, the lenders will be able to accelerate the maturity of the credit
agreement and exercise other rights and remedies, including taking available
cash in our bank accounts.  If an event of default exists and we are
unable to obtain forbearance from our lenders or a waiver of the events of
default under our credit agreement, we may be forced to sell assets, make a
bankruptcy filing or take other action that could have a material adverse effect
on our business, the price of our common units and our results of
operations.  We are also prohibited from making cash distributions to
our unitholders while the events of default exist.




We used
interest rate swap agreements to manage a portion of the exposure related to
changing interest rates by converting floating-rate debt to fixed-rate debt. See
Note 4 of the
Notes to the Consolidated Financial Statements included in Item 1 of this
Quarterly Report for a description of these interest rate
swaps.   The interest rate swap agreements contain cross-default
provisions to events of default under the credit agreement.  Due to
events related to the Bankruptcy Filings, all of these interest rate swap
positions were terminated in the third quarter of 2008, and we have recorded a
$1.5 million liability as of September 30, 2008 with respect to these
positions.




Item 6.
            Exhibits




The
information required by this Item 6 is set forth in the Index to Exhibits
accompanying this quarterly report and is incorporated herein by
reference.


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SIGNATURES




Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this Report to be signed on its behalf by the undersigned thereunto
duly authorized.









SemGroup
      Energy Partners, L.P.By:
            
            SemGroup
      Energy Partners G.P., L.L.C.
              its
      General PartnerDate: May
      27, 2009
            
            
            
            By:
            
            /s/
      Alex G. StallingsAlex
      G. Stallings
              Chief
      Financial Officer and SecretaryDate:
      May 27, 2009
            
            
            
            By:
            
            /s/
      James R. GriffinJames
      R. Griffin
              Chief
      Accounting Officer


Table of Contents




INDEX
TO EXHIBITS






Exhibit
                    Number
                  
                  Exhibit
      Name3.1
                  
                  Certificate
      of Limited Partnership of SemGroup Energy Partners, L.P. (the
      “Partnership”), dated February 22, 2007 (filed as Exhibit 3.1 to the
      Partnership’s Registration Statement on Form S-1 (Reg. No. 333-141196),
      filed March 9, 2007, and incorporated herein by
  reference).3.2
                  
                  First
      Amended and Restated Agreement of Limited Partnership of the Partnership,
      dated July 20, 2007 (filed as Exhibit 3.1 to the Partnership’s Current
      Report on Form 8-K, filed July 25, 2007, and incorporated herein by
      reference).3.3
                  
                  Amendment
      No. 1 to First Amended and Restated Agreement of Limited Partnership of
      the Partnership, effective as of July 20, 2007 (filed as Exhibit 3.1 to
      the Partnership’s Current Report on Form 8-K, filed on April 14, 2008, and
      incorporated herein by reference).3.4
                  
                  Amendment
      No. 2 to First Amended and Restated Agreement of Limited Partnership of
      the Partnership, dated June 25, 2008 (filed as Exhibit 3.1 to the
      Partnership’s Current Report on Form 8-K, filed on June 30, 2008, and
      incorporated herein by reference).3.5
                  
                  Certificate
      of Formation of SemGroup Energy Partners G.P., L.L.C. (the “General
      Partner”), dated February 22, 2007 (filed as Exhibit 3.3 to the
      Partnership’s Registration Statement on Form S-1 (Reg. No. 333-141196),
      filed March 9, 2007, and incorporated herein by
  reference).3.6
                  
                  Amended
      and Restated Limited Liability Company Agreement of the General Partner,
      dated July 20, 2007 (filed as Exhibit 3.2 to the Partnership’s Current
      Report on Form 8-K, filed July 25, 2007, and incorporated herein by
      reference).3.7
                  
                  Amendment
      No. 1 to Amended and Restated Limited Liability Company Agreement of the
      General Partner, dated June 25, 2008 (filed as Exhibit 3.2 to the
      Partnership’s Current Report on Form 8-K, filed on June 30, 2008, and
      incorporated herein by reference).3.8
                  
                  Amendment
      No. 2 to Amended and Restated Limited Liability Company Agreement of the
      General Partner, dated July 18, 2008 (filed as Exhibit 3.1 to the
      Partnership’s Current Report on Form 8-K, filed on July 22, 2008, and
      incorporated herein by reference).4.1
                  
                  Specimen
      Unit Certificate (included in Exhibit 3.2).10.1
                  
                  Agreed
      Order of the United States Bankruptcy Court for the District of Delaware
      Regarding Motion by SemGroup Energy Partners, L.P. (i) to Compel Debtors
      to Provide Adequate Protection and (ii) to Modify the Automatic Stay
      (filed as Exhibit 99.1 to the Partnership’s Current Report on Form 8-K,
      filed on September 9, 2008, and incorporated herein by
      reference).10.2
                  
                  Forbearance
      Agreement and Amendment to Credit Agreement, dated September 12, 2008 but
      effective as of September 18, 2008, by and among SemGroup Energy Partners,
      L.P., Wachovia Bank, National Association, as Administrative Agent, L/C
      Issuer and Swing Line Lender, and the Lenders party thereto (filed as
      Exhibit 10.1 to the Partnership’s Current Report on Form 8-K, filed on
      September 22, 2008, and incorporated herein by
  reference).10.3
                  
                  First
      Amendment to Forbearance Agreement and Amendment to Credit Agreement,
      dated as of December 11, 2008, by and among SemGroup Energy Partners,
      L.P., Wachovia Bank, National Association, as Administrative Agent, L/C
      Issuer and Swing Line Lender, and the Lenders party thereto (filed as
      Exhibit 10.1 to the Partnership’s Current Report on Form 8-K, filed on
      December 12, 2008, and incorporated herein by
  reference).10.4
                  
                  Second
      Amendment to Forbearance Agreement and Amendment to Credit Agreement,
      dated as of December 18, 2008, by and among SemGroup Energy Partners,
      L.P., Wachovia Bank, National Association, as Administrative Agent, L/C
      Issuer and Swing Line Lender, and the Lenders party thereto (filed as
      Exhibit 10.1 to the Partnership’s Current Report on Form 8-K, filed on
      December 19, 2008, and incorporated herein by
  reference).10.5
                  
                  Third
      Amendment to Forbearance Agreement and Amendment to Credit Agreement,
      dated as of March 17, 2009, by and among SemGroup Energy Partners, L.P.,
      Wachovia Bank, National Association, as Administrative Agent, L/C Issuer
      and Swing Line Lender, and the Lenders party thereto (filed as Exhibit
      10.1 to the Partnership’s Current Report on Form 8-K, filed on March 19,
      2009, and incorporated herein by reference).10.6
                  
                  Consent,
      Waiver and Amendment to Credit Agreement, dated as of April 7, 2009, by
      and among SemGroup Energy Partners, L.P., as Borrower, SemGroup Energy
      Partners G.P., L.L.C., SemGroup Energy Partners Operating, L.L.C.,
      SemMaterials Energy Partners, L.L.C., SemGroup Energy Partners, L.L.C.,
      SemGroup Crude Storage, L.L.C., SemPipe, L.P., SemPipe G.P., L.L.C. and
      SGLP Management, Inc., as Guarantors, Wachovia Bank, National Association,
      as Administrative Agent, L/C Issuer and Swing Line Lender, and the Lenders
      party thereto (filed as Exhibit 10.14 to the Partnership’s Current Report
      on Form 8-K, filed on April 10, 2009, and incorporated herein by
      reference).10.7
                  
                  Amendment
      to the SemGroup Energy Partners G.P., L.L.C. Long Term Incentive Plan
      (filed as Exhibit 10.1 to the Partnership’s Current Report on Form 8-K,
      filed on December 23, 2008, and incorporated herein by
      reference).10.8
                  
                  Form
      of Director Restricted Common Unit Agreement (filed as Exhibit 10.2 to the
      Partnership’s Current Report on Form 8-K, filed on December 23, 2008, and
      incorporated herein by reference).10.9
                  
                  Form
      of Director Restricted Subordinated Unit Agreement (filed as Exhibit 10.3
      to the Partnership’s Current Report on Form 8-K, filed on December 23,
      2008, and incorporated herein by reference).10.10
                  
                  Term
      Sheet, dated as of March 6, 2009 (filed as Exhibit 10.1 to the
      Partnership’s Current Report on Form 8-K, filed on March 10, 2009, and
      incorporated herein by reference).10.11
                  
                  Master
      Agreement, dated as of April 7, 2009 to be effective as of 11:59 PM CDT
      March 31, 2009, by and among by and among SemGroup, L.P., SemManagement,
      L.L.C., SemOperating G.P., L.L.C., SemMaterials, L.P., K.C. Asphalt,
      L.L.C., SemCrude, L.P., Eaglwing, L.P., SemGroup Holdings, L.P., SemGroup
      Energy Partners, L.P., SemGroup Energy Partners G.P., L.L.C., SemGroup
      Energy Partners Operating, L.L.C., SemGroup Energy Partners, L.L.C.,
      SemGroup Crude Storage, L.L.C., SemPipe, L.P., SemPipe G.P., L.L.C., SGLP
      Management, Inc. and SemMaterials Energy Partners, L.L.C. (filed as
      Exhibit 10.1 to the Partnership’s Current Report on Form 8-K, filed on
      April 10, 2009, and incorporated herein by reference).10.12
                  
                  Shared
      Services Agreement, dated as of April 7, 2009 to be effective as of 11:59
      PM CDT March 31, 2009, by and among SemGroup Energy Partners, L.P.,
      SemGroup Energy Partners, L.L.C., SemGroup Crude Storage, L.L.C., SemPipe
      G.P., L.L.C., SemPipe, L.P., SemCrude, L.P. and SemManagement, L.L.C.
      (filed as Exhibit 10.2 to the Partnership’s Current Report on Form 8-K,
      filed on April 10, 2009, and incorporated herein by
      reference).10.13
                  
                  Transition
      Services Agreement, dated as of April 7, 2009 to be effective as of 11:59
      PM CDT March 31, 2009, by and among SemGroup Energy Partners, L.P.,
      SemGroup Energy Partners, L.L.C., SemGroup Crude Storage, L.L.C., SemPipe
      G.P., L.L.C., SemPipe, L.P., SemMaterials Energy Partners, L.L.C., SGLP
      Asphalt L.L.C., SemCrude, L.P., SemGroup, L.P., SemMaterials, L.P. and
      SemManagement, L.L.C. (filed as Exhibit 10.3 to the Partnership’s Current
      Report on Form 8-K, filed on April 10, 2009, and incorporated herein by
      reference).10.14
                  
                  Contribution,
      Conveyance, Assignment and Assumption Agreement, dated as of April 7, 2009
      to be effective as of 11:59 PM CDT March 31, 2009, by and among
      SemMaterials, L.P., K.C. Asphalt, L.L.C., SGLP Asphalt, L.L.C. and
      SemMaterials Energy Partners, L.L.C. (filed as Exhibit 10.4 to the
      Partnership’s Current Report on Form 8-K, filed on April 10, 2009, and
      incorporated herein by reference).10.15
                  
                  Membership
      Interest Transfer Agreement, dated as of April 7, 2009 to be effective as
      of 11:59 PM CDT March 31, 2009, by and between SemMaterials, L.P. and
      SemMaterials Energy Partners, L.L.C. (filed as Exhibit 10.5 to the
      Partnership’s Current Report on Form 8-K, filed on April 10, 2009, and
      incorporated herein by reference).10.16
                  
                  Throughput
      Agreement, dated as of April 7, 2009 to be effective as of 11:59 PM CDT
      March 31, 2009, by and among SemGroup Energy Partners, L.L.C. and
      SemCrude, L.P. (filed as Exhibit 10.6 to the Partnership’s Current Report
      on Form 8-K, filed on April 10, 2009, and incorporated herein by
      reference).10.17
                  
                  Terminalling
      and Storage Agreement, dated as of April 7, 2009 to be effective as of
      11:59 PM CDT March 31, 2009, by and between SemMaterials Energy Partners,
      L.L.C. and SemMaterials, L.P. (filed as Exhibit 10.7 to the Partnership’s
      Current Report on Form 8-K, filed on April 10, 2009, and incorporated
      herein by reference).10.18
                  
                  Access
      and Use Agreement, dated as of April 7, 2009 to be effective as of 11:59
      PM CDT March 31, 2009, by and between SemMaterials, L.P. and SemMaterials
      Energy Partners, L.L.C. (filed as Exhibit 10.8 to the Partnership’s
      Current Report on Form 8-K, filed on April 10, 2009, and incorporated
      herein by reference).10.19
                  
                  Trademark
      License Agreement, dated as of April 7, 2009 to be effective as of 11:59
      PM CDT March 31, 2009, by and among SemGroup, L.P., SemMaterials, L.P. and
      SemGroup Energy Partners, L.P. (filed as Exhibit 10.9 to the Partnership’s
      Current Report on Form 8-K, filed on April 10, 2009, and incorporated
      herein by reference).10.20
                  
                  Office
      Lease, dated as of April 7, 2009 to be effective as of 11:59 PM CDT March
      31, 2009, by and between SemGroup Energy Partners, L.L.C. and SemCrude,
      L.P. (filed as Exhibit 10.10 to the Partnership’s Current Report on Form
      8-K, filed on April 10, 2009, and incorporated herein by
      reference).10.21
                  
                  Building
      Lease, dated as of April 7, 2009 to be effective as of 11:59 PM CDT March
      31, 2009, by and between SemGroup Energy Partners, L.L.C. and SemCrude,
      L.P. (filed as Exhibit 10.11 to the Partnership’s Current Report on Form
      8-K, filed on April 10, 2009, and incorporated herein by
      reference).10.22
                  
                  Mutual
      Easement Agreement, dated as of April 7, 2009 to be effective as of 11:59
      PM CDT March 31, 2009, among SemCrude, L.P., SemGroup Energy Partners,
      L.L.C., and SemGroup Crude Storage, L.L.C. (filed as Exhibit 10.12 to the
      Partnership’s Current Report on Form 8-K, filed on April 10, 2009, and
      incorporated herein by reference).10.23
                  
                  Pipeline
      Easement Agreement, dated as of April 7, 2009 to be effective as of 11:59
      PM CDT March 31, 2009, by and among White Cliffs Pipeline, L.L.C.,
      SemGroup Energy Partners, L.L.C., and SemGroup Crude Storage, L.L.C.
      (filed as Exhibit 10.13 to the Partnership’s Current Report on Form 8-K,
      filed on April 10, 2009, and incorporated herein by
      reference).31.1*
                  
                  Certifications
      of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.31.2*
                  
                  Certifications
      of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.32.1*
                  
                  Certification
      of Chief Executive Officer and Chief Financial Officer pursuant to 18
      U.S.C., Section 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002. Pursuant to SEC Release 34-47551, this Exhibit
      is furnished to the SEC and shall not be deemed to be
    “filed.”*
                  Filed
      herewith.