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 June 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 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 March 13, 2009, there were 21,557,309 common units and
12,570,504 subordinated 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 June
      30, 2008
                    1Consolidated Statements of Operations for the three and six
      months ended June 30, 2007 and 2008
                    2Consolidated Statements of Changes in Partners’ Capital for
      the six months ended June 30, 2008
                    3Consolidated Statements of Cash Flows for the six months ended
      June 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
                    54Item 4T.
                    
                    Controls and Procedures
                    54PART II. OTHER INFORMATION
                    55Item 1.
                    
                    Legal Proceedings
                    55Item
      1A.
                    
                    Risk Factors
                    57Item
      3.
                    
                    Defaults Upon Senior Securities
                    86Item
      5.
                    
                    Other Information
                    87Item 6.
                    
                    Exhibits
                    87SIGNATURESCERTIFICATIONS













Table of Contents




PART I – FINANCIAL INFORMATION




Item 1.
            Financial
      Statements




SEMGROUP ENERGY PARTNERS, L.P.


CONSOLIDATED
BALANCE SHEETS


(in
thousands, except units)




As
      of December 31,
                                            
                                            
                                            As
      of June 30,2007
                                            
                                            
                                            2008(unaudited)ASSETSCurrent
      assets:Cash
      and cash equivalents
                                            
                                            $
                                            416
                                            
                                            
                                            $
                                            758Accounts
      receivable, net of allowance for doubtful accounts of $0 and
      $357at
      December 31, 2007 and June 30, 2008, respectively
                                            
                                            
                                            2,666
                                            
                                            
                                            
                                            2,081Receivables
      from related parties, net of allowance for doubtful accounts
      of$0
      and $900 at December 31, 2007 and June 30, 2008,
    respectively
                                            
                                            
                                            9,665
                                            
                                            
                                            
                                            1,971Prepaid
      insurance
                                            
                                            
                                            797
                                            
                                            
                                            
                                            1,091Debt
      issuance costs
                                            
                                            
                                            -
                                            
                                            
                                            
                                            2,776Interest
      rate swaps asset
                                            
                                            
                                            -
                                            
                                            
                                            
                                            2,998Other
      current assets
                                            
                                            
                                            442
                                            
                                            
                                            
                                            506Total
      current assets
                                            
                                            
                                            13,986
                                            
                                            
                                            
                                            12,181Property,
      plant and equipment, net of accumulated depreciation of $40,222 and
      $69,277at
      December 31, 2007 and June 30, 2008, respectively
                                            
                                            
                                            102,239
                                            
                                            
                                            
                                            293,681Goodwill
                                            
                                            
                                            6,340
                                            
                                            
                                            
                                            6,340Other
      assets, net
                                            
                                            
                                            2,917
                                            
                                            
                                            
                                            1,976Total
      assets
                                            
                                            $
                                            125,482
                                            
                                            
                                            $
                                            314,178LIABILITIES AND PARTNERS' CAPITAL
      (DEFICIT)Current
      liabilities:Accounts
      payable
                                            
                                            $
                                            3,045
                                            
                                            
                                            $
                                            3,941Payables
      to related parties
                                            
                                            
                                            10,227
                                            
                                            
                                            
                                            9,915Accrued
      interest payable
                                            
                                            
                                            449
                                            
                                            
                                            
                                            1,921Accrued
      property taxes
                                            
                                            
                                            -
                                            
                                            
                                            
                                            1,183Unearned
      revenue
                                            
                                            
                                            -
                                            
                                            
                                            
                                            968Other
      accrued liabilities
                                            
                                            
                                            340
                                            
                                            
                                            
                                            290Current
      portion of capital lease obligations
                                            
                                            
                                            1,236
                                            
                                            
                                            
                                            1,116Interest
      rate swaps liability
                                            
                                            
                                            -
                                            
                                            
                                            
                                            2,502Current
      portion of long term debt
                                            
                                            
                                            -
                                            
                                            
                                            
                                            421,900Total
      current liabilities
                                            
                                            
                                            15,297
                                            
                                            
                                            
                                            443,736Long-term
      debt
                                            
                                            
                                            89,600
                                            
                                            
                                            
                                            -Long-term
      capital lease obligations
                                            
                                            
                                            1,123
                                            
                                            
                                            
                                            587Interest
      rate swaps liability
                                            
                                            
                                            2,233
                                            
                                            
                                            
                                            -Commitments
      and contingencies (Notes 4, 10 and 13)Partners'
      capital (deficit):Common
      unitholders (14,375,000 and 21,275,000 units issued and outstanding
      atDecember
      31, 2007 and June 30, 2008, respectively)
                                            
                                            
                                            317,004
                                            
                                            
                                            
                                            479,253Subordinated
      unitholders (12,570,504 units issued and outstanding for both
      dates)
                                            
                                            
                                            (287,210
                                            )
                                            
                                            
                                            (285,469
                                            )General
      partner interest (2.0% interest with 549,908 and 690,725 general partner
      unitsoutstanding
      at December 31, 2007 and June 30, 2008, respectively)
                                            
                                            
                                            (12,565
                                            )
                                            
                                            
                                            (323,929
                                            )Total
      Partners' capital (deficit)
                                            
                                            
                                            17,229
                                            
                                            
                                            
                                            (130,145
                                            )Total
      liabilities and Partners' capital (deficit)
                                            
                                            $
                                            125,482
                                            
                                            
                                            $
                                            314,178




See
accompanying notes to unaudited financial statements.


1
 Table of Contents




SEMGROUP ENERGY PARTNERS, L.P.


CONSOLIDATED
STATEMENTS OF OPERATIONS


(in thousands, except per unit
data)




Three
      Months Ended
                            
                            
                            Six
      Months EndedJune
      30,
                            
                            
                            June
      30,2007
                            
                            
                            2008
                            
                            
                            2007
                            
                            
                            2008(unaudited)Service revenue:Third
      party revenue
                            
                            $
                            10,464
                            
                            
                            $
                            6,027
                            
                            
                            $
                            18,975
                            
                            
                            $
                            10,651Related
      party revenue
                            
                            
                            -
                            
                            
                            
                            49,249
                            
                            
                            
                            123
                            
                            
                            
                            84,839Total
      revenue
                            
                            
                            10,464
                            
                            
                            
                            55,276
                            
                            
                            
                            19,098
                            
                            
                            
                            95,490Expenses:Operating
                            
                            
                            18,041
                            
                            
                            
                            29,505
                            
                            
                            
                            34,158
                            
                            
                            
                            51,771Allowance
      for doubtful accounts
                            
                            
                            -
                            
                            
                            
                            1,266
                            
                            
                            
                            -
                            
                            
                            
                            1,266General
      and administrative
                            
                            
                            4,118
                            
                            
                            
                            3,057
                            
                            
                            
                            8,490
                            
                            
                            
                            6,067Total
      expenses
                            
                            
                            22,159
                            
                            
                            
                            33,828
                            
                            
                            
                            42,648
                            
                            
                            
                            59,104Operating
      income (loss)
                            
                            
                            (11,695
                            )
                            
                            
                            21,448
                            
                            
                            
                            (23,550
                            )
                            
                            
                            36,386Other
      expenses:Interest
      (income) expense
                            
                            
                            516
                            
                            
                            
                            (225
                            )
                            
                            
                            945
                            
                            
                            
                            4,864Income
      (loss) before income taxes
                            
                            
                            (12,211
                            )
                            
                            
                            21,673
                            
                            
                            
                            (24,495
                            )
                            
                            
                            31,522Provision
      for income taxes
                            
                            
                            -
                            
                            
                            
                            77
                            
                            
                            
                            -
                            
                            
                            
                            168Net
      income (loss)
                            
                            $
                            (12,211
                            )
                            
                            $
                            21,596
                            
                            
                            $
                            (24,495
                            )
                            
                            $
                            31,354Allocation
      of net income to limited and subordinated partners:General
      partner interest in net income
                            
                            
                            
                            
                            
                            $
                            3,410
                            
                            
                            
                            
                            
                            
                            $
                            3,605Net
      income allocable to limited and subordinated partners
                            
                            
                            
                            
                            
                            $
                            18,186
                            
                            
                            
                            
                            
                            
                            $
                            27,749Basic
      and diluted net income per common unit
                            
                            
                            
                            
                            
                            $
                            0.53
                            
                            
                            
                            
                            
                            
                            $
                            0.84Basic
      and diluted net income per subordinated unit
                            
                            
                            
                            
                            
                            $
                            0.53
                            
                            
                            
                            
                            
                            
                            $
                            0.84Weighted
      average common units outstanding - basic and diluted
                            
                            
                            
                            
                            
                            
                            21,275
                            
                            
                            
                            
                            
                            
                            
                            19,310Weighted
      average subordinated partners' units outstanding - basic and
      diluted
                            
                            
                            
                            
                            
                            
                            12,571
                            
                            
                            
                            
                            
                            
                            
                            12,571


See
accompanying notes to unaudited 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
                                
                                
                                17,296
                                
                                
                                
                                10,453
                                
                                
                                
                                3,605
                                
                                
                                
                                31,354Equity-based
      compensation
                                
                                
                                849
                                
                                
                                
                                559
                                
                                
                                
                                29
                                
                                
                                
                                1,437Distributions
      paid
                                
                                
                                (13,719
                                )
                                
                                
                                (9,271
                                )
                                
                                
                                (727
                                )
                                
                                
                                (23,717
                                )Proceeds
      from sale of 6,900,000 common units, net of underwriters' discount
      andoffering
      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
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                (317,636
                                )
                                
                                
                                (317,636
                                )Balance,
      June 30, 2008
                                
                                $
                                479,253
                                
                                
                                $
                                (285,469
                                )
                                
                                $
                                (323,929
                                )
                                
                                $
                                (130,145
                                )


See
accompanying notes to unaudited financial statements.


3
 Table of Contents




SEMGROUP ENERGY PARTNERS, L.P.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(in
thousands)




Six
      Months EndedJune
      30,2007
                            
                            
                            2008(unaudited)Cash
      flows from operating activities:Net
      income (loss)
                            
                            $
                            (24,495
                            )
                            
                            $
                            31,354Adjustments
      to reconcile net income (loss) to net cash provided by (used in) operating
      activities:Provision
      for uncollectible receivables from third parties
                            
                            
                            -
                            
                            
                            
                            357Provision
      for uncollectible receivables from related parties
                            
                            
                            -
                            
                            
                            
                            900Depreciation
      and amortization
                            
                            
                            4,387
                            
                            
                            
                            9,772Amortization
      of debt issuance costs
                            
                            
                            -
                            
                            
                            
                            262Unrealized
      gain related to interest rate swaps
                            
                            
                            -
                            
                            
                            
                            (2,729
                            )(Gain)
      loss on sale of assets
                            
                            
                            52
                            
                            
                            
                            (46
                            )Equity-based
      incentive compensation expense
                            
                            
                            -
                            
                            
                            
                            1,437Changes
      in assets and liabilities:Decrease
      (increase) in accounts receivable
                            
                            
                            (1,269
                            )
                            
                            
                            228Decrease
      in receivables from related parties
                            
                            
                            -
                            
                            
                            
                            6,794Increase
      in prepaid insurance
                            
                            
                            (399
                            )
                            
                            
                            (294
                            )Increase
      in other current assets
                            
                            
                            (105
                            )
                            
                            
                            (369
                            )Decrease
      (increase) in other assets
                            
                            
                            70
                            
                            
                            
                            (152
                            )Increase
      (decrease) in accounts payable
                            
                            
                            (747
                            )
                            
                            
                            242Decrease
      in payables to related parties
                            
                            
                            -
                            
                            
                            
                            (312
                            )Increase
      in accrued interest payable
                            
                            
                            -
                            
                            
                            
                            1,472Increase
      in accrued property taxes
                            
                            
                            -
                            
                            
                            
                            1,183Increase
      in unearned revenue
                            
                            
                            -
                            
                            
                            
                            968Increase
      (decrease) in accrued liabilities
                            
                            
                            605
                            
                            
                            
                            (50
                            )Net
      cash provided by (used in) operating activities
                            
                            
                            (21,901
                            )
                            
                            
                            51,017Cash
      flows from investing activities:Acquisition
      of assets from Private Company
                            
                            
                            -
                            
                            
                            
                            (514,643
                            )Capital
      expenditures
                            
                            
                            (15,265
                            )
                            
                            
                            (3,485
                            )Proceeds
      from sale of assets
                            
                            
                            331
                            
                            
                            
                            372Net
      cash used in investing activities
                            
                            
                            (14,934
                            )
                            
                            
                            (517,756
                            )Cash flows from financing
      activities:Debt
      issuance costs
                            
                            
                            -
                            
                            
                            
                            (2,094
                            )Payments
      on capital lease obligations
                            
                            
                            (992
                            )
                            
                            
                            (646
                            )Borrowings
      under credit facility
                            
                            
                            -
                            
                            
                            
                            492,400Payments
      under credit facility
                            
                            
                            -
                            
                            
                            
                            (160,100
                            )Proceeds
      from equity issuance, net of offering costs
                            
                            
                            -
                            
                            
                            
                            161,238Distributions
      paid
                            
                            
                            -
                            
                            
                            
                            (23,717
                            )Contributions
      from Parent
                            
                            
                            37,827
                            
                            
                            
                            -Net
      cash provided by financing activities
                            
                            
                            36,835
                            
                            
                            
                            467,081Net
      increase in cash and cash equivalents
                            
                            
                            -
                            
                            
                            
                            342Cash
      and cash equivalents at beginning of period
                            
                            
                            -
                            
                            
                            
                            416Cash
      and cash equivalents at end of period
                            
                            $
                            -
                            
                            
                            $
                            758Supplemental
      disclosure of cash flow information:Increase
      (decrease) in accounts payable related to purchases of property, plant and
      equipment
                            
                            $
                            (421
                            )
                            
                            $
                            654


See
accompanying notes to unaudited financial statements.




4
 Table of Contents
 SEMGROUP
ENERGY PARTNERS, L.P.
 NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
  1.
ORGANIZATION AND 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 provides 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 provides liquid asphalt cement
terminalling and storage and throughput services to the Private Company and the
Private Company has 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.
   5
 Table of Contents
 SEMGROUP
ENERGY PARTNERS, L.P.
 NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
   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.




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 $90.2 million, including $0.2
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 $16.6 million, with the additional purchase price of $73.6 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
six months ended June 30, 2008 and the year ended December 31, 2008,
the Partnership derived approximately 88%
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 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.  As discussed in Notes 4
and 13 to the financial statements, events of default have occurred and are
continuing under the Partnership’s credit agreement resulting in the
classification of $421.9 million of debt as a current liability and a working
capital deficiency of $431.6 million.  The Partnership is operating on
cash flows received from operations and from a $25.0 million borrowing
under its credit facility on July 8, 2008 prior to the occurrence of the
events of default. If the Partnership is unable to sustain its sources
of revenue generation and reestablish its relationships within the credit
markets, this cash position will not be sufficient to operate its business
over the long-term.  As of March 13, 2009, the Partnership has
approximately $33.9 million of cash that it is using to operate its
business.  Additionally, the Partnership earned 88% of its revenues,
excluding fuel surcharge revenues related to fuel and power consumed to operate
its liquid asphalt cement storage tanks, for the six months ended June 30, 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.




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


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
common control of the Private Company and the Partnership, subsequent
acquisitions of fixed assets from the Private Company are 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.




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 provides 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 provides liquid asphalt cement terminalling and storage
and throughput services to the Private Company (See Note 8).




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 $2.7 million for the six months ended June 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
reimburses the Private Company for the provision of various general and
administrative services for the Partnership’s benefit.  The Omnibus
Agreement was amended in conjunction with the purchase of the Acquired Asphalt
Assets in February 2008 (See Note 8).  The events related to the
Bankruptcy Filings have terminated the Private Company’s obligations to provide
services to the Partnership under the Omnibus Agreement.  Pursuant to
an order entered by the Bankruptcy Court, the Private Company agreed to continue
providing such services until November 30, 2008.  Although the Private
Company is not required to continue providing these services pursuant to the
Omnibus Agreement or the order of the Bankruptcy Court, the Private Company has
continued to provide these services to the Partnership as of the date of the
filing of this report (See Note 13).  Pursuant
to the Settlement Agreement (as defined below), the Private Company will reject
the Amended Omnibus Agreement as part of the Bankruptcy Cases (as defined below)
and the Partnership and the Private Company will enter into a shared services
agreement pursuant to which the Private Company will provide certain operational
services for the Partnership.  There can be no assurance that the
conditions to effectiveness in the Settlement Agreement will be completed and
that the transactions contemplated thereby will be consummated(see Note
13).




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


The
statements of operations for the three and six months ended June 30, 2007 and
2008 and the statements of cash flows for the six months ended June 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.




3.
PROPERTY, PLANT AND EQUIPMENT




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




EstimatedUseful
                        
                        
                        December
      31,
                        
                        
                        June
      30,Lives
      (Years)
                        
                        
                        2007
                        
                        
                        2008Land
                        
                        
                        
                        
                        $
                        309
                        
                        
                        $
                        15,065Land
      improvements
                        
                        
                        10-20
                        
                        
                        
                        -
                        
                        
                        
                        5,179Pipelines
      and facilities
                        
                        
                        5-31
                        
                        
                        
                        34,626
                        
                        
                        
                        94,177Storage
      and terminal facilities
                        
                        
                        10-35
                        
                        
                        
                        71,873
                        
                        
                        
                        166,625Transportation
      equipment
                        
                        
                        3-10
                        
                        
                        
                        25,133
                        
                        
                        
                        24,996Office
      property and equipment and other
                        
                        
                        3-31
                        
                        
                        
                        8,505
                        
                        
                        
                        19,973Construction-in-progress
                        
                        
                        
                        
                        
                        
                        2,015
                        
                        
                        
                        36,943Property,
      plant and equipment, gross
                        
                        
                        
                        
                        
                        
                        142,461
                        
                        
                        
                        362,958Accumulated
      depreciation
                        
                        
                        
                        
                        
                        
                        (40,222
                        )
                        
                        
                        (69,277
                        )Property,
      plant and equipment, net
                        
                        
                        
                        
                        
                        $
                        102,239
                        
                        
                        $
                        293,681
 
 Property,
plant and equipment includes assets under capital leases of $2.4 million and
$1.7 million, net of accumulated depreciation of $4.2 million and $4.7 million
at December 31, 2007 and June 30, 2008, respectively. All capital leases
relate to the transportation equipment asset category.  At June 30,
2008, $35.5 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 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 six months ended June 30, 2007 and June 30, 2008 was $4.2
million and $9.6 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.  The credit facility will mature on July 20,
2012.


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




Events of
default have occurred and are continuing under the Partnership’s credit
agreement.  In addition, the Private Company’s actions related to the
Bankruptcy Filings as well as the Private Company’s liquidity issues and any
corresponding impact upon the Partnership may result in additional events of
default under the Partnership’s credit agreement (See Note 13).  No
cure periods are applicable to these existing events of
default.  These events of default have not been waived and are
continuing under the Partnership’s credit agreement.  Due to the
existing events of default under the Partnership’s credit agreement, the
Partnership is not able to borrow under its credit facility to fund working
capital needs or for other purposes (See Note 13).




Due to
the events of default, upon the expiration or termination of any applicable
forbearance period, the lenders may, among other remedies, declare all
outstanding amounts under the credit agreement immediately due and payable and
exercise all other rights and remedies available to the lenders under the credit
agreement and related loan documents.  A vote of lenders having more
than 50% of the sum of (i) the aggregate revolver commitments and (ii) the
outstanding term loan are required to exercise such a remedy.  If the
lenders exercise such a remedy, the Partnership may be forced to make
a bankruptcy filing or take other actions.  The Partnership is also
prohibited from making cash distributions to its unitholders while the events of
default exist.  Certain lenders under the
Partnership's 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 the
Partnership's credit facility.




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 events of default described above
and other defaults or 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 Amendment”),
and 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 Amendment").




On March 18,
2009, the Partnership and the requisite lenders entered into the Third Amendment
to Forbearance Agreement and Amendment to Credit Agreement (the “Third
Amendment”), dated as of March 17, 2009.  The Third Amendment extends
the Forbearance Period until the earliest of (i) April 8, 2009, (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, as amended by the First Amendment, the Second Amendment and the Third
Amendment, or (iii) the failure of the Partnership to comply with any of
the terms of the Forbearance Agreement, as amended by the First Amendment, the
Second Amendment and the Third Amendment (the “Extended Forbearance
Period”).  The Partnership is working with its lenders to obtain a
waiver of the events of default under its credit agreement in connection with
the transactions related to the Settlement Agreement (as defined below);
however, there can be no assurance that such a waiver will be
obtained.




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 Amendment further
permanently reduced the Partnership’s revolving credit facility under the credit
agreement from $300 million to $220 million.  The Third
Amendment prohibits the Partnership from borrowing additional funds under
its revolving credit facility during the Extended Forbearance
Period.  In addition, under the Second Amendment, the Partnership
agreed to pay the lenders executing the Second Amendment a fee equal to 0.375%
of the aggregate commitments under the credit agreement after the above
described commitment reduction.  As of March 13, 2009, the Partnership
had $448.1 million in outstanding borrowings under its credit facility
(including $198.1 million under its revolving credit facility and $250 million
under its term loan facility) with an aggregate unused credit availability of
approximately $21.9 million under its credit facility.  As described
above, the Partnership is prohibited from borrowing additional funds under its
credit agreement during the Extended Forbearance Period.




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




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%, 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
administrative agent’s prime rate or the federal funds rate plus 0.50%, 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 Amendment, commencing on December 12,
2008, indebtedness under the credit agreement bears interest at the
Partnership’s option, at either (i) the administrative agent’s prime rate
or the federal funds rate plus 5.0% per annum, with a prime rate or federal
funds rate floor of 4.0% per annum, or (ii) LIBOR plus 6.0% per annum, with
a LIBOR floor of 3.0% per annum.  During the three months ended June 30,
2008, the weighted average interest rate incurred by the Partnership was 4.62%
resulting in interest expense of approximately $4.3 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.




Under the
Forbearance Agreement, as amended by the First Amendment, the Second Amendment,
and the Third Amendment, the lender’s forbearance is subject to certain
conditions as described therein, including, among other items, periodic
deliverables and minimum liquidity, minimum receipts and maximum disbursement
requirements.




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, businesses and operations,
materially alter the character of its business, and make acquisitions,
investments and capital expenditures. Under the terms of the Forbearance
Agreement, as amended by the First Amendment, the Second Amendment, and the
Third Amendment, and due to the current events of default that exist under the
credit agreement, the Partnership is prohibited from making distributions of
available cash to its unitholders and will continue to be prohibited from making
any such distributions as long as any such events of default
exist.  The credit agreement 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 eachquarter for the
four-quarter period ending on the date of determination, of not more than 5.00
to 1.00 and, on a temporary basis, from the date of the consummation of certain
acquisitions until the last day of the third consecutive fiscal quarter
following such acquisitions, not more than 5.50 to 1.00; provided, that after
the issuance of senior unsecured notes, the leverage ratio limitation will be
modified by a requirement that the Partnership maintain a senior secured
leverage ratio of not more than 4.00 to 1.00 and a total leverage ratio of not
more than 5.50 to 1.00, subject to temporary increases of the senior secured
leverage ratio to not more than 4.50 to 1.00 and the total leverage ratio of not
more than 6.00 to 1.00 following the consummation of certain acquisitions as
described above. As of June 30, 2008 and December 31, 2008, the
Partnership’s leverage ratio was 3.97 to 1.00 and 4.82 to 1.00,
respectively.




The credit agreement 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) of not less than 2.75 to 1.00 determined as of
the last day of each quarter for the four-quarter period
ending on the date of determination. As of June 30, 2008 and December
31, 2008, the Partnership’s interest coverage ratio was6.49to 1.00 and 3.61 to 1.00,
respectively.




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, the Partnership’s general partner or the Private Company, and other
customary defaults.  Because events of default exist under the credit
agreement, the lenders are 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.  The lenders have
agreed to forbear from exercising such rights during the Extended Forbearance
Period subject to certain limitations and conditions contained in the
Forbearance Agreement, as amended by the First Amendment, the Second Amendment,
and the Third Amendment.  If the Partnership is unable to obtain
further forbearance from its lenders or a permanent 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.


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




The
Partnership is exposed to market risk for changes in interest rates related to
its credit facility. Interest rate swap agreements are 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 will pay fixed rates of 4.9% and will receive
three-month LIBOR with quarterly settlement. The fair market value of the August
2007 interest rate swaps at June 30, 2008 was a liability of $2.5
million.  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 will pay fixed rates of 2.6% to 2.7% and will
receive three-month LIBOR with quarterly settlement.  The fair market
value of the March 2008 interest rate swaps at June 30, 2008 was a net asset of
$3.0 million.  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.




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 June 30, 2008 (in thousands):


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




Fair
      Value Measurements at Reporting Date UsingQuoted
      Prices in Active
                        
                        
                        Significant
      Other
                        
                        
                        SignificantMarkets
      for Identical
                        
                        
                        Observable
                        
                        
                        UnobservableAssets
                        
                        
                        Inputs
                        
                        
                        InputsDescription
                        
                        June
      30, 2008
                        
                        
                        (Level
      1)
                        
                        
                        (Level
      2)
                        
                        
                        (Level
      3)Interest
      rate swap assets
                        
                        $
                        2,998
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        2,998Interest
      rate swap liabilities
                        
                        
                        (2,502
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (2,502
                        )Total
                        
                        $
                        496
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        496
 
 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 June 30, 2008
                                
                                
                                Six
      Months Ended June 30, 2008Beginning
      balance
                                
                                $
                                (4,390
                                )
                                
                                $
                                (2,233
                                )Total
      gains or losses (realized/unrealized)Included
      in earnings (1)
                                
                                
                                4,720
                                
                                
                                
                                2,569Included
      in other comprehensive income
                                
                                
                                -
                                
                                
                                
                                -Purchases,
      issuances, and settlements
                                
                                
                                166
                                
                                
                                
                                160Transfers
      in and/or out of Level 3
                                
                                
                                -
                                
                                
                                
                                -Ending
      balance, June 30, 2008
                                
                                $
                                496
                                
                                
                                $
                                496The
      amount of total gains for the period includedin
      earnings attributable to the change in the unrealizedgains
      or losses relating to assets and liabilities stillheld
      at the reporting date
                                
                                $
                                4,886
                                
                                
                                $
                                2,729(1)
      Amounts reported as included in earnings are reported as interest (income)
      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
following sets forth the computation of basic and diluted net income per common
and subordinated unit (in thousands, except per unit data):


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




Three
      Months
                            
                            
                            Three
      Months
                            
                            
                            Six
      Months
                            
                            
                            Six
      MonthsEnded
                            
                            
                            Ended
                            
                            
                            Ended
                            
                            
                            EndedJune
      30, 2007
                            
                            
                            June
      30, 2008
                            
                            
                            June
      30, 2007
                            
                            
                            June
      30, 2008Net
      income (loss)
                            
                            $
                            (12,211
                            )
                            
                            $
                            21,596
                            
                            
                            $
                            (24,495
                            )
                            
                            $
                            31,354Less:
      General partner interest in net income
                            
                            
                            
                            
                            
                            
                            3,410
                            
                            
                            
                            
                            
                            
                            
                            3,605Net
      income available to limited and subordinated partners
                            
                            
                            $
                            18,186
                            
                            
                            
                            
                            
                            
                            $
                            27,749Basic
      and diluted weighted average number of units:Common
      units
                            
                            
                            
                            
                            
                            
                            21,275
                            
                            
                            
                            
                            
                            
                            
                            19,310Subordinated
      units
                            
                            
                            
                            
                            
                            
                            12,571
                            
                            
                            
                            
                            
                            
                            
                            12,571Restricted
      and phantom units
                            
                            
                            
                            
                            
                            
                            530
                            
                            
                            
                            
                            
                            
                            
                            508Basic
      and diluted net income per common unit
                            
                            
                            
                            
                            
                            $
                            0.53
                            
                            
                            
                            
                            
                            
                            $
                            0.84Basic
      and diluted net income per subordinated unit
                            
                            
                            
                            
                            
                            $
                            0.53
                            
                            
                            
                            
                            
                            
                            $
                            0.84


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 existing 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 distribution for the quarters ended June 30,
2008, September 30, 2008 or December 31, 2008.  In addition, the
Partnership does not currently expect to make a distribution relating to
operations during the first quarter of 2009.  If the events of
default under the Partnership’s credit agreement are not waived by its lenders
or the Partnership’s business operations and prospects do not improve, the
Partnership may not make quarterly distributions to its unitholders in the
future (See Note 13).  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.


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




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 $90.2 million, including $0.2 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 $16.6
million, and with the additional purchase price of $73.6 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.




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 $317.6 million and negative Partners’ Capital
of $130.2 million as of June 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 six months ended
June 30, 2008, the Partnership recognized revenue of $56.2 million under the
Throughput Agreement.




In
conjunction with the purchase of the Acquired Asphalt Assets in February 2008,
the Partnership entered into a Terminalling Agreement with the Private Company.
For the six months ended June 30, 2008, the Partnership recognized revenue of
$28.2 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 is 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 is no longer making such
minimum payments under the Throughput Agreement but instead is paying a market
rate based upon the Private Company’s actual usage.  Pursuant
to the Settlement Agreement (as defined below), the Private Company
will reject the Throughput Agreement as part of the Bankruptcy Cases (as defined
below) and the Partnership and the Private Company will enter into a new
throughput agreement pursuant to which the Partnership will provide certain
crude oil gathering, transportation, terminalling and storage services to the
Private Company.  There can be no assurance that the
conditions to effectiveness in the Settlement Agreement will be completed and
that the transactions contemplated thereby will be consummated (see
Note 13).The revenues under the Terminalling Agreement have been
and will continue to be adversely affected by the Bankruptcy Filings (See Note
13).





The
Partnership does not take title to, or marketing responsibility for, the crude
oil or liquid asphalt cement that it gathers, transports, terminals and stores.
The Throughput Agreement and the Terminalling Agreement contain a Consumer Price
Index adjustment that may offset a portion of any increased costs that the
Partnership incurs. If new laws or regulations that affect these services
provided under the Throughput Agreement or the Terminalling Agreement generally
are enacted that require the Partnership to make substantial and unanticipated
capital expenditures, the Partnership has the right pursuant to the terms of
such agreements to negotiate an upfront payment or monthly surcharge to be paid
by the Private Company for the use of the Partnership’s services to cover the
Private Company’s pro rata portion of the cost of complying with these laws or
regulations, after the Partnership has made efforts to mitigate their effect.
The Partnership and the Private Company are obligated to negotiate in good faith
to agree on the level of the monthly surcharge. The surcharge will not apply in
respect of routine capital expenditures.


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


The
Private Company’s obligations under the Throughput Agreement and the
Terminalling Agreement may be temporarily suspended during the occurrence of a
force majeure event that renders performance of services impossible with respect
to an asset for at least 30 consecutive days. If a force majeure event results
in a diminution in the services the Partnership is able to provide to the
Private Company pursuant to the Throughput Agreement or the Terminalling
Agreement, the Private Company’s minimum service usage commitment would be
reduced proportionately for the duration of the force majeure event. If such a
force majeure event continues for twelve consecutive months or more, the
Partnership and the Private Company will each have the right to terminate the
rights and obligations with respect to the affected services under the
Throughput Agreement or the Terminalling Agreement.




The
Throughput Agreement and the Terminalling Agreement have initial terms that
expire on December 31, 2014 with additional automatic one-year renewals
unless either party terminates the agreement upon one year’s prior
notice.  The Private Company may reject or attempt to modify these
contracts in the Bankruptcy Cases (as defined below) (See Note 13). The
Throughput Agreement and the Terminalling Agreement may be assigned by the
Private Company only with the Partnership’s consent; provided, however, that the
Bankruptcy Court may approve an assignment of these agreements despite the
Partnership’s objections.  On February 6, 2009, the Private Company
filed a motion in the Bankruptcy Court requesting approval of the sale of the
Private Company’s asphalt related assets, or in the event of an unsuccessful
auction, the rejection of the Terminalling Agreement and the winding down of its
asphalt business (See Note 13).




The
Throughput Agreement and the Terminalling Agreement do not apply to any services
the Partnership may provide to customers other than the Private
Company.




Pursuant
to the Settlement Agreement (as defined below), the Private Company will
reject the Terminalling Agreement and the Throughput Agreement as part of the
Bankruptcy Cases (as defined below) and the Partnership will receive the
Private Company’s asphalt assets that are connected to the Partnership’s asphalt
assets.  In addition, pursuant to the Settlement Agreement, the
Partnership and the Private Company will enter into a new throughput agreement
pursuant to which the Partnership will provide certain crude oil gathering,
transportation, terminalling and storage services to the Private
Company.  There can be no assurance that the
conditions to effectiveness in the Settlement Agreement will be completed and
that the transactions contemplated thereby will be consummated (see Note
13).




As of
December 31, 2007 and June 30, 2008, the Partnership had $9.7 million
and $2.0 millionin
receivables from the Private Company and its subsidiaries, net of allowance for
doubtful accounts of $0 and $0.9 million, respectively.  The $0.9
million allowance for doubtful accounts relates to amounts that were due from
the Private Company as of June 30, 2008 and are considered prepetition debt in
the Bankruptcy Cases.  These amounts have been reserved due to the
uncertainty of collecting prepetition amounts from the Private Company in the
Bankruptcy Cases (See Note 13).




Under the Partnership’s partnership
agreement and the Omnibus Agreement with the Private Company, the Partnership
reimburses the Private Company for the provision of various general and
administrative services for the Partnership’s benefit. As of June 30, 2008, 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 pays the
Private Company for providing general and administrative services to the
Partnership from $5.0 million per year to $7.0 million per year through February
2011, subject to annual increases based on increases in the Consumer Price Index
and subject to further increases in connection with expansions of the
Partnership’s operations through the acquisition or construction of new assets
or businesses with the concurrence of the Partnership’s conflicts
committee.  After February 2011, the general and
administrative expenses will be allocated to the Partnership only in accordance
with the partnership agreement. For the six months ended June 30, 2008, the
Partnership paid the Private Company $3.2million for the services provided under
the Omnibus Agreement.  The obligation for the Private Company to
provide services under the 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 agreed to provide these services until
at least November 30, 2008 pursuant to an Agreed Order approved by the
Bankruptcy Court and, as of the date of filing this report, has continued to
provide these services (See Note 13).  Pursuant
to the Settlement Agreement (as defined below), the Private Company will
reject the Amended Omnibus Agreement as part of the Bankruptcy Cases (as defined
below) and the Partnership and the Private Company will enter into a shared
services agreement pursuant to which the Private Company will provide certain
operational services for the Partnership.  There can be no assurance
that the
conditions to effectiveness in the Settlement Agreement will be completed and
that the transactions contemplated thereby will be consummated(see Note
13).




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 six months ended
June 30, 2008, the Partnership recorded $14.3 million in compensation costs and
$1.6 million 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 June 30,
2008, the Partnership had $10.2 million and $9.9 millionin payables to the
Private Company and its subsidiaries. As of the date of the filing of this
report, the Partnership has not paid the $9.9 million payable to the Private
Company prior to the Bankruptcy Filings.  Pursuant
to the Settlement Agreement (as defined below), these pre-petition claims by the
Private Company will be netted against pre-petition claims by the
Partnership and waived.  There can be no assurance that the
conditions to effectiveness in the Settlement Agreement will be completed and
that the transactions contemplated thereby will be consummated (see Note
13).


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




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.




During
the six months ended June 30, 2008, the Partnership made payments of
$1.0 million to a third party entity on whose board of directors a former
member of the Board serves in connection with leased transport trucks and
trailers utilized in the Partnership’s gathering and transportation services
segment. At June 30, 2008 the Partnership had future commitments to this
entity totaling $8.5 million.




As of
June 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.  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 and $9.8
million on their grant dates, respectively, and the unrecognized estimated
compensation cost at June 30, 2008 was $18.0 million, which will be
recognized over the remaining vesting periods. As of June 30, 2008, all
outstanding awards were expected to fully vest.  Due to the change of
control of the Partnership’s general partner related to the Private Company’s
liquidity issues, all outstanding awards vested on July 18, 2008.  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).




The
Partnership’s equity-based incentive compensation expense for the six months
ended June 30, 2007 and 2008 was $0 and $1.4 million, respectively.




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 June 30, 2008.  The Partnership is subject
to securities class actions 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.


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




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 has 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.  Due to
the Bankruptcy Filings the Partnership may not be able to collect any amounts
that would otherwise be payable under these indemnification provisions if such
events were to occur.  Pursuant to the Settlement Agreement (as
defined below), the Private Company will reject the Amended Omnibus Agreement
including the indemnification provisions therein. If the Partnership experiences
an environmental or other loss and the Private Company fails to honor its
indemnification obligations, 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.





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:


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




Terminalling
      and Storage
                                                                
                                                                
                                                                Gathering
      and Transportation
                                                                
                                                                
                                                                Total(in thousands)Three
      Months Ended June 30, 2007Service
      revenueThird
      party revenue
                                                                
                                                                $
                                                                4,409
                                                                
                                                                
                                                                $
                                                                6,055
                                                                
                                                                
                                                                $
                                                                10,464Related
      party revenue
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -Total
      revenue for reportable segments
                                                                
                                                                
                                                                4,409
                                                                
                                                                
                                                                
                                                                6,055
                                                                
                                                                
                                                                
                                                                10,464
                                                                
                                                                (1
                                                                )Operating
      expenses (excluding depreciation and amortization)
                                                                
                                                                
                                                                606
                                                                
                                                                
                                                                
                                                                15,248
                                                                
                                                                
                                                                
                                                                15,854Operating
      margin (excluding depreciation and amortization)
                                                                
                                                                
                                                                3,803
                                                                
                                                                
                                                                
                                                                (9,193
                                                                )
                                                                
                                                                
                                                                (5,390
                                                                )
                                                                (2
                                                                )Total
      assets (end of period)
                                                                
                                                                
                                                                66,148
                                                                
                                                                
                                                                
                                                                50,476
                                                                
                                                                
                                                                
                                                                116,624Three
      Months Ended June 30, 2008Service
      revenueThird
      party revenue
                                                                
                                                                $
                                                                982
                                                                
                                                                
                                                                $
                                                                5,045
                                                                
                                                                
                                                                $
                                                                6,027Related
      party revenue
                                                                
                                                                
                                                                30,299
                                                                
                                                                
                                                                
                                                                18,950
                                                                
                                                                
                                                                
                                                                49,249Total
      revenue for reportable segments
                                                                
                                                                
                                                                31,281
                                                                
                                                                
                                                                
                                                                23,995
                                                                
                                                                
                                                                
                                                                55,276Operating
      expenses (excluding depreciation and amortization)
                                                                
                                                                
                                                                8,151
                                                                
                                                                
                                                                
                                                                15,595
                                                                
                                                                
                                                                
                                                                23,746Allowance
      for doubtful accounts
                                                                
                                                                
                                                                817
                                                                
                                                                
                                                                
                                                                449
                                                                
                                                                
                                                                
                                                                1,266Operating
      margin (excluding depreciation and amortization)
                                                                
                                                                
                                                                22,313
                                                                
                                                                
                                                                
                                                                7,951
                                                                
                                                                
                                                                
                                                                30,264
                                                                
                                                                (2
                                                                )Total
      assets (end of period)
                                                                
                                                                
                                                                227,255
                                                                
                                                                
                                                                
                                                                86,923
                                                                
                                                                
                                                                
                                                                314,178Six
      Months Ended June 30, 2007Service
      revenueThird
      party revenue
                                                                
                                                                $
                                                                7,145
                                                                
                                                                
                                                                $
                                                                11,830
                                                                
                                                                
                                                                $
                                                                18,975Related
      party revenue
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                123
                                                                
                                                                
                                                                
                                                                123Total
      revenue for reportable segments
                                                                
                                                                
                                                                7,145
                                                                
                                                                
                                                                
                                                                11,953
                                                                
                                                                
                                                                
                                                                19,098
                                                                
                                                                (1
                                                                )Operating
      expenses (excluding depreciation and amortization)
                                                                
                                                                
                                                                1,156
                                                                
                                                                
                                                                
                                                                28,615
                                                                
                                                                
                                                                
                                                                29,771Operating
      margin (excluding depreciation and amortization)
                                                                
                                                                
                                                                5,989
                                                                
                                                                
                                                                
                                                                (16,662
                                                                )
                                                                
                                                                
                                                                (10,673
                                                                )
                                                                (2
                                                                )Total
      assets (end of period)
                                                                
                                                                
                                                                66,148
                                                                
                                                                
                                                                
                                                                50,476
                                                                
                                                                
                                                                
                                                                116,624Six
      Months Ended June 30, 2008Service
      revenueThird
      party revenue
                                                                
                                                                $
                                                                1,013
                                                                
                                                                
                                                                $
                                                                9,638
                                                                
                                                                
                                                                $
                                                                10,651Related
      party revenue
                                                                
                                                                
                                                                47,879
                                                                
                                                                
                                                                
                                                                36,960
                                                                
                                                                
                                                                
                                                                84,839Total
      revenue for reportable segments
                                                                
                                                                
                                                                48,892
                                                                
                                                                
                                                                
                                                                46,598
                                                                
                                                                
                                                                
                                                                95,490Operating
      expenses (excluding depreciation and amortization)
                                                                
                                                                
                                                                10,970
                                                                
                                                                
                                                                
                                                                31,029
                                                                
                                                                
                                                                
                                                                41,999Allowance
      for doubtful accounts
                                                                
                                                                
                                                                817
                                                                
                                                                
                                                                
                                                                449
                                                                
                                                                
                                                                
                                                                1,266Operating
      margin (excluding depreciation and amortization)
                                                                
                                                                
                                                                37,105
                                                                
                                                                
                                                                
                                                                15,120
                                                                
                                                                
                                                                
                                                                52,225
                                                                
                                                                (2
                                                                )Total
      assets (end of period)
                                                                
                                                                
                                                                227,255
                                                                
                                                                
                                                                
                                                                86,923
                                                                
                                                                
                                                                
                                                                314,178


(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 June 30,
                                
                                
                                Six
      Months Ended June 30,2007
                                
                                
                                2008
                                
                                
                                2007
                                
                                
                                2008(in
      thousands)Operating
      margin (excluding depreciation and amortization)
                                
                                $
                                (5,390
                                )
                                
                                $
                                30,264
                                
                                
                                $
                                (10,673
                                )
                                
                                $
                                52,225Depreciation
      and amortization
                                
                                
                                2,187
                                
                                
                                
                                5,759
                                
                                
                                
                                4,387
                                
                                
                                
                                9,772General
      and administrative expenses
                                
                                
                                4,118
                                
                                
                                
                                3,057
                                
                                
                                
                                8,490
                                
                                
                                
                                6,067Interest
      (income) expense
                                
                                
                                516
                                
                                
                                
                                (225
                                )
                                
                                
                                945
                                
                                
                                
                                4,864Income
      (loss) before income taxes
                                
                                $
                                (12,211
                                )
                                
                                $
                                21,673
                                
                                
                                $
                                (24,495
                                )
                                
                                $
                                31,522
 
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ENERGY PARTNERS, L.P.
 NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





12.
RECENTLY ISSUED ACCOUNTING STANDARDS




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.


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




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.




13.
SUBSEQUENT EVENTS




Due to
the events related to the Bankruptcy Filings described herein, including the
uncertainty relating to future cash flows and the existing events of default
under the Partnership’s credit facility, 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 June 30, 2008
reflect an allowance for doubtful accounts of $0.9 million related to amounts
due from the Private Company as of June 30, 2008, which are considered
prepetition debt in the Bankruptcy Cases.  The Partnership’s financial
results as of June 30, 2008 also reflect a $0.4 million allowance for doubtful
accounts related to amounts due from third parties as of June 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.  Other than the allowance for doubtful accounts described
above, the results of operations for the three and six months ended
June 30, 2008 included in this quarterly report were not affected by the
Bankruptcy Filings and related events.




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.


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




On July
18, 2008, Manchester Securities Corp. and Alerian Finance Partners, LP
(“Manchester and 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.  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 and Alerian have not
foreclosed on the subordinated units of the Partnership owned by SemGroup
Holdings or the membership interests in the Partnership’s general
partner.  Manchester and Alerian 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, which may cause an additional event of default under the
Partnership's credit agreement and its Forbearance Agreement. 
Neither the Partnership nor the Partnership’s 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 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). These restricted common units and restricted
subordinated units will vest in one-third increments over a three-year
period.  The Plan was amended in December 2008 to provide for the
issuance of restricted subordinated units.




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.




As discussed in
"Part II. Item 5. Other Information," 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 and Mr. Stallings had previously served as Chief Accounting Officer and
Secretary.


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




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 shall directly pay any utility costs
attributable to the operations of the Private Company at certain shared
facilities, and the Private Company will pay the Partnership for past utility
cost reimbursements that are due from the Private Company; (ii) commencing on
September 15, 2008, payments under the Terminalling Agreement shall be netted
against amounts due under the Amended Omnibus Agreement and shall be made on the
15th day of each month for the prior month (with a three business-day grace
period); (iii) the Private Company will provide 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 will 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
will 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
has been 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 will
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 will 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 shall continue to provide services in accordance with the
Amended Omnibus Agreement through at least November 30, 2008; (viii) the Private
Company will consent to an order relating a third-party storage contract which
shall provide that the Partnership is 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 will enter into a specified lease with the
Private Company to permit the Private Company to construct a
pipeline.




Since the
time that the Order was entered, the Partnership negotiated a replacement letter
of credit, which expires on April 7, 2009, in the amount of approximately $4.9
million to secure the Private Company’s postpetition obligations under the
Terminalling Agreement.  Although certain provisions of the Order have
expired, the Private Company, as of the date of filing this report, has
continued to (i) provide services under the Amended Omnibus Agreement, (ii) make
payments to the Partnership under the Terminalling Agreement based upon the
monthly contract minimums (netted against amounts due under the Amended Omnibus
Agreement) and (iii) make payments under the Throughput Agreement to the
Partnership for actual volumes transported or stored each month at a rate equal
to the average rate charged by the Partnership to third-party shippers in the
same geographical area (netted against amounts due under the Amended Omnibus
Agreement).  However, there can be no assurance that the Private
Company will continue to provide such services or make such payments in the
future.  Pursuant
to the Settlement Agreement (as defined below), such services and payments will
be modified as described below under “—Settlement with the Private
Company.”




Settlement with
the Private Company.
 
 On March
12, 2009, the Bankruptcy Court held a hearing and approved the transactions
contemplated by a term sheetrelating to the settlement of certain
matters between the Private Company and the Partnership (the “Settlement
Agreement”).  The
Bankruptcy Court entered an order approving the Settlement Agreement on March
20, 2009.
  The
Settlement Agreement provides for the following, among other
things:
 
 ·
              the
      Partnership will transfer certain crude oil storage assets located in
      Kansas to the Private Company;
 
 ·
              the
      Private Company will transfer ownership of 355,000 barrels of crude oil
      tank bottoms and line fill to the
Partnership;
 
 ·
              the
      Private Company will reject the Throughput Agreement as part of the
      Bankruptcy Cases;
 
 ·
              the
      Partnership and its affiliates will have a $20 million unsecured claim
      against the Private Company relating to rejection of the Throughput
      Agreement;
 
 ·
              the
      Partnership and the Private Company will enter into a new throughput
      agreement pursuant to which the Partnership will provide certain crude oil
      gathering, transportation, terminalling and storage services to the
      Private Company;
 
 ·
              the
      Partnership will offer employment to certain crude oil
      employees;
 
 ·
              the
      Private Company will transfer its asphalt assets that are connected to the
      Partnership’s asphalt assets to the Partnership or one of its affiliates
      (unless the Private Company executes a definitive agreement to sell
      substantially all of its asphalt assets or business as a going concern to
      a third-party purchaser and the Partnership enters into a terminalling and
      storage agreement with such
purchaser);
 
 ·
              the
      Private Company will reject the Terminalling Agreement as part of the
      Bankruptcy Cases;
 
 ·
              a
      subsidiary of the Partnership will have a $35 million unsecured claim
      against the Private Company relating to rejection of the Terminalling
      Agreement;
  ·
                the
      Partnership and the Private Company will enter into a new terminalling
      agreement pursuant to which the Partnership will provide asphalt
      terminalling and storage services for the Private Company ’s remaining
      asphalt inventory on the following terms: (i) the Partnership will receive
      a monthly storage service fee equal to $0.565 per barrel multiplied by the
      total shell capacity in barrels for each tank where the Private Company
      has asphalt inventory and (ii) the Partnership will receive a throughput
      fee of $9.25 per ton for each ton of the Private Company’s asphalt
      inventory that is delivered out of or otherwise removed from the
      Partnership’s asphalt assets (unless the Private Company executes a
      definitive agreement to sell substantially all of its asphalt assets or
      business as a going concern to a third-party purchaser and the Partnership
      enters into a terminalling and storage agreement with such
      purchaser);
  ·
                the
      Private Company will remove all of its remaining asphalt inventory from
      the Partnership’s asphalt storage facilities no later than October 31,
      2009 (unless the Private Company executes a definitive agreement to sell
      substantially all of its asphalt assets or business as a going concern to
      a third-party purchaser and the Partnership enters into a terminalling and
      storage agreement with such
purchaser);
  ·
                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 Agreement that occurs within
      nine months of the transfer of such assets to the Partnership (unless the
      Private Company executes a definitive agreement to sell substantially all
      of its asphalt assets or business as a going concern to a third-party
      purchaser and the Partnership enters into a terminalling and storage
      agreement with such purchaser);
 ·
              the
      Private Company will reject the Amended and Restated Omnibus Agreement as
      part of the Bankruptcy Cases;
 
 ·
              the
      Partnership and the Private Company will enter into a shared services
      agreement pursuant to which the Private Company will provide 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 and Storage Agreement, Throughput Agreement and Amended and
      Restated Omnibus Agreement;
 
 ·
              certain
      pre-petition claims by the Private Company and the Partnership will be
      netted and waived;
 
 ·
              the
      Private Company and the Partnership will resolve 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 will enter into a license agreement
      providing 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 will waive claims
      for infringement relating to such trade names and mark prior to the date
      of such license agreement.
  The
parties agreed to negotiate and execute definitive documentation, to be approved
by the Bankruptcy Court, with respect to the items contained in the
Settlement Agreement as soon as practicably possible, which will supersede the
Settlement Agreement when so executed.The Settlement Agreement is
subject to the obtaining of a consent from the Partnership’s lenders under its
credit agreement and a waiver of the existing defaults or events of default
under the credit agreement.  There can be no assurance that the
Partnership’s lenders will provide the required consent to the transactions or
waiver of existing defaults or events of default under the Partnership’s credit
agreement or that the transactions contemplated by the Settlement Agreement will
be consummated.


Partnership
Revenues




For the six
months ended June 30, 2008 and the year ended December 31, 2008, the Partnership
derived approximately
88% 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.  The Private Company is
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 are actually utilized by the Private
Company.  As described above, the Order requires the Private Company
to make certain payments under the Throughput Agreement and Terminalling
Agreement.  As of the date of the filing of this report, payments made
under the Throughput Agreement for services rendered since September 2008 have
been made based upon actual usage rather than the contractual minimum monthly
storage amounts in such agreement.  As of the date of the filing of
this report, payments made under the Terminalling Agreement have continued to be
made based upon the contractual minimum monthly storage amounts in such
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.




22
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 SEMGROUP
ENERGY PARTNERS, L.P.
 NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


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 $4.7 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 $13.9 million, or approximately 51% and 86% 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 $9.2 million less than second
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.  Pursuant to the Settlement Agreement, the Partnership has agreed to
waive the fees pursuant to the Terminalling Agreement for the month of March
2009, and the Partnership will enter into a new terminalling agreement with the
Private Company for periods thereafter (see "-Settlement with the Private
Company").




Any delay
or failure of the Private Company to make its required payments under the
Throughput Agreement or the Terminalling Agreement, to the extent such revenues
have not been replaced by third party revenues, will have a material
adverse effect on the Partnership’s financial condition and results of
operations.  For example, the Partnership has reserved as a doubtful
account the receivable balance owed by the Private Company for services provided
to the Private Company during the first 21 days of July, totaling $9.6 million,
as such amounts are considered prepetition debt in the Bankruptcy
Filings.  In addition, the Private Company may reject the contracts it
has with the Partnership, including the Throughput Agreement and the
Terminalling Agreement, as part of its bankruptcy proceedings, which ultimately
would have the effect of breaching such contracts.  Such action would
have a material adverse effect on the Partnership’s financial condition and
results of operations.  Any transaction relating to a rejection,
assignment or modification of the Throughput Agreement or the Terminalling
Agreement would require approval of the Bankruptcy Court.  On February
6, 2009, the Private Company filed a motion in the Bankruptcy Court requesting
approval of the sale of its asphalt related assets, or in the event of an
unsuccessful auction, the rejection of the Terminalling Agreement and the
winding down of its asphalt business (see “—Asphalt Operations” below). 
Pursuant
to the Settlement Agreement, among other items, the Private Company will reject
the Terminalling Agreement and the Throughput Agreement as part of the
Bankruptcy Cases.  In addition, pursuant to the Settlement Agreement,
the Partnership and the Private Company will enter into a new throughput
agreement and a new terminalling agreement pursuant to which the Partnership
will provide certain crude oil gathering, transportation, terminalling and
storage services and asphalt terminalling and storage services to the
Private Company.  There can be no assurance that the
conditions to effectiveness in the Settlement Agreement will be completed and
that the transactions contemplated thereby will be consummated (see
“—Settlement with the Private Company”).




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 may experience lower
volume in its system which could have a material adverse effect on its results
of operations and cash flows.




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Asphalt
Operations




The
Partnership provides liquid asphalt cement terminalling and storage services to
the Private Company.  The Private Company processes, distributes and
markets liquid asphalt cement and finished asphalt products to third party
customers.  Pursuant to the Amended Omnibus Agreement, the Private
Company has agreed, so long as the Terminalling Agreement is in effect, not to
engage in, or acquire or invest in an entity that engages in, the business of
terminalling and storing liquid asphalt cement within 50 miles of the
Partnership’s liquid asphalt cement facilities and the Partnership has agreed,
so long as the Terminalling Agreement is in effect, not to engage in, or acquire
or invest in an entity that engages in, the business of processing, marketing
and distributing liquid asphalt cement and finished asphalt products within 50
miles of its liquid asphalt cement facilities.  As a result, subject
to certain exceptions, the Partnership is contractually prohibited from
marketing or distributing liquid asphalt cement directly to third party
customers while the Terminalling Agreement is in effect.  In addition,
the Private Company is responsible for obtaining and maintaining all
environmental and other permits related to the Partnership’s liquid asphalt
cement operations.  The Private Company’s failure to obtain, renew or
maintain compliance under these permits may materially adversely effect the
Partnership’s operations.  The Partnership is currently evaluating
strategic alternatives for its asphalt operations, including the possibility of
entering into storage contracts with third party customers and the sale of all
or a portion of its 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.  Although there remains some liquid asphalt
cement in the Partnership’s asphalt storage tanks that was not sold during the
summer of 2008, the Private Company, as of the date of the filing of this
report, has not purchased any significant volumes of additional liquid asphalt
cement during the recent winter months.




On
February 6, 2009, the Private Company filed a motion in the Bankruptcy Court
requesting approval of the sale of its asphalt related assets.  There
is significant uncertainty as to the Partnership’s revenues related to its
asphalt assets and there is substantial risk that the Partnership’s asphalt
assets may be idle during 2009 and subsequent years, which would adversely
effect the Partnership’s financial condition and results of
operations.  Without revenues from its asphalt assets, the Partnership
may be unable to meet the covenants, including the minimum liquidity and minimum
receipt requirements, under its Forbearance Agreement with its senior secured
lenders pursuant to which such lenders have agreed to forbear from exercising
their rights and remedies arising from the Partnership’s events of default under
its credit agreement.  Pursuant
to the Settlement Agreement filed for approval with the Bankruptcy Court, the
Partnership will receive the Private Company’s asphalt assets that are
connected to the Partnership’s asphalt assets (unless
the Private Company executes a definitive agreement to sell substantially all of
its asphalt assets or business as a going concern to a third-party purchaser and
the Partnership enters into a terminalling and storage agreement with such
purchaser).  The transfer
of the Private Company’s asphalt assets in connection with the Settlement
Agreement will provide the Partnership with outbound logistics for its existing
asphalt assets and, therefore, will allow it to better provide asphalt
terminalling and storage services.  In addition, the Private Company
will reject the Terminalling Agreement as part of the Bankruptcy Cases and the
Partnership and the Private Company will enter into a new terminalling agreement
pursuant to which the Partnership will provide asphalt terminalling and storage
services for the Private Company’s remaining asphalt inventory.There can be no assurance that the
conditions to effectiveness in the Settlement Agreement will be completed and
that the transactions contemplated thereby will be consummated (see
“—Settlement with the Private Company”).  Even if the Partnership
acquires such asphalt assets, it may not be able to enter into agreements to
provide terminalling and storage services for such assets.  In
addition,if the Private Company sells its asphalt assets to a
third party, the Partnership will need to negotiate a new
terminalling and storage contract with the purchaser of such assets and such
agreement may not be on as favorable terms as the Terminalling
Agreement.  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.




Operation
and General Administration of the Partnership




As is the
case with many publicly traded partnerships, the Partnership does not directly
employ 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.  Due to the Change of Control, the Private Company is no
longer obligated to operate the Partnership’s assets or perform other
administrative services pursuant to the Amended Omnibus
Agreement.  The Private Company agreed to continue providing such
services until at least November 30, 2008 pursuant to the
Order.  While the Private Company has continued to provide such
services as of the date of the filing of this report, there can be no assurance
that it will continue to provide such services to the Partnership or that the
Partnership could replace any of these services if the Private Company stops
providing them.  If the Private Company stops providing these
services, the Partnership may incur increased costs to replace these services
and its financial results may suffer.  Pursuant
to the Settlement Agreement, the Private Company will reject the Amended Omnibus
Agreement as part of the Bankruptcy Cases and the Partnership and the Private
Company will enter into a shared services agreement pursuant to which the
Private Company will provide certain operational services for the
Partnership.  There can be no assurance that the
conditions to effectiveness in the Settlement Agreement will be completed and
that the transactions contemplated thereby will be consummated (see
“—Settlement with the Private Company”).  In addition, if the terms of
this shared services agreement are not as favorable as the terms under the
Amended Omnibus Agreement, it 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.


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In
addition, 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.  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 its ability to conduct its
business and its results of operations.




Change
of Control of the Private Company




On
December 15, 2008, Red Apple Group Inc. (“Red Apple”), which is chaired by John
Catsimatidis, announced that it controls five of the nine seats on the
management committee of the general partner of the Private Company and therefore
effectively controls the Private Company (the “Private Company Change of
Control”).  Mr. Catsimatidis has indicated that Red Apple does not
intend to liquidate the Private Company and that it plans on filing a new
reorganization plan for the Private Company with the Bankruptcy
Court.  As of the date of the filing of this report, Red Apple has not
filed a reorganization plan.  There is no assurance that any
reorganization plan will be submitted by Red Apple or that if a reorganization
plan is submitted by Red Apple that the Bankruptcy Court will approve such plan
or that continued performance by the Private Company under the Throughput
Agreement or the Terminalling Agreement will be part of any such
plan.  In addition, the Private Company Change of Control may lead to
additional uncertainty regarding the Partnership’s continued relationship with
the Private Company.  The Partnership is unsure what impact, if
any, the Private Company Change of Control will have on the
Partnership and its operations.




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.  The termination
of the explicit rights to use this intellectual property under the Amended
Omnibus Agreement may adversely effect the Partnership’s ability to operate or
grow its business and its results of operations.  In addition, the
Partnership may be subject to claims for trademark or other intellectual
property infringement due to its continued use of these intellectual property
rights.  Pursuant
to the Settlement Agreement, the Partnership and the Private Company will enter
into a license agreement pursuant to which the Partnership may use the trade
names and mark until December 31, 2009.  In addition, pursuant to the
Settlement Agreement, the Private Company has agreed to waive all claims
relating to infringement of the trade names and mark prior to the date of
this license agreement.  There can be no assurance that the
conditions to effectiveness in the Settlement Agreement will be completed and
that the transactions contemplated thereby will be consummated (see
“—Settlement with the Private Company”).




Credit
Facility




As
described in Note 4, certain events of default have occurred and are continuing
under the Partnership’s credit agreement, which prohibit the Partnership from
borrowing under its credit facility to fund working capital needs or to pay
distributions to its unitholders, among other things.  No cure periods
are applicable to the existing events of default.  These events of
default have not been waived and are continuing under the Partnership’s credit
agreement.  In addition, the Private Company’s action related to the
Bankruptcy Cases as well as the Private Company’s liquidity issues and any
corresponding impact may result in additional events of default under the
Partnership’s credit Agreement.The Partnership and the
requisite lenders under its credit facility have entered into the Forbearance
Agreement relating to the existing events of default under the credit
agreement.  Waiver of
the existing events of default under the credit agreement is a condition
precedent to the effectiveness of the Settlement Agreement.  There can
be no assurance that the Partnership’s lenders will provide such a waiver and
that the transactions contemplated by the Settlement Agreement will be
consummated.See Note 4 for more information regarding the
Partnership’s credit facility, the events of default thereunder and the
Forbearance Agreement.





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 or December 31, 2008 due
to the existing 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 the quarters ended June 30, 2008, September 30, 2008 or
December 31, 2008.  In addition, the Partnership does not currently
expect to make a distribution relating to the first quarter of
2009.  The Partnership distributed approximately $14.3 million to its
unitholders for the three months ended March 31, 2008.  If the events
of default under the Partnership’s credit agreement are not waived by its
lenders or the Partnership’s business operations and prospects do not improve,
the Partnership may not make quarterly distributions to its unitholders in the
future.  Pursuant to the Forbearance Agreement, as amended by the
First Amendment, the Second Amendment, and the Third Amendment, the Partnership
is prohibited from making distributions to its unitholders during the Extended
Forbearance Period.





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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 September 30, 2008.  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.


Claims
Against and By the Private Company’s Bankruptcy Estate




The
Partnership currently has claims against the Private Company’s bankruptcy estate
due to amounts owed the Partnership by the Private Company prior to the
Bankruptcy Filings.  In addition, if the Private Company fails to make
its payments under the Throughput Agreement or the Terminalling Agreement or
otherwise fails to perform under the contracts the Partnership has with the
Private Company, the Partnership may have additional potential claims against
the Private Company’s bankruptcy estate.




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.  The
Partnership is uncertain regarding the ultimate amount of damages for breaches
of contract or other claims that it will be able to establish in the Bankruptcy
Cases and the Partnership cannot predict the amounts, if any, that it will
collect or the timing of any such collection, but its losses could be
substantial and 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.




Pursuant to the Settlement
Agreement, the Private Company will reject the Terminalling Agreement and the
Throughput Agreement.  The Partnership will have a $35 million
unsecured claim relating to rejection of the Terminalling Agreement in the
Bankruptcy Cases.  In addition, the Partnership will have a $20
million unsecured claim against the Private Company relating to rejection of the
Throughput Agreement.  There can be no assurance that the
conditions to effectiveness in the Settlement Agreement will be completed and
that the transactions contemplated thereby will be consummated (see
“—Settlement with the Private Company”).





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In
addition, under bankruptcy law, a debtor-in-possession, such as the Private
Company, may seek to avoid certain prepetition transfers if such transfers were
to insiders and occurred within one year before the bankruptcy
filing.  For purposes of avoidance under bankruptcy law, title to real
property that is perfected more than thirty days after the transfer is deemed to
have been transferred as of the date of perfection.  In addition, a
debtor-in-possession, such as the Private Company, may seek to avoid prepetition
transfers of real property that were not perfected as of the bankruptcy filing
date against a hypothetical bona fide purchaser of such real
property.




Through a
series of transactions the Partnership acquired certain real property from the
Private Company during the one-year period preceding the Bankruptcy
Filings.  Deeds to approximately 27 asphalt facilities transferred to
the Partnership by the Private Company as part of the Acquired Asphalt Assets
either were not recorded within thirty days of such transfer or were not
recorded as of the Bankruptcy Filings.  In addition, a deed to the
Acquired Storage Assets was not recorded as of the Bankruptcy
Filings.  Although the Partnership has title to such properties, the
Private Company may in the Bankruptcy Cases seek to avoid the transfers of
these properties.  The Partnership has defenses against these actions
based upon bankruptcy law and state law and intends to vigorously defend against
any such action.  However, there can be no assurance regarding the
outcome of any potential litigation.  If the Private Company succeeds
in such litigation, the Partnership may be required to return the affected
properties to the Private Company or pay an amount equal to the value of such
properties, which would 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.  The Partnership
would then have unsecured claims in the Bankruptcy Court for the amounts
originally paid for such properties.   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 this matter. However, the ultimate
resolution of this matter 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.  Pursuant
to the Settlement Agreement, the Private Company will release certain of its
claims related to this real property including the real property claims
discussed above (see “—Settlement with the Private Company”).  There may
be additional claims that are not released by the Settlement
Agreement.  In addition, there can be no assurance that the
conditions to effectiveness in the Settlement Agreement will be completed and
that the transactions contemplated thereby will be
consummated.




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
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);




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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).




TheCarson case was
filed as a putative class action on behalf of all purchasers of the
Partnership’s common units between February 20, 2008 and July 17,
2008.  Plaintiff alleges violations of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 (“Exchange Act”) and SEC Rule 10b-5, resulting
in damages to members of the putative class.  Plaintiff's specific
allegations include that, despite an obligation to do so, the Defendants failed
to disclose between February 20, 2008 and May 8, 2008 that the Private Company
was engaged in high-risk crude oil hedging transactions that could affect its
ability to continue as a going concern or that the Private Company was suffering
from liquidity problems.  Plaintiff seeks class certification, damages,
interest, fees, and costs.




TheMaurer case was
filed as a putative class action on behalf of all persons who purchased the
Partnership’s common units pursuant to or traceable to the February 12, 2008
Registration Statement and Prospectus.  Plaintiff alleges violations of
Section 11 of the Securities Act of 1933 (“Securities Act”), resulting in
damages to members of the putative class.  Plaintiff’s specific allegations
include that, despite an obligation to do so, the Defendants failed to disclose
in connection with the secondary offering in February 2008 that the Private
Company was engaged in high-risk crude oil hedging transactions that could
affect its ability to continue as a going concern or that the Private Company
was suffering from liquidity problems.  Plaintiff seeks class
certification, damages, interest, fees, and costs.




TheRubin, Jain, andHickman cases were filed as
putative class actions on behalf of all purchasers of the Partnership’s common
units between July 17, 2007 and July 17, 2008.  Plaintiffs allege
violations of Sections 11, 12(a)(2), and 15 of the Securities Act and violations
of Sections 10(b) and 20(a) of the Exchange Act and SEC Rule 10b-5, resulting in
damages to members of the putative class.  Plaintiff’s specific allegations
include that, despite an obligation to do so, the Defendants failed to disclose
between July 17, 2007 and July 17, 2008 the adverse financial condition and lack
of liquidity of the Private Company that was caused by the Private Company’s
speculative and unauthorized hedging and trading in crude oil.  Plaintiffs
seek class certification, rescission of the sale of common units under Section
12(a)(2) of the Securities Act, damages, interest, fees, and costs.




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.




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.




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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.




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.  The examiner is
required to prepare and file a report summarizing the findings of his
investigation by March 24, 2009, unless the Bankruptcy Court extends that
deadline.




The
Partnership may incur additional costs in cooperating with this
examiner.  In
addition, in connection with the Settlement Agreement, the Partnership and the
Private Company will release certain claims relating to the contribution of
assets to the Partnership in connection with its initial public offering and the
Partnership’s acquisition of the Acquired Asphalt Assets, Acquired Pipeline
Assets and Acquired Storage Assets.  However, other claims that may be
identified by the examiner will not be released in connection with the
Settlement Agreement.If the examiner’s investigation results in an
unfavorable outcome to the Partnership, such an investigation may prompt the
filing of lawsuits in the Bankruptcy Cases to challenge or to seek to unwind
transactions with the Partnership under the bankruptcy laws.  Such
litigation may be expensive and, if successful, would have a material adverse
effect on the Partnership’s business, financial condition, results of
operations, ability to make distributions to its unitholders and the trading
price of the Partnership’s common units.




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 tothe
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.
  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.


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




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.




Insurance




The
Partnership shares some insurance policies, including its general liability
policy, with the Private Company. These policies contain caps on the insurer’s
maximum liability under the policy, and claims made by either the Private
Company or the Partnership are applied against the caps and deductibles. The
possibility exists that, in an event in which the Partnership wishes to make a
claim under a shared insurance policy, the Partnership’s claim could be denied
or only partially satisfied due to claims made by the Private Company against
the policy cap. Further, where events occur that would entitle both the Private
Company and the Partnership to benefits under these insurance policies, the full
deductible may be borne by the first claimant under the policy. In addition,
claims made by the Private Company could affect the Partnership’s premiums and
its ability to obtain insurance in the future.  The Bankruptcy Filings
have had and may continue to have an adverse effect on the Partnership’s
insurance premiums and coverage.  The Partnership’s premiums and
ability to obtain insurance in the future could also be adversely impacted by
the Bankruptcy Filings if the Private Company fails to renew any shared policies
and the Partnership is required to purchase its own policy, cover any premiums
currently being paid by the Private Company or if an insurance carrier increases
the insurance premiums due to the Bankruptcy Filings.  These increased
costs could have a material adverse effect on the Partnership’s financial
condition and results of operations.





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.




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




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 has 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.  Due to
the Bankruptcy Filings, the Partnership may not be able to collect any amounts
that would otherwise be payable under these indemnification provisions if such
events were to occur.  Pursuant to the Settlement Agreement, the Private
Company will reject the Amended Omnibus Agreement including the indemnification
provisions therein.




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 noncash compensation
expense related to the vesting of the units under the Plan- See Note 9)
increased by approximately $6.6 million and $7.4 million, or approximately 287%
and 322%, to approximately $8.9 million for the third quarter of 2008 and $9.7
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 plans and objectives of management for future operations
or economic performance, the impact of the Bankruptcy Filings, 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.





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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 provide 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 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 $90.2 million, including $0.2 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 described herein, including the
uncertainty relating to future cash flows and the existing events of default
under our credit facility, 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 we, our general partner,
our subsidiaries nor our general partner’s subsidiaries are debtors in the
Bankruptcy Cases.  However, because of our contractual relationships
with the Private Company and certain of its subsidiaries, the Bankruptcy Filings
have impacted us and may in the future impact us in various ways, including the
items discussed below.  Our financial results as of June 30, 2008
reflect an allowance for doubtful accounts of $0.9 million related to amounts
collectible from the Private Company as of June 30, 2008, which are considered
prepetition debt in the Bankruptcy Cases.  Our financial results as of
June 30, 2008 also reflect a $0.4 million allowance for doubtful accounts
related to amounts collectible from third parties as of June 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.  Other than the
allowance for doubtful accounts described above, the results of operations for
the three and six months ended June 30, 2008 included in this quarterly report
were not affected by the Bankruptcy Filings and related events.




Board
and Management Composition




On July
18, 2008, Manchester Securities Corp. and Alerian Finance Partners, LP
(“Manchester and 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.  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 and Alerian have not foreclosed on our subordinated units owned by
SemGroup Holdings or the membership interests in our general
partner.  Manchester and Alerian 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, which may cause an additional event of default under our credit agreement
and Forbearance Agreement (as defined below).  Neither we 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 as directors of the Board.  Mr. Srinivasan was elected as
Chairman of the Board.  Messrs. Brian F. Billings and Edward F. Kosnik
remain as 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.




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 SemGroup Energy Partners G.P., L.L.C.
Long-Term Incentive Plan (the “Plan”), Mr. Ligon was granted an award of
3,333 restricted common units and 1,667 restricted subordinated units on
December 23, 2008. These restricted common units and restricted
subordinated units will vest in one-third increments over a three-year
period.  The Plan was amended in December 2008 to provide for the
issuance of restricted subordinated units.


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 Table of Contents




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.




As
discussed in "Part II. Item 5. Other Information," 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, and Mr. Stallings had previously served as
Chief Accounting Officer and Secretary.


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 shall directly pay any utility costs attributable to the
operations of the Private Company at certain shared facilities, and the Private
Company will pay us for past utility cost reimbursements that are due from the
Private Company; (ii) commencing on September 15, 2008, payments under the
Terminalling Agreement shall be netted against amounts due under the Amended
Omnibus Agreement and shall be made on the 15th day of each month for the prior
month (with a three business-day grace period); (iii) the Private Company will
provide 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 will 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 will 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 has been 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;
(vi) the parties will reevaluate the Throughput Agreement and the payment terms
with respect to services provided after October 2008; (vii) representatives of
the Private Company and us will 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 shall continue to
provide services in accordance with the Amended Omnibus Agreement through at
least November 30, 2008; (viii) the Private Company will consent to an order
relating a third-party storage contract which shall provide that we are the
rightful owner of the rights in and to a certain third-party storage agreement
and the corresponding amounts due thereunder; and (ix) we will enter into a
specified lease with the Private Company to permit the Private Company to
construct a pipeline.




Since the
time that the Order was entered, we negotiated a replacement letter of credit,
which expires on April 7, 2009, in the amount of approximately $4.9 million to
secure the Private Company’s postpetition obligations under the Terminalling
Agreement.  Although certain portions of the Order have expired, the
Private Company, as of the date of filing this report, has continued to (i)
provide services under the Amended Omnibus Agreement, (ii) make payments to us
under the Terminalling Agreement based upon the monthly contract minimums
(netted against amounts due under the Amended Omnibus Agreement) and (iii) make
payments to us under the Throughput Agreement for actual volumes transported or
stored each month at a rate equal to the average rate charged by us to
third-party shippers in the same geographical area (netted against amounts due
under the Amended Omnibus Agreement).  However, there can be no
assurance that the Private Company will continue to provide such services or
make such payments in the future.  Pursuant
to the Settlement Agreement (as defined below), such services and payments will
be modified as described below under “—Settlement with the Private
Company.”




Settlement with the Private
Company.


On March 12, 2009, the
Bankruptcy Court held a hearing and approved the transactions contemplated by a
term sheet relating to the
settlement of certain matters between us and the Private Company (the
“Settlement Agreement”).  The
Bankruptcy Court entered an order approving the Settlement Agreement on March
20, 2009.
  The
Settlement Agreement provides for the following, among other
things:
 
 ·
                  we
      will transfer certain crude oil storage assets located in Kansas to the
      Private Company;
 
 ·
                  the
      Private Company will transfer ownership of 355,000 barrels of crude oil
      tank bottoms and line fill to us;
 
 ·
                  the
      Private Company will reject the Throughput Agreement as part of the
      Bankruptcy Cases;
 
 ·
                  we
      and our affiliates will have a $20 million unsecured claim against the
      Private Company relating to rejection of the Throughput
      Agreement;
 
 ·
                  we
      and the Private Company will enter into a new throughput agreement
      pursuant to which we will provide certain crude oil gathering,
      transportation, terminalling and storage services to the Private
      Company;
 
 ·
                  we
      will offer employment to certain crude oil
  employees;
 
 ·
                  the
      Private Company will transfer its asphalt assets that are connected to our
      asphalt assets to the us or one of our affiliates (unless the Private
      Company executes a definitive agreement to sell substantially all of its
      asphalt assets or business as a going concern to a third-party purchaser
      and we enter into a terminalling and storage agreement with such
      purchaser);
 
 ·
                  the
      Private Company will reject the Terminalling Agreement as part of the
      Bankruptcy Cases;
 
 ·
                  one
      of our subsidiaries will have a $35 million unsecured claim against the
      Private Company relating to rejection of the Terminalling
      Agreement;
  ·
                    we
      and the Private Company will enter into a new terminalling agreement
      pursuant to which we will provide asphalt terminalling and storage
      services for the Private Company ’s remaining asphalt inventory on the
      following terms: (i) we will receive a monthly storage service fee equal
      to $0.565 per barrel multiplied by the total shell capacity in barrels for
      each tank where the Private Company has asphalt inventory and (ii) we will
      receive a throughput fee of $9.25 per ton for each ton of the Private
      Company’s asphalt inventory that is delivered out of or otherwise removed
      from our asphalt assets (unless the Private Company executes a definitive
      agreement to sell substantially all of its asphalt assets or business as a
      going concern to a third-party purchaser and we enter into a terminalling
      and storage agreement with such
purchaser);
  ·
                    the
      Private Company will remove all of its remaining asphalt inventory from
      our asphalt storage facilities no later than October 31, 2009 (unless the
      Private Company executes a definitive agreement to sell substantially all
      of its asphalt assets or business as a going concern to a third-party
      purchaser and we enter into a terminalling and storage agreement with such
      purchaser);
  ·
                    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 Agreement that occurs within nine months of the
      transfer of such assets to us (unless the Private Company executes a
      definitive agreement to sell substantially all of its asphalt assets or
      business as a going concern to a third-party purchaser and we enter into a
      terminalling and storage agreement with such
  purchaser);
 ·
                  the
      Private Company will reject the Amended and Restated Omnibus Agreement as
      part of the Bankruptcy Cases;
 
 ·
                  we
      and the Private Company will enter into a shared services agreement
      pursuant to which the Private Company will provide 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 and
      Storage Agreement, Throughput Agreement and Amended and Restated Omnibus
      Agreement;
 
 ·
                  certain
      pre-petition claims by the Private Company and us will be netted and
      waived;
 
 ·
                  we
      and the Private Company will resolve 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 will enter into a license agreement providing 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 will waive claims for infringement
      relating to such trade names and mark prior to the date of such license
      agreement.
 
 The parties agreed to
negotiate and execute definitive documentation, to be approved by the Bankruptcy
Court, with respect to the items contained in the Settlement Agreement as
soon as practicably possible, which will supersede the Settlement Agreement when
so executed. The Settlement Agreement
is subject to the obtaining of a consent from our lenders under our credit
agreement and a waiver of the existing defaults or events of default under the
credit agreement.  There can be no assurance that our lenders will
provide the required consent to the transactions or waiver of existing defaults
or events of default under our credit agreement or that the transactions
contemplated by the Settlement Agreement will be
consummated.


Our
Revenues




We
provide services to the crude oil purchasing, marketing and distribution
operations of the Private Company pursuant to a crude oil gathering,
transportation, terminalling and storage agreement with the Private Company,
which we refer to as the Throughput Agreement, and we provide services to the
finished asphalt product processing and marketing operations of the Private
Company pursuant to a terminalling and storage agreement with the Private
Company, which we refer to as the Terminalling Agreement.  For a
detailed description of the Throughput Agreement and the Terminalling Agreement,
please see “Item 7. Management’s Discussion and Analysis of Financial Condition
and Results of Operation” and “Item 13. Certain Relationships and Related Party
Transactions” in our 2007 Form 10-K.  For the six months ended June
30, 2008 and the year ended December 31, 2008, we derived
approximately 88% 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.  The
Private Company is 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 are actually utilized by the
Private Company.  As described above, the Order requires the Private
Company to make certain payments under the Throughput Agreement and Terminalling
Agreement.  As of the date of the filing of this report, payments made
under the Throughput Agreement for services rendered since September 2008 have
been made based upon actual usage rather than the contractual minimum monthly
storage amounts in such agreement.  As of the date of the filing of
this report, payments made under the Terminalling Agreement have continued to be
made based upon the contractual minimum monthly storage amounts in such
agreement.  We have been pursuing opportunities to provide crude oil
terminalling and storage services and crude oil gathering and transportation
services to third parties.




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As a
result of new crude oil third-party storage contracts, we have 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 $4.7 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 have 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 $13.9 million, or approximately 51% and 86% 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 total
revenues are approximately $9.2 million less than second 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. Pursuant
to the Settlement Agreement, we have agreed to waive the fees pursuant to the
Terminalling Agreement for the month of March 2009, and we will enter into a new
terminalling agreement with the Private Company for periods thereafter (see
"-Settlement with the Private Company").




Any delay
or failure of the Private Company to make its required payments under the
Throughput Agreement or the Terminalling Agreement, to the extent such revenues
have not been replaced by third party revenues, will have a material
adverse effect on our financial condition and results of
operations.  For example, we have reserved as a doubtful account the
receivable balance owed by the Private Company for services provided to the
Private Company during the first 21 days of July, totaling $9.6 million, as such
amounts are considered prepetition debt in the Bankruptcy Filings.  In
addition, the Private Company may reject the contracts it has with us, including
the Throughput Agreement and the Terminalling Agreement, as part of its
bankruptcy proceedings, which ultimately would have the effect of breaching such
contracts.  Such action would have a material adverse effect on our
financial condition and results of operations.  Any transaction
relating to a rejection, assignment or modification of the Throughput Agreement
or the Terminalling Agreement would require approval of the Bankruptcy
Court.  On February 6, 2009, the Private Company filed a motion in the
Bankruptcy Court requesting approval of the sale of its asphalt related assets,
or in the event of an unsuccessful auction, the rejection of the Terminalling
Agreement and the winding down of its asphalt business (see “—Asphalt
Operations” below).  Pursuant
to the Settlement Agreement, among other things, the Private Company will reject
the Terminalling Agreement and the Throughput Agreement as part of the
Bankruptcy Cases.  In addition, pursuant to the Settlement Agreement,
we will enter into a new throughput agreement and a new terminalling agreement
with the Private Company pursuant to which we will provide certain crude oil
gathering, transportation, terminalling and storage services and asphalt
terminalling and storage services to the Private Company.   We expect
revenues from services provided to the Private Company under this 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
will be based upon actual volumes gathered, transported, terminalled and stored
instead of certain minimum volumes and may be at reduced rates when compared to
the Throughput Agreement and Terminalling Agreement.There can be
no assurance that the
conditions to effectiveness in the Settlement Agreement will be completed and
that the transactions contemplated thereby will be consummated (see
“—Settlement with the Private Company”).




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 may experience lower volume in our system which could
have a material adverse effect on our results of operations and cash
flows.




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Asphalt
Operations




We
provide liquid asphalt cement terminalling and storage services to the Private
Company.  The Private Company processes, distributes and markets
liquid asphalt cement and finished asphalt products to third party
customers.  Pursuant to the Amended Omnibus Agreement, the Private
Company has agreed, so long as the Terminalling Agreement is in effect, not to
engage in, or acquire or invest in an entity that engages in, the business of
terminalling and storing liquid asphalt cement within 50 miles of our liquid
asphalt cement facilities and we have agreed, so long as the Terminalling
Agreement is in effect, not to engage in, or acquire or invest in an entity that
engages in, the business of processing, marketing and distributing liquid
asphalt cement and finished asphalt products within 50 miles of our liquid
asphalt cement facilities.  As a result, subject to certain
exceptions, we are contractually prohibited from marketing or distributing
liquid asphalt cement directly to third party customers while the Terminalling
Agreement is in effect.  In addition, the Private Company is
responsible for obtaining and maintaining all environmental and other permits
related to our liquid asphalt cement operations.  The Private
Company’s failure to obtain, renew or maintain compliance under these permits
may materially adversely effect our operations.  We are currently
evaluating strategic alternatives for our asphalt operations, including the
possibility of entering into storage contracts with third party customers and
the sale of all or a portion of our 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.  Although there remains some liquid asphalt
cement in our asphalt storage tanks that was not sold during the summer of 2008,
the Private Company, as of the date of the filing of this report, has not
purchased any significant volumes of additional liquid asphalt cement during the
recent winter months.




On
February 6, 2009, the Private Company filed a motion in the Bankruptcy Court
requesting approval of the sale of its asphalt related assets.  There
is significant uncertainty as to our revenues related to our asphalt assets and
there is substantial risk that our asphalt assets may be idle during 2009 and
subsequent years, which would adversely effect our financial condition and
results of operations.  Without revenues from our asphalt assets, we
may be unable to meet the covenants, including the minimum liquidity and minimum
receipt requirements, under our Forbearance Agreement (as defined
below) with our senior secured lenders pursuant to which such lenders have
agreed to forbear from exercising their rights and remedies arising from the
events of default under our credit agreement.  Pursuant
to the Settlement Agreement, we will receive the Private Company’s asphalt
assets that are connected to our asphalt assets (unless
the Private Company executes a definitive agreement to sell substantially all of
its asphalt assets or business as a going concern to a third-party purchaser and
we enter into a terminalling and storage agreement with such
purchaser).  The transfer
of the Private Company’s asphalt assets in connection with the Settlement
Agreement will provide us with outbound logistics for our existing asphalt
assets and, therefore, will allow us to better provide asphalt terminalling and
storage services.  In addition, the Private Company will reject the
Terminalling Agreement as part of the Bankruptcy Cases and we and the Private
Company will enter into a new terminalling agreement pursuant to which we will
provide asphalt terminalling and storage services for the Private Company ’s
remaining asphalt inventory.There can be no assurance that the
conditions to effectiveness in the Settlement Agreement will be completed and
that the transactions contemplated thereby will be consummated (see
“—Settlement with the Private Company”).  Even if we acquire such
asphalt assets, we may not be able to enter into agreements to provide
terminalling and storage services for such assets.  In
addition, if the Private Company sells its asphalt assets to a third
party, we will need to negotiate a new terminalling and storage
contract with the purchaser of such assets and such agreement may not be on as
favorable terms as the Terminalling 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.




Operation
and General Administration of the Partnership




As is the
case with many publicly traded partnerships, we do not directly employ any
persons responsible for managing or operating our business 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.  Due to the Change of
Control, the Private Company is no longer obligated to operate our assets or
perform other administrative services pursuant to the Amended Omnibus
Agreement.  The Private Company agreed to continue providing such
services until at least November 30, 2008 pursuant to the
Order.  While the Private Company has continued to provide such
services as of the date of the filing of this report, there can be no assurance
that it will continue to provide such services to us or that we could replace
any of these services if the Private Company stops providing them.  Pursuant
to the Settlement Agreement, the Private Company will reject the Amended Omnibus
Agreement as part of the Bankruptcy Cases and we will enter into a shared
services agreement with the Private Company pursuant to which the Private
Company will provide certain operational services for us.  There can
be no assurance that the
conditions to effectiveness in the Settlement Agreement will be completed and
that the transactions contemplated thereby will be consummated(see
“—Settlement with the Private Company”).  In addition, if the terms of
this shared services agreement are not as favorable as the terms under the
Amended Omnibus Agreement, it 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.If the Private Company stops providing these services, we may
incur increased costs to replace these services and our financial results may
suffer.




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 Table of Contents




In
addition, 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.  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.




Change
of Control of the Private Company




On
December 15, 2008, Red Apple Group Inc. (“Red Apple”), which is chaired by John
Catsimatidis, announced that it controls five of the nine seats on the
management committee of the general partner of the Private Company and therefore
effectively controls the Private Company (the “Private Company Change of
Control”).  Mr. Catsimatidis has indicated that Red Apple does not
intend to liquidate the Private Company and that it plans on filing a new
reorganization plan for the Private Company with the Bankruptcy
Court.  As of the date of the filing of this report, Red Apple has not
filed a reorganization plan.  There is no assurance that any
reorganization plan will be submitted by Red Apple or that if a reorganization
plan is submitted by Red Apple that the Bankruptcy Court will approve such plan
or that continued performance by the Private Company under the Throughput
Agreement or the Terminalling Agreement will be part of any such
plan.  In addition, the Private Company Change of Control may lead to
additional uncertainty regarding our continued relationship with the Private
Company.  We are unsure what impact, if any, the Private
Company Change of Control will have on us and our operations.




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.  The termination of the
explicit rights to use this intellectual property under the Amended Omnibus
Agreement may adversely effect our ability to operate or grow our business and
our results of operations.  In addition, we may be subject to claims
for trademark or other intellectual property infringement due to our continued
use of these intellectual property rights.  Pursuant
to the Settlement Agreement, we will enter into a license agreement with the
Private Company pursuant to which we may use the trade names and mark until
December 31, 2009.  In addition, pursuant to the Settlement Agreement,
the Private Company has agreed to waive all claims relating to infringement of
the trade names and mark prior to the date of this license
agreement.  There can be no assurance that the
conditions to effectiveness in the Settlement Agreement will be completed and
that the transactions contemplated thereby will be consummated(see
“—Settlement with the Private Company”).




Credit
Facility




As
described below under “—Liquidity and Capital Resources”, certain events of
default have occurred and are continuing under our credit agreement, which
prohibit us from borrowing under our credit facility to fund working capital
needs or to pay distributions to its unitholders, among other
things.  No cure periods are applicable to the existing events of
default.  These events of default have not been waived and are
continuing under our credit agreement.  In addition, the Private
Company’s action related to the Bankruptcy Cases as well as the Private
Company’s liquidity issues and any corresponding impact may result in additional
events of default under the Partnership’s credit agreement.  We and
the requisite lenders under our credit facility have entered into a Forbearance
Agreement (as defined below) relating to the existing events of default under
the credit agreement.  Waiver of
the existing events of default under our credit agreement is a condition
precedent to the effectiveness of the Settlement Agreement.  There can
be no assurance that our lenders will provide such a waiver and that the
transactions contemplated by the Settlement Agreement will be consummated.See “—Liquidity and Capital Resources” for more information regarding our
credit facility, the events of default thereunder and the Forbearance Agreement
(as defined below).





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, or December 31, 2008 due to the existing
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 the quarters ended June 30, 2008,
September 30, 2008 or December 31, 2008.  In addition, we do not
currently expect to make a distribution relating to the first quarter of
2009.  We distributed approximately $14.3 million to our unitholders
for the three months ended March 31, 2008.  If the events of default
under our credit agreement are not waived by our lenders or our business
operations and prospects do not improve, we may not make quarterly distributions
to our unitholders in the future.





38
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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 September 30, 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.


Claims
Against and By The Private Company’s Bankruptcy Estate




We
currently have claims against the Private Company’s bankruptcy estate due to
amounts owed us by the Private Company prior to the Bankruptcy
Filings.  In addition, if the Private Company fails to make its
payments under the Throughput Agreement or the Terminalling Agreement or
otherwise fails to perform under the contracts we have with the Private Company,
we may have additional potential claims against the Private Company’s bankruptcy
estate.




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.  We are uncertain regarding
the ultimate amount of damages for breaches of contract or other claims that we
will be able to establish in the Bankruptcy Cases 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 the
Partnership's ability to conduct its business and its results of
operations.




Pursuant to
the Settlement Agreement, the Private Company will reject the Terminalling
Agreement and the Throughput Agreement.  We will have a $35 million
unsecured claim relating to rejection of the Terminalling Agreement in the
Bankruptcy Cases.  In addition, we will have a $20 million unsecured
claim against the Private Company relating to rejection of the Throughput
Agreement.  There can be no assurance that the
conditions to effectiveness in the Settlement Agreement will be completed and
that the transactions contemplated thereby will be consummated(see
“—Settlement with the Private Company”).


In
addition, under bankruptcy law, a debtor-in-possession, such as the Private
Company, may seek to avoid certain prepetition transfers if such transfers were
to insiders and occurred within one year before the bankruptcy filing for
insiders.  For purposes of avoidance under bankruptcy law, title to
real property that is perfected more than thirty days after the transfer is
deemed to have been transferred as of the date of perfection.  In
addition, a debtor-in-possession, such as the Private Company, may seek to avoid
prepetition transfers of real property that were not perfected as of the
bankruptcy filing date against a hypothetical bona fide purchaser of such real
property.




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Through a
series of transactions we acquired certain real property from the Private
Company during the one-year period preceding the Bankruptcy
Filings.  Deeds to approximately 27 asphalt facilities transferred to
us by the Private Company as part of the Acquired Asphalt Assets either were not
recorded within thirty days of such transfer or were not recorded as of the
Bankruptcy Filings.  In addition, a deed to the Acquired Storage
Assets was not recorded as of the Bankruptcy Filings.  Although we
have title to such properties, the Private Company may in its Bankruptcy Cases
seek to avoid the transfers of these properties.  We have defenses
against these actions based upon bankruptcy law and state law and intend to
vigorously defend against any such action.  However, there can be no
assurance regarding the outcome of any potential litigation.  If the
Private Company succeeds in such litigation, we may be required to return the
affected properties to the Private Company or pay an amount equal to the value
of such properties, which would 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.  We would then have unsecured
claims in the Bankruptcy Court for the amounts originally paid for such
properties.   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 this matter. However, the ultimate resolution of this matter 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.  Pursuant
to the Settlement Agreement, the Private Company will release certain of its
claims related to this real property including the real property claims
discussed above (see “—Settlement with the Private Company”).  There may
be additional claims that are not released by the Settlement
Agreement.  In addition,there can be no assurance that the
conditions to effectiveness in the Settlement Agreement will be completed and
that the transactions contemplated thereby will be
consummated.




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
Litigation




Please
see “Part II—Item I. Legal Proceedings” for a discussion of certain securities
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.  The examiner is required to
prepare and file a report summarizing the findings of his investigation by March
24, 2009, unless the Bankruptcy Court extends that deadline.




We may
incur additional costs in cooperating with this examiner.  In
addition, in connection with the Settlement Agreement, we and the Private
Company will release certain claims relating to the contribution of assets to us
in connection with our initial public offering and our acquisition of the
Acquired Asphalt Assets, Acquired Pipeline Assets and Acquired Storage
Assets.  However, other claims that may be identified by the examiner
will not be released in connection with the Settlement Agreement. 
If the examiner’s investigation results in an unfavorable outcome to us,
such an investigation may prompt the filing of lawsuits by the Private Company’s
bankruptcy estate representative 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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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 involveus or
oursubsidiaries, it was investigated
because it did involve certain senior executive officers ofourgeneral 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 tothe 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 tousand 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.


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 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.  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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Insurance




We share
some insurance policies, including our general liability policy, with the
Private Company. These policies contain caps on the insurer’s maximum liability
under the policy, and claims made by either the Private Company or us are
applied against the caps and deductibles. The possibility exists that, in an
event in we wish to make a claim under a shared insurance policy, our claim
could be denied or only partially satisfied due to claims made by the Private
Company against the policy cap. Further, where events occur that would entitle
both the Private Company and us to benefits under these insurance policies, the
full deductible may be borne by the first claimant under the policy. In
addition, claims made by the Private Company could affect our premiums and our
ability to obtain insurance in the future.  The Bankruptcy Filings
have had and may continue to have an adverse effect on our insurance premiums
and coverage.  Our premiums and ability to obtain insurance in the
future could also be adversely impacted by the Bankruptcy Filings if the Private
Company fails to renew any shared policies and we are required to purchase our
own policy, cover any premiums currently being paid by the Private Company or if
an insurance carrier increases the insurance premiums due to the Bankruptcy
Filings.  These increased costs could have a material adverse effect
on our financial condition and results of operations.





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 has
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.  Due to the Bankruptcy Filings, we may not be able to collect any
amounts that would otherwise be payable under these indemnification provisions
if such events were to occur.  Pursuant to the Settlement Agreement, the
Private Company will reject the Amended Omnibus Agreement including the
indemnification provisions therein.




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.




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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 noncash
compensation expense related to the vesting of the units under the Plan)
increased by approximately $6.6 million and $7.4 million, or approximately 287%
and 322%, to approximately $8.9 million for the third quarter of 2008 and $9.7
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
            A
      substantial portion of our revenues are 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 pays us a fee for gathering,
      transportation, terminalling and storage services based on volume and
      throughput. In rendering these services, we do not take title to, or
      marketing responsibility for, the crude oil that we gather, transport,
      terminal or store and, therefore, we have 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 receive 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
      are party to an Omnibus Agreement with the Private Company.  The
      Omnibus Agreement was amended 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
      are 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.  Due to the Change of Control, the Private Company is no
      longer obligated to operate our assets or perform other administrative
      services pursuant to the Amended Omnibus Agreement.  While the
      Private Company has continued to provide such services as of the date of
      the filing of this report, there can be no assurance that it will continue
      to provide such services to us or that we could replace any of these
      services if the Private Company stops providing them.  Pursuant
      to the Settlement Agreement, the Private Company will reject the Amended
      Omnibus Agreement as part of the Bankruptcy Cases and we will enter into a
      shared services agreement with the Private Company pursuant to which the
      Private Company will provide certain operational services for
      us.  There can be no assurance that
      the conditions to effectiveness in the Settlement Agreement will be
      completed and that the transactions contemplated thereby will be
      consummated (see “Item 2. Management’s Discussion and Analysis of
      Financial Condition and Results of Operations—Settlement with the Private
      Company”).  In addition, if the terms of this shared services
      agreement are not as favorable as the terms under the Amended Omnibus
      Agreement, it
      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.




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 Table of Contents




·
            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 July 2012.  As of March 13, 2008, we
      had $448.1 million in outstanding borrowings under our credit facility
      (including $198.1 million under our revolving credit facility and $250.0
      million under our term loan facility) with an aggregate unused credit
      availability of approximately $21.9 million under the credit
      facility.  Events of default have occurred and are continuing
      under our credit agreement, which prohibit our ability to borrow under the
      credit facility.  Please see “—Liquidity and Capital
      Resources.”




Results
of Operations




The table
below summarizes the financial results of the Partnership for the three and six
months ended June 30, 2007 and 2008.  These financial results reflect
an allowance for doubtful accounts of $0.9 million related to amounts
collectible from the Private Company as of June 30, 2008, which are considered
prepetition debt in the Bankruptcy Filings.These financial results
also reflect a $0.4 million allowance for doubtful accounts related to amounts
collectible from third parties as of June 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.  Other than the allowance for doubtful
accounts described above, the results of operations for the three and six months
ended June 30, 2008 included in this quarterly report were not affected by the
Bankruptcy Filings and related events.




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 six months ended June 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 total
revenues are approximately $9.2 million less than second 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.  As
of the date of the filing of this report, we continue to collect the minimum
revenues from the Private Company under the Terminalling Agreement for
terminalling and storage services provided for liquid asphalt
cement.  Our future total revenues may be further impacted if the
Private Company rejects the Terminalling Agreement or otherwise fails to make
the minimum payments under the Terminalling Agreement.  Pursuant
to the Settlement Agreement, the Private Company will reject the Terminalling
Agreement and the Throughput Agreement as part of the Bankruptcy Cases and we
will receive the Private Company’s asphalt assets that are connected to our
asphalt assets.  In addition, pursuant to the Settlement Agreement, we
will enter into a new throughput agreement with the Private Company pursuant to
which we will provide certain crude oil gathering, transportation, terminalling
and storage services to the Private Company.  There can be no
assurance that the
conditions to effectiveness in the Settlement Agreement will be completed and
that the transactions contemplated thereby will be consummated (see “Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Settlement with the Private Company”).


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 Table of Contents


Three
      Months ended June 30,
                    
                    
                    Six
      Months ended June 30,2007
                    
                    
                    2008
                    
                    
                    2007
                    
                    
                    2008(in
      thousands)Service
      revenues:Terminalling
      and storage revenues:Third
      party
                    
                    $
                    4,409
                    
                    
                    $
                    982
                    
                    
                    $
                    7,145
                    
                    
                    $
                    1,013Related
      party
                    
                    
                    -
                    
                    
                    
                    30,299
                    
                    
                    
                    -
                    
                    
                    
                    47,879Total
      terminalling and storage
                    
                    
                    4,409
                    
                    
                    
                    31,281
                    
                    
                    
                    7,145
                    
                    
                    
                    48,892Gathering
      and transportation revenues:Third
      party
                    
                    
                    6,055
                    
                    
                    
                    5,045
                    
                    
                    
                    11,830
                    
                    
                    
                    9,638Related
      party
                    
                    
                    -
                    
                    
                    
                    18,950
                    
                    
                    
                    123
                    
                    
                    
                    36,960Total
      gathering and transportation
                    
                    
                    6,055
                    
                    
                    
                    23,995
                    
                    
                    
                    11,953
                    
                    
                    
                    46,598Total
      revenues
                    
                    
                    10,464
                    
                    
                    
                    55,276
                    
                    
                    
                    19,098
                    
                    
                    
                    95,490Operating
      expenses:Terminalling
      and storage
                    
                    
                    1,197
                    
                    
                    
                    12,088
                    
                    
                    
                    2,330
                    
                    
                    
                    17,096Gathering
      and transportation
                    
                    
                    16,844
                    
                    
                    
                    17,417
                    
                    
                    
                    31,828
                    
                    
                    
                    34,675Allowance
      for doubtful accounts
                    
                    
                    -
                    
                    
                    
                    1,266
                    
                    
                    
                    -
                    
                    
                    
                    1,266Total
      operating expenses
                    
                    
                    18,041
                    
                    
                    
                    30,771
                    
                    
                    
                    34,158
                    
                    
                    
                    53,037General
      and administrative expenses:
                    
                    
                    4,118
                    
                    
                    
                    3,057
                    
                    
                    
                    8,490
                    
                    
                    
                    6,067Operating
      income (loss)
                    
                    
                    (11,695
                    )
                    
                    
                    21,448
                    
                    
                    
                    (23,550
                    )
                    
                    
                    36,386Interest
      (income) expense
                    
                    
                    516
                    
                    
                    
                    (225
                    )
                    
                    
                    945
                    
                    
                    
                    4,864Income
      tax expense
                    
                    
                    -
                    
                    
                    
                    77
                    
                    
                    
                    -
                    
                    
                    
                    168Net
      income (loss)
                    
                    $
                    (12,211
                    )
                    
                    $
                    21,596
                    
                    
                    $
                    (24,495
                    )
                    
                    $
                    31,354


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




Service revenues. Service
revenues were $55.3 million for the three months ended June 30, 2008 compared to
$10.5 million for the three months ended June 30, 2007, an increase of $44.8
million, or 427%. Service revenues include revenues from terminalling and
storage services and gathering and transportation services. Terminalling and
storage revenues increased by $26.9 million to $31.3 million for the three
months ended June 30, 2008 compared to $4.4 million for the three months ended
June 30, 2007, primarily due to revenues generated under both the Throughput
Agreement (revenues of $9.9 million for the three months ended June 30, 2008)
and the Terminalling Agreement (revenues of $20.4 million for the three months
ended June 30, 2008) which were not present in the three months ended June 30,
2007. Our predecessor historically did not account for these services which were
provided on an intercompany basis.




Our
gathering and transportation services revenue increased by $17.9 million to
$24.0 million for the three months ended June 30, 2008 compared to $6.1 million
for the three months ended June 30, 2007. This increase is primarily due to
revenues generated under the Throughput Agreement subsequent to the closing of
our initial public offering. Our predecessor historically did not account for
these services which were provided on an intercompany basis.




Operating expenses. 
Operating expenses increased by $12.9 million, or 72%, to $30.9 million for the
three months ended June 30, 2008 compared to $18.0 million for the three months
ended June 30, 2007. Our fuel expenses increased by $5.5 million to $8.4 million
for the three months ended June 30, 2008 compared to $2.9 million for the three
months ended June 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 June 30, 2008 is $4.9 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 $4.9 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 June 30, 2008.


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 Table of Contents




Compensation
expense increased by $1.5 million to $7.4 million for the three months ended
June 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 $1.9 million for the three months ended June 30,
2008 compared to $2.7 million for the three months ended June 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 $0.7 million for the three months ended June 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 June 30, 2008
compared to $0.2 million for the three months ended June 30, 2007.




Depreciation
expense increased by $3.6 million to $5.7 million for the three months ended
June 30, 2008 compared to $2.1 million for the three months ended June 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 three
months ended June 30, 2008 include an allowance for doubtful accounts for
amounts due from the Private Company on June 30, 2008 of $0.9 million, which are
considered prepetition debt in the Bankruptcy Cases.  These amounts
have been reserved due to the uncertainty of collecting prepetition amounts from
the Private Company in the Bankruptcy Filings.  The three months ended
June 30, 2008 also reflect a $0.4 million allowance for doubtful accounts
related to amounts due from third parties as of June 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.




Outside
services expenses increased by $0.7 million to $1.3 million for the three months
ended June 30, 2008 compared to $0.6 million for the three months ended June 30,
2007, primarily due to an increase in third party transportation costs resulting
from increased volumes gathered in our gathering and transportation
segment.




Included
in operating expenses for the three months ended June 30, 2007 are $0.5 million
in costs associated with the clean up of a crude oil leak in relation to a
thirty-five mile pipeline located in Conroe, Texas.  This gathering
line was sold by the Private Company on April 30, 2007, and the Private Company
assumed any future obligations associated with the aforementioned
leak.  As of June 30, 2008 the clean up process was
complete.




General and administrative
expenses. General and administrative expenses decreased by $1.0
million, or 24%, to $3.1 million for the three months ended June 30, 2008
compared to $4.1 million for the three months ended June 30, 2007. The decrease
was primarily the result of entering into the Omnibus Agreement with the Private
Company in July 2007, pursuant to which we pay a fixed monthly fee of $0.4
million for general and administrative support services provided by the Private
Company. The Omnibus Agreement was amended in February 2008 in connection with
the purchase of our Acquired Asphalt Assets which increased our fixed monthly
fee to $0.6 million.  Also included in general and administrative
expenses for the three months ended June 30, 2008 is $0.7 million in non-cash,
equity-based compensation recognized under our long-term incentive plan. The
long-term incentive plan did not exist during the three months ended June 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 will include $18.0 million in non-cash, equity-based compensation
recognized under our long-term incentive plan.  General and administrative
expenses (exclusive of noncash compensation expense related to the vesting of
the units under the Plan) increased by approximately $6.6 million and $7.4
million, or approximately 287% and 322%, to approximately $8.9 million for the
third quarter of 2008 and $9.7 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.




Interest (income)
expense.  Interest (income) expense represents interest on capital
lease obligations and long-term borrowings under our credit facility offset by
the fair value of our interest rate swap agreements. Interest expense decreased
by $0.7 million to $0.2 million interest income for the three months ended June
30, 2008 compared to $0.5 million interest expense for the three months ended
June 30, 2007. The decrease was primarily due to 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, the fair
value accounting resulted in $4.9 million in interest income for the three
months ended June 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.  This decrease was
offset due to an increase in the average long-term borrowings outstanding during
the three months ended June 30, 2008 compared to the three months ended June 30,
2007, which accounted for approximately $4.0 million of an increase in interest
expense, and is a reflection of borrowings under our credit
facility.


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Six
Months Ended June 30, 2008 Compared to the Six Months Ended June 30,
2007




Service revenues. Service revenues were $95.5 million for the six months ended
June 30, 2008 compared to $19.1 million for the six months ended
June 30, 2007, an increase of $76.4 million, or 400%. Service revenues
include revenues from terminalling and storage services and gathering and
transportation services. Terminalling and storage revenues increased by $41.8
million to $48.9 million for the six months ended June 30, 2008 compared to
$7.1 million for the six months ended June 30, 2007, primarily due to
revenues generated under both the Throughput Agreement (revenues of $19.8
million for the six months ended June 30, 2008) and the Terminalling Agreement
(revenues of $28.1 million for the six months ended June 30, 2008) which were
not present in the six months ended June 30, 2007. Our predecessor historically
did not account for these services which were provided on an intercompany
basis.




Our
gathering and transportation services revenue increased by $34.6 million to
$46.6 million for the six months ended June 30, 2008 compared to $12.0 million
for the six months ended June 30, 2007. This increase is primarily due to
revenues generated under the Throughput Agreement subsequent to the closing of
our initial public offering. Our predecessor historically did not account for
these services which were provided on an intercompany basis.




Operating expenses. 
Operating expenses increased by $18.9 million, or 55%, to $53.1 million for the
six months ended June 30, 2008 compared to $34.2 million for the six months
ended June 30, 2007. Our fuel expenses increased by $7.6 million to $12.5
million for the six months ended June 30, 2008 compared to $4.9 million for the
six months ended June 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 six months ended June 30, 2008 is $6.1 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 $6.1 million in fuel surcharge revenues in relation
to fuel and power consumed to operate our liquid asphalt cement storage tanks
for the six months ended June 30, 2008.




Compensation
expense increased by $2.9 million to $14.3 million for the six months ended June
30, 2008 primarily as a result of the purchase of our Acquired Asphalt Assets in
February 2008.  Our repair and maintenance expenses decreased by $0.7
million to $3.8 million for the six months ended June 30, 2008 compared to $4.5
million for the six months ended June 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 $0.6 million to $1.2 million for
the six months ended June 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 $1.0 million to $1.4 million for the
six months ended June 30, 2008 compared to $0.4 million for the six months ended
June 30, 2007.




Depreciation
expense increased by $5.4 million to $9.6 million for the six months ended June
30, 2008 compared to $4.2 million for the six months ended June 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 six
months ended June 30, 2008 include an allowance for doubtful accounts for
amounts due from the Private Company on June 30, 2008 of $0.9 million, which are
considered prepetition debt in the Bankruptcy Filings.  These amounts
have been reserved due to the uncertainty of collecting prepetition amounts from
the Private Company in the Bankruptcy Filings.  The six months ended
June 30, 2008 also reflect a $0.4 million allowance for doubtful accounts
related to amounts due from third parties as of June 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.




Outside
services expenses increased by $1.4 million to $2.4 million for the six months
ended June 30, 2008 compared to $1.0 million for the six months ended June 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 $1.3 million for the six months ended June 30, 2008 compared to $0.9
million for the six months ended June 30, 2007, primarily due to growth in our
gathering and transportation segment.


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Included
in operating expenses for the six months ended June 30, 2007 are $1.6 million in
costs associated with the clean up of a crude oil leak in relation to a
thirty-five mile pipeline located in Conroe, Texas.  This gathering
line was sold by the Private Company on April 30, 2007, and the Private Company
assumed any future obligations associated with the aforementioned
leak.  As of June 30, 2008 the clean up process was
complete.





General and administrative
expenses. General and administrative expenses decreased by $2.4
million, or 28%, to $6.1 million for the six months ended June 30, 2008
compared to $8.5 million for the six months ended June 30, 2007. The
decrease was primarily the result of entering into the Omnibus Agreement with
the Private Company in July 2007, pursuant to which we pay a fixed monthly fee
of $0.4 million for general and administrative support services provided by the
Private Company. The Omnibus Agreement was amended in February 2008 in
connection with the purchase of our Acquired Asphalt Assets which increased our
fixed monthly fee to $0.6 million.  Also included in general and
administrative expenses for the six months ended June 30, 2008 is $1.4 million
in non-cash, equity-based compensation recognized under our long-term incentive
plan. The long-term incentive plan did not exist during the six months ended
June 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 will include $18.0 million in non-cash, equity-based
compensation recognized under our long-term incentive plan.  General and
administrative expenses (exclusive of noncash compensation expense related to
the vesting of the units under the Plan) increased by approximately $6.6 million
and $7.4 million, or approximately 287% and 322%, to approximately $8.9 million
for the third quarter of 2008 and $9.7 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.




Interest (income)
expense.  Interest (income) expense represents interest on capital
lease obligations and long-term borrowings under our credit facility offset by
the fair value of our interest rate swap agreements.  Interest expense
increased by $4.0 million to $4.9 million for the six months ended June 30, 2008
compared to $0.9 million for the six months ended June 30, 2007. The increase
was primarily due to an increase in the average long-term borrowings outstanding
during the six months ended June 30, 2008 compared to the six months ended June
30, 2007, which accounted for approximately $6.5 million of an increase in
interest expense, and is a reflection of borrowings under our new credit
facility.  This was offset by 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, the fair value accounting
resulted in $2.7 million in interest income for the six months ended June 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.


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Off
Balance Sheet Arrangements




We do not
have any off-balance sheet financing 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. As discussed below,
events of default have occurred and continue to exist under our credit agreement
and we therefore cannot borrow under our credit facility or make distributions
to our unitholders.  Due to the events related to the Bankruptcy
Filings, including uncertainties related to future revenues and cash flows as
well as the inability to borrow under our credit facility or make distributions
to our unitholders, we do not expect our historical cash flows to be indicative
of our future financial cash flows.  We are operating on cash flows
received from operations and from a $25 million borrowing under our credit
facility on July 8, 2008 prior to the occurrence of the events of
default.  If we are unable to sustain our sources of revenue
generation and reestablish our relationships within the credit markets, this
cash position will not be sufficient to operate our business over the
long-term.  As of March 13, 2009, we have approximately $33.9 million
of cash that we are using to operate our business.




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 six months ended June 30, 2007 and
2008:




Six
      Months EndedJune
      30,2007
                    
                    
                    2008(in
      thousands)Net
      cash provided by (used in) operating activities
                    
                    
                    (21.9
                    )
                    
                    
                    51.0Net
      cash used in investing activities
                    
                    
                    (14.9
                    )
                    
                    
                    (517.8
                    )Net
      cash provided by financing activities
                    
                    
                    36.8
                    
                    
                    
                    467.1


Operating
Activities. Net cash provided by operating activities was $51.0
million for the six months ended June 30, 2008 as compared to the $21.9 million
used in operating activities for the six months ended June 30,
2007.  The increase in net cash provided by operating activities is
primarily due to a $55.8 million increase in our net income for the six months
ended June 30, 2008 compared to the six months ended June 30,
2007.  In addition, cash provided by our operating activities
increased due to a $5.4 million increase in depreciation and amortization, a
$1.3 million increase in bad debt expense, and an increase of $11.8 million in
cash provided by changes in working capital.  The increase was
slightly offset by the change in our unrealized gain related to interest rate
swap agreements of $2.7 million.




Investing
Activities. Net cash used in investing activities was $517.8 million
for the six months ended June 30, 2008 compared to $14.9 million for the six
months ended June 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.




Financing
Activities. Net cash provided by financing activities was $467.1
million for the six months ended June 30, 2008 as compared to $36.8 million for
the six months ended June 30, 2007.  Net cash provided by financing
activities for the six months ended June 30, 2008 is primarily comprised of net
borrowings under our credit facility of $332.3 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 six months ended June 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 six
months ended June 30, 2007.





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Our
Liquidity and Capital Resources




Cash flow
from operations and our credit facility are our primary sources of liquidity. At
June 30, 2008, we had approximately $178.1 million of availability under our
revolving credit facility.  This availability has been reduced to
approximately $21.9 million as of the date of filing this report due to the
existence of events of default under the credit agreement and entering into the
associated Forbearance Agreement (as defined below).  Usage of our
revolving credit facility is subject to ongoing compliance with covenants.
Events of default have occurred and are continuing under our credit agreement,
which prohibit us from borrowing under the credit facility to fund working
capital needs or to pay distributions to our unitholders, among other
things.  As a result, we are operating on cash flows received from
operations and from a $25 million borrowing under our credit facility on July 8,
2008 prior to the occurrence of the events of default. If we are unable to
sustain our sources of revenue generation and reestablish our relationships
within the credit markets, this cash position will not be sufficient to operate
our business over the long-term.  As of March 13, 2009, we have
approximately $33.9 million of cash that we are using to operate our
business.   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.  The Bankruptcy Filings have had a significant impact upon
our liquidity and financing alternatives and the events and uncertainties
related to the Bankruptcy Filings as described herein provide for substantial
doubt about 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
the existing events of default under our credit agreement and the uncertainty
related to the Bankruptcy Filings.  For example, due to 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 while events of default exist under the credit
agreement.  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.  Due to the current events of default that exist under the
credit agreement, we are prohibited from making distributions of available cash
to our unitholders and will continue to be prohibited from making any such
distributions as long as any such events of default exist.  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. Our amended credit
facility includes a revolving credit facility and a term loan facility and will
mature on July 20, 2012.




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.  Events of default have
occurred and are continuing under our credit agreement.  In addition,
the Private Company’s actions related to the Bankruptcy Filings as well as the
Private Company’s liquidity issues and any corresponding impact upon us may
result in additional events of default under our credit agreement.  No
cure periods are applicable to these existing events of
default.  These events of default have not been waived and are
continuing under our credit agreement.  Due to the existing events of
default under our credit agreement, we are not able to borrow under its credit
facility to fund working capital needs or for other purposes.




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 events of default described above and other defaults or 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) our failure 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
Amendment”), and 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 Credit Agreement (the "Second
Amendment").




On March 18,
2009, we and the requisite lenders entered into the Third Amendment to
Forbearance Agreement and Amendment to Credit Agreement (the “Third Amendment”),
dated as of March 17, 2009.  The Third Amendment extends the
Forbearance Period until the earliest of (i) April 8, 2009, (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, as
amended by the First Amendment, the Second Amendment and the Third
Amendment, or (iii) our failure to comply with any of the terms of the
Forbearance Agreement, as amended by the First Amendment, the Second Amendment
and the Third Amendment (the “Extended Forbearance Period”).  We are
working with our lenders to obtain a waiver of the events of default under our
credit agreement in connection with the transactions related to the Settlement
Agreement however, there can be no assurance that such a waiver will be
obtained.


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 affect to the above described commitment reduction.  The Second
Amendment further permanently reduced our revolving credit facility under the
credit agreement from $300 million to $220 million.  The Third Amendment
prohibits us from borrowing additional funds under our revolving credit facility
during the Extended Forbearance Period.  In addition, under the Second
Amendment, we agreed to pay the lenders executing the Second Amendment a fee
equal to 0.375% of the aggregate commitments under the credit agreement after
the above described commitment reduction.  As of March 13, 2009, we
had $448.1 million in outstanding borrowings under our credit facility
(including $198.1 million under its revolving credit facility and $250 million
under its term loan facility) with an aggregate unused credit availability of
approximately $21.9 million under our credit facility.  As described
above, we are prohibited from borrowing additional funds under our credit
agreement during the Extended Forbearance Period.




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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%, 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
administrative agent’s prime rate or the federal funds rate plus 0.50%, 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 Amendment, commencing on December 12, 2008, indebtedness under the
credit agreement bears interest at our option, at either (i) the
administrative agent’s prime rate or the federal funds rate plus 5.0% per annum,
with a prime rate or federal funds rate floor of 4.0% per annum, or
(ii) LIBOR plus 6.0% per annum, with a LIBOR floor of 3.0% per
annum.  During the three months ended June 30, 2008, the weighted
average interest rate incurred by us was 4.62% resulting in interest expense of
approximately $4.3 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.




Under the
Forbearance Agreement, as amended by the First Amendment, the Second Amendment,
and the Third Amendment, the lender’s forbearance is subject to certain
conditions as described therein, including, among other items, periodic
deliverables and minimum liquidity, minimum receipts and maximum disbursement
requirements.




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, businesses and operations, materially
alter the character of its business, and make acquisitions, investments and
capital expenditures. Under the terms of the Forbearance Agreement, as amended
by the First Amendment, the Second Amendment, and the Third Amendment, and due
to the current events of default that exist under the credit agreement, we are
prohibited from making distributions of available cash to our unitholders and
will continue to be prohibited from making any such distributions as long as any
such events of default exist.  The credit agreement 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 eachquarter for the
four-quarter period ending on the date of determination, of not more than 5.00
to 1.00 and, on a temporary basis, from the date of the consummation of certain
acquisitions until the last day of the third consecutive fiscal quarter
following such acquisitions, not more than 5.50 to 1.00; provided, that after
the issuance of senior unsecured notes, the leverage ratio limitation will be
modified by a requirement that we maintain a senior secured leverage ratio of
not more than 4.00 to 1.00 and a total leverage ratio of not more than 5.50 to
1.00, subject to temporary increases of the senior secured leverage ratio to not
more than 4.50 to 1.00 and the total leverage ratio of not more than 6.00 to
1.00 following the consummation of certain acquisitions as described above. As
of June 30, 2008 and December 31, 2008, our leverage ratio was 3.97 to 1.00
and 4.82 to 1.00, respectively.




The credit agreement 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) of not less than 2.75 to 1.00 determined as of the last day of
each quarter for the
four-quarter period ending on the date of determination. As of June 30, 2008
and December 31, 2008, our interest coverage ratio was6.49to 1.00 and 3.61 to 1.00,
respectively.




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, our
general partner or the Private Company, and other customary
defaults.  Because events of default exist under the credit agreement,
the lenders are able to accelerate the maturity of the credit agreement and
exercise other rights and remedies, including taking available cash in our bank
accounts.  The lenders have agreed to forbear from exercising such
rights during the Extended Forbearance Period subject to certain limitations and
conditions contained in the Forbearance Agreement, as amended by the First
Amendment, the Second Amendment, and the Third Amendment.  If we are
unable to obtain further forbearance from our lenders or a permanent 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.


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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. 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. Due to the Change of Control, the Private
Company is no longer obligated to provide these services pursuant to the Amended
Omnibus Agreement.  Pursuant to the Order entered by the Bankruptcy
Court, the Private Company agreed to continue providing such services until
November 30, 2008.   While the Private Company has continued to
provide such services as of the date of the filing of this report, there can be
no assurance that it will continue to provide such services to us or that we
could replace any of these services if the Private Company stops providing
them.  Pursuant
to the Settlement Agreement, the Private Company will reject the Amended Omnibus
Agreement as part of the Bankruptcy Cases and we will enter into a shared
services agreement with the Private Company pursuant to which the Private
Company will provide certain operational services for us.  There can
be no assurance that the
conditions to effectiveness in the Settlement Agreement will be completed and
that the transactions contemplated thereby will be consummated (see “Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Settlement with the Private Company”).If the Private
Company stops providing these services we may incur increased costs to replace
these services and our financial results may suffer.  As of June 30,
2008, the Private Company was still obligated to provide services to us under
the Amended Omnibus Agreement and we were obligated to pay 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.  We are no longer obligated to pay this fee due to
the termination of certain provisions of the Amended Omnibus Agreement in
connection with the Change of Control.




A summary
of our contractual cash obligations over the next several fiscal years, as of
June 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)
                            
                            $
                            2.9
                            
                            
                            $
                            2.9
                            
                            
                            $
                            -
                            
                            
                            $
                            -
                            
                            
                            $
                            -Debt
      obligations (2)
                            
                            
                            421.9
                            
                            
                            
                            421.9
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -Capital
      lease obligations
                            
                            
                            1.7
                            
                            
                            
                            1.1
                            
                            
                            
                            0.6
                            
                            
                            
                            -
                            
                            
                            
                            -Operating
      lease obligations
                            
                            
                            13.9
                            
                            
                            
                            3.9
                            
                            
                            
                            6.5
                            
                            
                            
                            3.2
                            
                            
                            
                            0.3


(1)
            As
      of June 30, 2008, the Private Company was still obligated to provide
      services to us under the Amended Omnibus Agreement and we were obligated
      to pay 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.  Due to the Change of Control, the Private Company is
      no longer obligated to operate our assets or perform other administrative
      services pursuant to the Amended Omnibus Agreement.  Pursuant to
      the Order entered by the Bankruptcy Court, the Private Company agreed to
      continue providing such services until November 30,
      2008.   While the Private Company has continued to provide
      such services as of the date of the filing of this report, there can be no
      assurance that it will continue to provide such services to us or that we
      could replace any of these services if the Private Company stops providing
      them. For a description of this agreement, see Note 8 of the Notes to
      the Consolidated Financial Statements included in Item 1 of this Quarterly
      Report.  Pursuant
      to the Settlement Agreement, the Private Company will reject the Amended
      Omnibus Agreement as part of the Bankruptcy Cases and we will enter into a
      shared services agreement with the Private Company pursuant to which the
      Private Company will provide certain operational services for
      us.  There can be no assurance that
      the conditions to effectiveness in the Settlement Agreement will be
      completed and that the transactions contemplated thereby will be
      consummated (see “Item 2. Management’s Discussion and Analysis of
      Financial Condition and Results of Operations—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 July 2012.  See Note 4 of
      the Notes to the Consolidated Financial Statements included in Item 1 of
      this Quarterly Report.  Events of default have occurred and are
      continuing under our credit agreement, which prohibit us from borrowing
      under the credit facility to fund working capital needs or to pay
      distributions to our unitholders, among other things.   The
      lenders under such facility may, among other remedies, declare all
      outstanding amounts under the credit agreement immediately due and payable
      and exercise all other rights and remedies available to the lenders under
      the credit agreement and related loan documents.  Due to these
      events of default and the corresponding rights of the lenders, the amount
      outstanding under the credit facility has been classified as a current
      obligation.




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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.
            Quantitativeand Qualitative Disclosures about Market
      Risk




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




As of
March 13, 2009 we had $448.1 million outstanding under our credit facility
that was subject to a variable interest rate.  Interest rate swap
agreements are 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 will pay fixed rates of 4.9% and will
receive three-month LIBOR with quarterly settlement. The fair market value of
the August 2007 interest rate swaps at June 30, 2008 was a liability of $2.5
million.  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 will
pay fixed rates of 2.6% to 2.7% and will receive three-month LIBOR with
quarterly settlement.  The fair market value of the March 2008
interest rate swaps at June 30, 2008 was a net asset of $3.0
million.  The interest rate swaps do not receive hedge accounting
treatment under 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 higher of the administrative agent’s prime
rate or the federal funds rate plus 0.5%, 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
administrative agent’s prime rate or the federal funds rate plus 0.50%, 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 Amendment, commencing on December 12, 2008, indebtedness under the
credit agreement bears interest at our option, at either (i) the
administrative agent’s prime rate or the federal funds rate plus 5.0% per annum,
with a prime rate or federal funds rate floor of 4.0% per annum, or
(ii) LIBOR plus 6.0% per annum, with a LIBOR floor of 3.0% per
annum.  During the three months ended June 30, 2008, the weighted
average interest rate incurred by us was 4.62% resulting in interest expense of
approximately $4.3 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 and the Second 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 $4.5 million.




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
June 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 June 30, 2008 that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.  However, since the completion of the second 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 the Partnership's 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.


Since the
completion of the second quarter of 2008, the Private Company has made the
Bankruptcy Filings discussed elsewhere in this report.  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.  Due to
the Change of Control of our general partner, the Private Company is no longer
obligated to operate our assets or perform other administrative services
pursuant to the Amended Omnibus Agreement.  The Private Company agreed
to continue providing such services until at least November 30, 2008 pursuant to
the Order entered by the Bankruptcy Court.  While the Private
Company has continued to provide such services as of the date of the filing
of this report, there can be no assurance that it will continue to provide such
services to us or that we could replace any of these services if the Private
Company stops providing them.  If the Private Company stops providing
these services we may incur increased costs to replace these services and our
financial results may suffer.  Pursuant
to the Settlement Agreement, the Private Company will reject the Amended Omnibus
Agreement as part of the Bankruptcy Cases and we will enter into a shared
services agreement with the Private Company pursuant to which the Private
Company will provide certain operational services for us.  There can
be no assurance that the
conditions to effectiveness in the Settlement Agreement will be completed and
that the transactions contemplated thereby will be consummated (see “Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Settlement with the Private Company”).  In addition, if the
terms of this shared services agreement are not as favorable as the terms under
the Amended Omnibus Agreement, it 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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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).




TheCarson case was
filed as a putative class action on behalf of all purchasers of our common units
between February 20, 2008 and July 17, 2008.  Plaintiff alleges
violations of Sections 10(b) and 20(a) of the Securities Exchange Act and SEC
Rule 10b-5, resulting in damages to members of the putative class. 
Plaintiff's specific allegations include that, despite an obligation to do so,
the Defendants failed to disclose between February 20, 2008 and May 8, 2008 that
the Private Company was engaged in high-risk crude oil hedging transactions that
could affect its ability to continue as a going concern or that the Private
Company was suffering from liquidity problems.  Plaintiff seeks class
certification, damages, interest, fees, and costs.




TheMaurer case was
filed as a putative class action on behalf of all persons who purchased our
common units pursuant to or traceable to the February 12, 2008 Registration
Statement and Prospectus.  Plaintiff alleges violations of Section 11 of
the Securities Act, resulting in damages to members of the putative class. 
Plaintiff’s specific allegations include that, despite an obligation to do so,
the Defendants failed to disclose in connection with the secondary offering in
February 2008 that the Private Company was engaged in high-risk crude oil
hedging transactions that could affect its ability to continue as a going
concern or that the Private Company was suffering from liquidity problems. 
Plaintiff seeks class certification, damages, interest, fees, and
costs.











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TheRubin, Jain, andHickman cases were filed as
putative class actions on behalf of all purchasers of our common units between
July 17, 2007 and July 17, 2008.  Plaintiffs allege violations of Sections
11, 12(a)(2), and 15 of the Securities Act and violations of Sections 10(b) and
20(a) of the Exchange Act and SEC Rule 10b-5, resulting in damages to members of
the putative class.  Plaintiff’s specific allegations include that, despite
an obligation to do so, the Defendants failed to disclose between July 17, 2007
and July 17, 2008 the adverse financial condition and lack of liquidity of the
Private Company that was caused by the Private Company’s speculative and
unauthorized hedging and trading in crude oil.  Plaintiffs seek class
certification, rescission of the sale of common units under Section 12(a)(2) of
the Securities Act, damages, interest, fees, and costs.




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.




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.




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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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 affect the Private Company’s  ability to make
payments to us and 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.




We are 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 provide 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 provide 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 six months ended June 30, 2008 and the year ended
December 31, 2008, we derived approximately 88% 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.  The
Private Company is 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 are actually used by the
Private Company.  As of the date of the filing of this report,
payments by the Private Company made under the Throughput Agreement for services
rendered to the Private Company since September have been made based upon actual
usage rather than the contractual minimum monthly storage amounts in such
agreement.  As of the date of the filing of this report, payments by
the Private Company made under the Terminalling Agreement have continued to be
made based upon the contractual minimum monthly storage amounts in such
agreement.  However, on February 6, 2009, the Private Company filed a
motion in the Bankruptcy Court requesting approval of the sale of the Private
Company’s asphalt related assets, or in the event of an unsuccessful auction,
the rejection of the Terminalling Agreement and the winding down of its asphalt
business.  Pursuant
to the Settlement Agreement, the Private Company will reject the Terminalling
Agreement and the Throughput Agreement as part of the Bankruptcy Cases and we
will receive the Private Company’s asphalt assets that are connected to our
asphalt assets. In addition, pursuant to the Settlement Agreement, we will enter
into a new throughput agreement and new terminalling agreement with the Private
Company pursuant to which we will provide certain crude oil gathering,
transportation, terminalling and storage services and asphalt terminalling and
storage services to the Private Company.  We expect
revenues from services provided to the Private Company under this 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
will be based upon actual volumes gathered, transported, terminalled and stored
instead of certain minimum volumes and may be at reduced rates when compared to
the Throughput Agreement and Terminalling Agreement.There can be
no assurance that the conditions to effectiveness in the Settlement Agreement
will be completed and that the transactions contemplated thereby will be
consummated (see “Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations—Settlement with the Private Company”). See “─The Private Company may reject the 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 total revenues are approximately
$9.2 million less than second 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.





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 Table of Contents




There can be
no assurance that our efforts to increase the percentage of revenues derived
from third parties will be successful.  If the Private Company is
unable to make to us the payments required by it under the Throughput Agreement
or the Terminalling Agreement for any reason, including the Bankruptcy Filings,
our revenues would decline to the extent such revenues have not been replaced by
third party revenues, our ability to make distributions to our unitholders
would be reduced and we may be forced to make a bankruptcy filing, any of which
would likely have a material adverse effect on the trading price of our common
units.




In addition,
the Private Company’s customers may be less likely to enter into business
transactions with the Private Company while it is in bankruptcy, and the Private
Company may choose to curtail its operations or liquidate its assets as part of
its bankruptcy proceedings.  As a result, unless we are able to
generate additional third party revenues, we may experience less 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.  Events of default have occurred and are continuing under our
credit agreement.  Additionally, we earned 88% of our revenues,
excluding fuel surcharge revenues related to fuel and power consumed to operate
our liquid asphalt cement storage tanks, for the six months ended June 30, 2008
from the Private Company, which commenced the Bankruptcy Cases in July 2008, the
effects of which are more fully described herein.  These factors, 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 may reject the 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.




The Private
Company may reject or attempt to modify the contracts it has with us as part of
the Bankruptcy Cases.  If the Private Company rejects the contracts it
has with us, it will be deemed to have breached such
contracts.  Because of the Bankruptcy Filings, we may not have an
adequate remedy for such breach.  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.  On February 6, 2009, the Private Company filed a motion
in the Bankruptcy Court requesting approval of the sale of its asphalt related
assets.  There is significant uncertainty as to the revenues related
to our asphalt assets and there is substantial risk that our asphalt assets
may be idle during 2009 and subsequent years.  Without revenues from
our asphalt assets, we may be unable to meet the covenants, including the
minimum liquidity and minimum receipt requirements, under our Forbearance
Agreement with our senior secured lenders pursuant to which such lenders have
agreed to forbear from exercising their rights and remedies arising from the
events of default under our credit agreement.  Pursuant
to the Settlement Agreement, among other things, the Private Company will reject
the Throughput Agreement and the Terminalling Agreement and we will receive
the Private Company’s asphalt assets that are connected to our asphalt assets
(unless
the Private Company executes a definitive agreement to sell substantially all of
its asphalt assets or business as a going concern to a third-party purchaser and
we enter into a terminalling and storage agreement with such
purchaser).  There can be no assurance that the
conditions to effectiveness in the Settlement Agreement will be completed and
that the transactions contemplated thereby will be consummated (see “Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Settlement with the Private Company”).  Even if we acquire
such asphalt assets, we may not be able to enter into agreements to provide
terminalling and storage services for such assets.  In addition,if the Private Company sells its asphalt assets to a third party the
Partnership will need to negotiate a new terminalling and storage
contract with the winner of the auction and such agreement may not be on as
favorable terms as the Terminalling Agreement.





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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.




Under
bankruptcy law, a debtor-in-possession, such as the Private Company, may seek to
avoid certain prepetition transfers if such transfers were to insiders and
occurred within one year before the bankruptcy filing.  For purposes
of avoidance under bankruptcy law, title to real property that is perfected more
than thirty days after the transfer is deemed to have been transferred as of the
date of perfection.  In addition, a debtor-in-possession, such as the
Private Company, may seek to avoid prepetition transfers of real property that
were not perfected as of the bankruptcy filing date against a hypothetical bona
fide purchaser of such real property.




Through a
series of transactions we acquired certain real property from the Private
Company during the one-year period preceding the Bankruptcy
Filings.  Deeds to approximately 27 asphalt facilities transferred to
us by the Private Company as part of the Acquired Asphalt Assets either were not
recorded within thirty days of such transfer or were not recorded as of the
Bankruptcy Filings.  In addition, a deed to the Acquired Storage
Assets was not recorded as of the Bankruptcy Filings.  Although we
have title to such properties, the Private Company may in its bankruptcy
proceedings seek to avoid the transfers of these properties.  We have
defenses against these actions based upon bankruptcy law and state law and
intend to vigorously defend against any such action.  However, there
can be no assurance regarding the outcome of any potential
litigation.  If the Private Company succeeds in such litigation, we
may be required to return the affected properties to the Private Company or pay
an amount equal to the value of such properties, which would 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.  We
would then have unsecured claims in the Bankruptcy Court for the amounts
originally paid for such properties.   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 this matter. However, the ultimate
resolution of this matter 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.  Pursuant
to the Settlement Agreement, the Private Company will release certain of its
claims related to this real property including the real property claims
discussed above (see “Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations—Settlement with the Private
Company”).  There may
be additional claims that are not released by the Settlement
Agreement.  In addition,there can be no assurance that the
conditions to effectiveness in the Settlement Agreement will be completed and
that the transactions contemplated thereby will be
consummated.




We
did not make a distribution for the second quarter, third quarter or fourth
quarter of 2008, do not expect to make a distribution for the first 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 or December 31, 2008, due to the existing
events of default under our credit agreement and the uncertainty of our future
cash flows relating to the Bankruptcy Filings.  Even though we did not
pay a distribution for the second, third or fourth quarters of 2008 and we
do not currently expect to pay a distribution for the first quarter of
2009, our unitholders will be liable for taxes on their share of our taxable
income.  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.” 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.  If the
events of default under our credit agreement are not waived by our lenders or
our business operations, expenses, including interest expense, and prospects do
not improve, we will not be able to make quarterly distributions to our
unitholders in the future.





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.




We are party
to the Terminalling Agreement with the Private Company pursuant to which we
provide certain liquid asphalt cement terminalling and storage services to the
Private Company. We are also party to the Throughput Agreement with the Private
Company pursuant to which we provide certain crude oil gathering,
transportation, terminalling and storage services to the Private
Company.  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 Throughput
Agreement or the Terminalling Agreement by the Private Company could materially
and adversely impact our ability to operate and make distributions to our
unitholders.  On February 6, 2009, the Private Company filed a motion
in the Bankruptcy Court requesting approval of the sale of the Private Company’s
asphalt related assets, or in the event of an unsuccessful auction, the
rejection of the Terminalling Agreement and the winding down of its asphalt
business.  Pursuant
to the Settlement Agreement, the Private Company will reject the Terminalling
Agreement and the Throughput Agreement as part of the Bankruptcy Cases and we
will receive the Private Company’s asphalt assets that are connected to our
asphalt assets.  In addition, pursuant to the Settlement Agreement, we
will enter into a new throughput agreement with the Private Company pursuant to
which we will provide certain crude oil gathering, transportation, terminalling
and storage services to the Private Company.  There can be no
assurance that the
conditions to effectiveness in the Settlement Agreement will be completed and
that the transactions contemplated thereby will be consummated (see “Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Settlement with the Private Company”).See “─The Private
Company may reject the 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.”




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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
substantial 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.


We
do not have employees and rely solely on the employees of the Private
Company.  The Private Company is no longer obligated to provide
services to us, which may adversely affect our financial results, our ability to
operate and our ability to make distributions to our unitholders.




As is the
case with many publicly traded partnerships, we do not directly employ 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 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.  Due to
the Change of Control of our general partner, the Private Company is no longer
obligated to operate our assets or perform other administrative services
pursuant to the Amended Omnibus Agreement.  The Private Company agreed
to continue providing such services until at least November 30, 2008 pursuant to
the Order entered by the Bankruptcy Court.  While the Private
Company has continued to provide such services as of the date of the filing
of this report, there can be no assurance that it will continue to provide such
services to us or that we could replace any of these services if the Private
Company stops providing them.  If the Private Company stops providing
these services we may incur increased costs to replace these services and our
financial results may suffer.




Pursuant to
the Settlement Agreement, the Private Company will reject the Amended Omnibus
Agreement as part of the Bankruptcy Cases and we will enter into a shared
services agreement with the Private Company pursuant to which the Private
Company will provide certain operational services for us.  There can
be no assurance that the
conditions to effectiveness in the Settlement Agreement will be completed and
that the transactions contemplated thereby will be consummated (see “Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Settlement with the Private Company”).  In addition, if the
terms of this shared services agreement are not as favorable as the terms under
the Amended Omnibus Agreement, it 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 Bankruptcy Filings, the Private Company may reduce
a substantial number of its employees, some of whom may provide general and
administrative and operating services to us.  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.




Beginning
April 1, 2009, we will begin to directly employ a number of persons responsible
for managing our operations and for providing services relating
to our day-to-day business affairs.  Subject to the consummation
of the transactions contemplated by the Settlement Agreement, we may
directly employ additional persons responsible for providing services relating
to our asphalt assets.  Our costs
may increase as we directly employ individuals associated with our operations
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.


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.




We are a
creditor in the Bankruptcy Cases due to amounts owed to us by the Private
Company prior to the Bankruptcy Filings.  In addition, if the Private
Company fails to make its payments under the Throughput Agreement or the
Terminalling Agreement or otherwise fails to perform under the contracts we have
with the Private Company, we may have additional potential claims against the
Private Company’s bankruptcy estate.




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 damages for breaches of contract or other claims that it will be able
to establish in the bankruptcy proceedings and we cannot predict the amounts, if
any, that it 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.




Pursuant
to the Settlement Agreement, the Private Company will reject the Terminalling
Agreement and the Throughput Agreement.  We will have a $35 million
unsecured claim relating to rejection of the Terminalling Agreement in the
Bankruptcy Cases.  In addition, we will have a $20 million unsecured
claim against the Private Company relating to rejection of the Throughput
Agreement.  There can be no assurance that the
conditions to effectiveness in the Settlement Agreement will be completed and
that the transactions contemplated thereby will be consummated (see “Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Settlement with the Private Company”).




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As a
result of these items, our interests may be adverse to the Private Company’s
interests.  The Private Company provides administrative, legal,
regulatory, development, finance, land and engineering services for
us.  The Private Company is also responsible for obtaining and
renewing environmental and other permits related to our liquid asphalt cement
operations.  In addition, we rely upon the Private Company’s personnel
for the design and implementation 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
do not have title to all of the intellectual property relating to our
business.




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 of our general partner.  The
termination of the explicit rights to use this intellectual property under the
Amended Omnibus Agreement may adversely affect our ability to operate or grow
our business and our results of operations.  In addition, we may be
subject to claims for trademark or other intellectual property infringement due
to our continued use of these intellectual property rights.  Pursuant
to the Settlement Agreement, we will enter into a license agreement with the
Private Company pursuant to which we may use the trade names and mark until
December 31, 2009.  In addition, pursuant to the Settlement Agreement,
the Private Company has agreed to waive all claims relating to infringement of
the trade names and mark prior to the entering into this license
agreement.  There can
be no assurance that the conditions to effectiveness in the Settlement Agreement
will be completed and that the transactions contemplated thereby will be
consummated (see “Item 2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations—Settlement with the Private
Company”).





Our
liquid asphalt cement operations are dependent upon the Private Company and may
be materially and adversely affected by the  Bankruptcy
Filings.




We provide
liquid asphalt cement terminalling and storage services to the Private
Company.  The Private Company processes, distributes and markets
liquid asphalt cement and finished asphalt products to third party
customers.  Pursuant to the Amended Omnibus Agreement, the Private
Company has agreed, so long as the Terminalling Agreement is in effect, not to
engage in, or acquire or invest in an entity that engages in, the business of
terminalling and storing liquid asphalt cement within 50 miles of our liquid
asphalt cement facilities and we have agreed, so long as the Terminalling
Agreement is in effect, not to engage in, or acquire or invest in an entity that
engages in, the business of processing, marketing and distributing liquid
asphalt cement and finished asphalt products within 50 miles of our liquid
asphalt cement facilities.  As a result, subject to certain
exceptions, we are contractually prohibited from marketing or distributing
liquid asphalt cement directly to third party customers while the Terminalling
Agreement is in effect.  In addition, the Private Company is
responsible for obtaining all environmental and other permits related to our
liquid asphalt cement operations.  The Private Company’s failure to
obtain, renew or maintain compliance under these permits may materially
adversely effect our operations.





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.  Although there remains some liquid asphalt
cement in our asphalt storage tanks that was not sold during the summer of 2008,
the Private Company, as of the date of the filing of this report, has not
purchased any significant volumes of additional liquid asphalt cement during the
recent winter months.  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.




On
February 6, 2009, the Private Company filed a motion in the Bankruptcy Court
requesting approval of the sale of its asphalt related assets.  There
is significant uncertainty as to our revenues related to our asphalt assets and
there is substantial risk that our asphalt assets may be idle during 2009 and
subsequent years, which would adversely effect our financial condition and
results of operations.  Without revenues from our asphalt assets, we
may be unable to meet the covenants, including the minimum liquidity and minimum
receipt requirements, under our Forbearance Agreement with our senior secured
lenders pursuant to which such lenders have agreed to forbear from exercising
their rights and remedies arising from the events of default under our credit
agreement.  Pursuant
to the Settlement Agreement, we will receive the Private Company’s asphalt
assets that are connected to our asphalt assets (unless
the Private Company executes a definitive agreement to sell substantially all of
its asphalt assets or business as a going concern to a third-party purchaser and
we enter into a terminalling and storage agreement with such
purchaser).  There can be no assurance that the
conditions to effectiveness in the Settlement Agreement will be completed and
that the transactions contemplated thereby will be consummated (see “Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Settlement with the Private Company”).  Even if we acquire
such asphalt assets, we may not be able to enter into agreements to provide
terminalling and storage services for such assets.  In
addition, if the Private Company sells its asphalt assets to a third
party, we will need to negotiate a new terminalling and storage contract
with the purchaser of such assets and such agreement may not be on as
favorable terms as the Terminalling 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.




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Events
of default currently exist under our credit agreement.




Events of
default have occurred and are continuing under our credit
agreement.  We are therefore prohibited from borrowing under our
credit facility to fund working capital needs or to pay distributions to our
unitholders, among other things.  In addition, the Private Company’s
actions related to the Bankruptcy Filings as well as the Private Company’s
liquidity issues and any corresponding impact upon us may result in additional
events of default under our credit agreement.  As a result, we are
operating on cash flows received from operations and from a $25 million
borrowing under our credit facility on July 8, 2008 prior to the occurrence of
the events of default.  If we are unable to sustain our sources of
revenue generation and reestablish our relationships within the credit markets,
we do not expect such cash flows to be sufficient to operate our business over
the long-term.  As of March 13, 2009, we have approximately
$33.9 million of cash that we are using to operate our
business.  No cure periods are applicable to the existing events of
default.  These events of default have not been waived and are
continuing under our credit agreement.




Under the
Forbearance Agreement, as amended by the First Amendment, the Second
Amendment and the Third Amendment, the lender’s forbearance is subject
to certain conditions as described therein, including, among other items,
periodic deliverables and minimum liquidity, minimum receipts and maximum
disbursement requirements.  If we fail to meet these conditions or are
unable to obtain further forbearance from our lenders or a permanent 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.




The
Forbearance Agreement, as amended by the First Amendment, the Second Amendment
and Third Amendment, permanently reduced our revolving credit facility under the
credit agreement from $350 million to $220 million.  In addition, our
interest expense has increased due to the events of default that exist under our
credit agreement and our entering into the Forbearance Agreement, as amended by
the First Amendment, the Second Amendment and the Third
Amendment.  For example, the weighted average interest rate incurred
by us during the three months ended June 30, 2008 was 4.62% resulting in
interest expense of approximately $4.3 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.




Due to the
events of default, upon the expiration or termination of any applicable
forbearance period, the lenders may, among other remedies, declare all
outstanding amounts under the credit agreement immediately due and payable and
exercise all other rights and remedies available to the lenders under the credit
agreement and related loan documents, including taking available cash in our
bank accounts.  A vote of lenders having more than 50% of the sum of
(i) the aggregate revolver commitments and (ii) the outstanding term loan are
required to exercise such a remedy.  If the lenders exercise such a
remedy, we may be forced to make a bankruptcy filing or take other
actions.  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.





The
Change of Control of the Private Company may lead to additional uncertainty
regarding our future operations and cash flows.





On
December 15, 2008, Red Apple, which is chaired by John Catsimatidis, announced
that it controls five of the nine seats on the management committee of the
general partner of the Private Company and therefore effectively controls the
Private Company.  Mr. Catsimatidis has indicated that Red Apple does
not intend to liquidate the Private Company and that it plans on filing a new
reorganization plan for the Private Company with the Bankruptcy
Court.  As of the date of the filing of this report, Red Apple has not
filed a reorganization plan.  There is no assurance that any
reorganization plan will be submitted by Red Apple or that if a reorganization
plan is submitted by Red Apple that the Bankruptcy Court will approve such plan
or that continued performance by the Private Company under the Throughput
Agreement or the Terminalling Agreement will be part of any such
plan.  In addition, the Private Company Change of Control may lead to
additional uncertainty regarding our continued relationship with the Private
Company.




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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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TheCarson case was filed as a
putative class action on behalf of all purchasers of our common units between
February 20, 2008 and July 17, 2008.  Plaintiff alleges violations of
Sections 10(b) and 20(a) of the Exchange Act and SEC Rule 10b-5, resulting in
damages to members of the putative class.  Plaintiff's specific allegations
include that, despite an obligation to do so, the Defendants failed to disclose
between February 20, 2008 and May 8, 2008 that the Private Company was engaged
in high-risk crude oil hedging transactions that could affect its ability to
continue as a going concern or that the Private Company was suffering from
liquidity problems.  Plaintiff seeks class certification, damages,
interest, fees, and costs.




TheMaurer case was filed as a
putative class action on behalf of all persons who purchased our common units
pursuant to or traceable to the February 12, 2008 Registration Statement and
Prospectus.  Plaintiff alleges violations of Section 11 of the Securities
Act, resulting in damages to members of the putative class.  Plaintiff’s
specific allegations include that, despite an obligation to do so, the
Defendants failed to disclose in connection with the secondary offering in
February 2008 that the Private Company was engaged in high-risk crude oil
hedging transactions that could affect its ability to continue as a going
concern or that the Private Company was suffering from liquidity problems. 
Plaintiff seeks class certification, damages, interest, fees, and
costs.




TheRubin, Jain, andHickman cases were filed as
putative class actions on behalf of all purchasers of our common units between
July 17, 2007 and July 17, 2008.  Plaintiffs allege violations of Sections
11, 12(a)(2), and 15 of the Securities Act and violations of Sections 10(b) and
20(a) of the Exchange Act and SEC Rule 10b-5, resulting in damages to members of
the putative class.  Plaintiff’s specific allegations include that, despite
an obligation to do so, the Defendants failed to disclose between July 17, 2007
and July 17, 2008 the adverse financial condition and lack of liquidity of the
Private Company that was caused by the Private Company’s speculative and
unauthorized hedging and trading in crude oil.  Plaintiffs seek class
certification, rescission of the sale of common units under Section 12(a)(2) of
the Securities Act, damages, interest, fees, and costs.




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.




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




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.




The
Private Company may not honor its indemnification obligations, which may expose
us to increased losses.




In the
Amended Omnibus Agreement and other agreements with the Private Company, the
Private Company has 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.  Due to the Bankruptcy Filings we may not be able
to collect any amounts that would otherwise be payable under these
indemnification provisions if such events were to occur.  Pursuant to
the Settlement Agreement, the Private Company will reject the Amended Omnibus
Agreement including the indemnification provisions therein.  If we
experience an environmental or other loss and the Private Company fails to honor
its indemnification obligations, 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 our ability to conduct our
business.





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Our
common units were delisted from the Nasdaq and is 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 September 30,
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 designing and implementing 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 merger 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 noncash
compensation expense related to the vesting of the units under the Plan)
increased by approximately $6.6 million and $7.4 million, or approximately 287%
and 322%, to approximately $8.9 million for the third quarter of 2008 and $9.7
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 merger 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.




We are
currently operating on cash flows received from operations and from a $25
million borrowing under our credit facility on July 8, 2008 prior to the
occurrence of the events of default under our credit agreement.  If we
are unable to sustain our sources of revenue generation and reestablish our
relationships within the credit markets, we do not expect such cash flows to be
sufficient to operate our business over the long-term.  As of March
13, 2009, we have approximately $33.9 million of cash that we are using to
operate our business.  Our ability to access capital markets may 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
are unable to obtain further forbearance from our lenders or a permanent 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.  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.  In addition, we share some
insurance policies with the Private Company and claims made by the Private
Company under such policies or increased costs associated to renew such policies
due to the Bankruptcy Filings may have a material adverse effect on our
financial condition and results of operations.




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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We share
some insurance policies, including our general liability policy, with the
Private Company. These policies contain caps on the insurer’s maximum liability
under the policy, and claims made by either the Private Company or us are
applied against the caps and deductibles. The possibility exists that, in an
event in which we wish to make a claim under a shared insurance policy, our
claim could be denied or only partially satisfied due to claims made by the
Private Company against the policy cap. Further, where events occur that would
entitle both the Private Company and us to benefits under these insurance
policies, the full deductible may be borne by the first claimant under the
policy. In addition, claims made by the Private Company could affect our
premiums and our ability to obtain insurance in the future.  The
Bankruptcy Filings have had and may continue to have an adverse effect on our
insurance premiums and coverage.  Our premiums and ability to obtain
insurance in the future could also be adversely impacted by the Bankruptcy
Filings if the Private Company fails to renew any shared policies and we are
required to purchase our own policy, cover any premiums currently being paid by
the Private Company or if an insurance carrier increases the insurance premiums
due to the Bankruptcy Filings.  These increased costs could have a
material adverse effect on our financial condition and results of
operations.





Risks
Related to Our Business





We
depend upon the Private Company for a substantial 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 substantial 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.”





The
Private Company’s obligations under the Throughput Agreement and the
Terminalling Agreement may be reduced or suspended in some circumstances, which
would reduce our ability to make distributions to our unitholders.








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In
addition to the impact of the Bankruptcy Filings described above, some of the
circumstances under which the Private Company’s obligations under the Throughput
Agreement and the Terminalling Agreement may be permanently reduced are within
the exclusive control of the Private Company. Any such permanent reduction would
reduce our ability to make distributions to our unitholders. For example, under
the Throughput Agreement, if we and the Private Company cannot agree on an
upfront payment or ratable fee surcharge to cover substantial and unanticipated
capital expenditures at any of our facilities in order to comply with new laws
or regulations, and if we are not able to direct the affected crude oil to
mutually acceptable storage or gathering and transportation assets that we own,
either party will have the right to remove the affected facility from the
Throughput Agreement, and the Private Company’s minimum monthly payment
obligation will be correspondingly reduced. The Private Company’s minimum
monthly payment obligation may also be temporarily suspended under the
Throughput Agreement or the Terminalling Agreement to the extent that the
occurrence of a force majeure event that is outside the control of the parties
prevents us from making our services available to the Private Company and the
affected services under the Throughput Agreement or the Terminalling Agreement,
as applicable, may be terminated if the force majeure event prevents performance
for more than twelve months.  Please see “Item 7. Management’s Discussion
and Analysis of Financial Condition and Results of Operation” and “Item 13.
Certain Relationships and Related Party Transactions” in our 2007 Form
10-K.  Pursuant
to the Settlement Agreement, the Private Company will reject the Terminalling
Agreement and the Throughput Agreement as part of the Bankruptcy Cases and we
will receive the Private Company’s asphalt assets that are connected to our
asphalt assets.  In addition, pursuant to the Settlement Agreement, we
will enter into a new throughput agreement with the Private Company pursuant to
which we will provide certain crude oil gathering, transportation, terminalling
and storage services to the Private Company.  There can be no
assurance that the
conditions to effectiveness in the Settlement Agreement will be completed and
that the transactions contemplated thereby will be consummated(see “Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Settlement with the Private Company”).





Even if we regain
compliance under our credit agreement, 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 obtain a permanent waiver of the
events of default under our credit agreement or to negotiate further 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.





Due to the events of default that have
occurred and are continuing under our credit agreement, we are currently
prohibited from paying distributions to our unitholders.  Even if we
regain compliance under our credit agreement or obtain permanent waivers of the
events of default, 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 total revenues are
approximately $9.2 million less than second 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.  As of
the date of the filing of this report, we continue to collect the minimum
revenues from the Private Company under the Terminalling Agreement for
terminalling and storage services provided for liquid asphalt
cement.  Our future total revenues may be further impacted if the
Private Company rejects the Terminalling Agreement or otherwise fails to make
the minimum payments under the Terminalling Agreement.  Pursuant
to the Settlement Agreement, the Private Company will reject the Terminalling
Agreement and the Throughput Agreement as part of the Bankruptcy Cases and we
will receive the Private Company’s asphalt assets that are connected to our
asphalt assets.  In addition, pursuant to the Settlement Agreement, we
will enter into a new throughput agreement with the Private Company pursuant to
which we will provide certain crude oil gathering, transportation, terminalling
and storage services to the Private Company.  There can be no
assurance that
the conditions to effectiveness in the Settlement Agreement will be completed
and that the transactions contemplated thereby will be
consummated (see “Item 2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations—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 and events of default 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 and the existing events of default 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
because events of default exist under the credit agreement. 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 as
is currently the case. In addition, our credit facility contains various
covenants that limit, among other things, our ability to incur indebtedness,
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—Events of default currently exist 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
borrowing funds to pay distributions to our unitholders due to the events of
default that have occurred and are continuing under our credit agreement. If we
regain compliance under our credit facility or obtain permanent waivers of the
events of default and are able to again borrow funds to pay distributions to our
unitholders, 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 the
Private Company and our other 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. Some of these competitors have greater capital resources
and control greater supplies of crude oil than the Private Company. 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.








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In addition, the Private
Company owns midstream assets and may engage in competition with us, subject to
certain restrictions on the Private Company’s ability to acquire and construct
liquid asphalt cement terminalling and storage assets. 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.




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.





We
completed the acquisition of our asphalt assets on February 20, 2008. If our
assets do not perform as expected, our future financial performance may be
negatively impacted.




Our
acquisition of our asphalt assets significantly increased the size of our
company and diversified the geographic areas and lines of business in which we
operate. We cannot assure our unitholders that we will achieve the desired
profitability from our asphalt assets. In addition, our failure to successfully
integrate our asphalt assets into our business could adversely affect our
financial condition and results of operations. We face certain challenges as we
work to integrate our asphalt assets into our business. In particular, the
acquisition of our asphalt assets, by adding 46 terminals in 23 states, expanded
our operations and the types of business in which we engage, significantly
expanding our geographic scope and increasing the number of employees involved
in our operations, thereby presenting us with significant challenges as we work
to manage the increase in scale resulting from the acquisition. Delays in this
process could have a material adverse effect on our revenues, expenses,
operating results and financial condition. In addition, events outside of our
control, including changes in state and federal regulation and laws as well as
economic trends, also could adversely affect our ability to realize the
anticipated benefits from the acquisition of our asphalt assets.




Further, the
liquid asphalt cement operations may not perform in accordance with our
expectations, we may lose key employees and our expectations with regards to
integration and synergies may not be fully realized. Our failure to successfully
integrate and operate our asphalt assets, and to realize the anticipated
benefits of the acquisition could adversely affect our operating and financial
results.





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.


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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.




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.


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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 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.





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 other than the Private Company 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 third-party 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 the Private Company and our other
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.








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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.





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.








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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.




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.





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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
and Alerian are creditors 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.  Manchester
and/or Alerian 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.




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.




Other than
the Private Company’s agreement not to engage in the business of terminalling
and storing liquid asphalt cement within 50 miles of our liquid asphaltcement
facilities, neither our partnership agreement nor the Amended Omnibus Agreement
prohibits the Private Company or any successor to the Private Company or
acquirer of its assets from owning assets or engaging inbusinesses
that compete directly or indirectly with us. In addition, subject to the
restrictions above, the Private Company or any successor to the Private
Company or acquirer of its assets may acquire, construct or dispose ofadditional
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.





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Our
agreement not to compete with the Private Company may limit our ability to
grow.




Pursuant to
the Amended Omnibus Agreement, we have agreed that for so long as the
Terminalling Agreement is in effect, we will not engage in the business of
processing, marketing and distributing finished asphalt products within 50 miles
of our liquid asphalt cement facilities. This agreement not to compete with the
Private Company may limit our ability to grow if we decide to engage in the
finished asphalt products business.  Pursuant
to the Settlement Agreement, the Private Company will reject the Terminalling
Agreement and the Amended Omnibus Agreement as part of the Bankruptcy Cases and
we will no longer be limited by these restrictions.  There can be no
assurance that the
conditions to effectiveness in the Settlement Agreement will be completed and
that the transactions contemplated thereby will be consummated(see “Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Settlement with the Private Company”).





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





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 and Alerian pursuant to their
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.





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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 and Alerian from transferring all or a portion
of their 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.





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 1,667 subordinated 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 and Alerian. 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.





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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.





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








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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, and December 31, 2008.  In addition, we do not expect to
make a distribution relating to the first 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 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.








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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 June 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.


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.





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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.





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.


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Item 3.
            Defaults
      Upon Senior Securities




Events of
default have occurred and are continuing under our credit
agreement.  We are therefore prohibited from borrowing under our
credit facility to fund working capital needs or to pay distributions to our
unitholders, among other things. In addition, the Private Company’s actions
related to the Bankruptcy Filings as well as the Private Company’s liquidity
issues and any corresponding impact upon us may result in additional events of
default under our credit agreement.  As a result, we are operating on
cash flows received from operations and from a $25 million borrowing under our
credit facility on July 8, 2008 prior to the occurrence of the events of
default.  If we are unable to sustain our sources of revenue
generation and reestablish our relationships within the credit markets, we do
not expect such cash flows to be sufficient to operate our business over the
long-term.  No cure periods are applicable to the existing events of
default.  As of March 13, 2009, we have approximately $33.9 million of
cash that we are using to operate our business.  These events of
default have not been waived and are continuing under our credit
agreement.  Due to the existing events of default under our credit
agreement, we are not able to borrow under its credit facility to fund working
capital needs or for other purposes.




Effective
on September 18, 2008, we and the requisite lenders under our credit facility
entered into 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 events of default described above and other
defaults or events of default described therein for the Forbearance
Period.  On December 11, 2008, the lenders agreed to extend the
Forbearance Period until December 18, 2008 pursuant to the First
Amendment.  On December 18, 2008, we and the requisite lenders entered
into the Second Amendment under which the lenders agreed, subject to specified
limitations and conditions, to forbear from exercising their rights and remedies
arising from the events of default described above and other defaults or events
of default described therein until March 18, 2009.  On March
18, 2009, we and the requisite lenders entered into the Third Amendment under
which the lenders agreed, subject to specified limitations and conditions, to
forbear from exercising their rights and remedies arising from the events of
default described above and other defaults or events of default described
therein for the Extended Forbearance
Period.




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 affect to the above described commitment reduction.  The Second
Amendment further permanently reduced our revolving credit facility under the
credit agreement from $300 million to $220 million.  The Third Amendment
prohibits us from borrowing additional funds under our revolving credit facility
during the Extended Forbearance Period.  In addition, under the Second
Amendment, we agreed to pay the lenders executing the Second Amendment a fee
equal to 0.375% of the aggregate commitments under the credit agreement after
the above described commitment reduction.  As of March 13, 2009, we
had $448.1 million in outstanding borrowings under our credit facility
(including $198.1 million under its revolving credit facility and $250 million
under its term loan facility) with an aggregate unused credit availability of
approximately $21.9 million under our credit facility.  As described
above, we are prohibited from borrowing additional funds under our credit
agreement during the Extended Forbearance Period.




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%, 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
administrative agent’s prime rate or the federal funds rate plus 0.50%, 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 Amendment, commencing on December 12, 2008, indebtedness under the
credit agreement bears interest at our option, at either (i) the
administrative agent’s prime rate or the federal funds rate plus 5.0% per annum,
with a prime rate or federal funds rate floor of 4.0% per annum, or
(ii) LIBOR plus 6.0% per annum, with a LIBOR floor of 3.0% per
annum.  During the three months ended June 30, 2008, the weighted
average interest rate incurred by us was 4.62% resulting in interest expense of
approximately $4.3 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 $8.9million.




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Under the
Forbearance Agreement, as amended by the First Amendment, the Second Amendment
and the Third Amendment, the lender’s forbearance is subject to certain
conditions as described therein, including, among other items, periodic
deliverables and minimum liquidity, minimum receipts and maximum disbursement
requirements.  If we fail to meet these conditions or are unable to
obtain further forbearance from our lenders or a permanent 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.





Due to
the events of default, upon the expiration or termination of any applicable
forbearance period, the lenders may, among other remedies, declare all
outstanding amounts under the credit agreement immediately due and payable and
exercise all other rights and remedies available to the lenders under the credit
agreement and related loan documents.  A vote of lenders having more
than 50% of the sum of (i) the aggregate revolver commitments and (ii) the
outstanding term loan are required to exercise such a remedy.  If the
lenders exercise such a remedy, we may be forced to make a bankruptcy filing or
take other actions.  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.





We use
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 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 5.
              Other Information


On March
18, 2009, we announced the realignment of the management team of our general
partner.  Michael J. Brochetti was appointed as our general partner’s
ExecutiveVice President—Corporate Development and Treasurer,
Alex G. Stallings was appointed as our general partner’s Chief Financial Officer
and Secretary, and James R. Griffin was appointed as our general
partner’s Chief Accounting Officer.  Mr. Brochetti had
previously served as our general partner’s Chief Financial Officer; and Mr.
Stallings had previously served as our general partner’s Chief Accounting
Officer and Secretary; and Mr. Griffin had previously served as our general
partner's controller.


Additional
information regarding Mr. Brochetti’s and Mr. Stallings’ business experience is
set forth in Item 10 of our Annual Report on Form 10-K for the fiscal year ended
December 31, 2007, as filed with the Securities and Exchange Commission on March
6, 2008, and is incorporated herein by reference.
  In connection with his
appointment as our general partner's Chief Financial Officer and Secretary, Mr.
Stallings' annual base salary was increased from $275,000 to $300,000. 
This increase was approved by the compensation committee of the
Board.
  James
R. Griffin has served as controller of our general partner since May of 2007 and
the Private Company's transactional services controller since September
2006.  Prior to joining the Private Company, Mr. Griffin served
in various capacities, most recently as an audit manager, for the public
accounting firm of PricewaterhouseCoopers LLP, working in its Tulsa, Oklahoma
office since January 2000.
  In
connection with his appointment as our general partner’s Chief Accounting
Officer, Mr. Griffin entered into the following agreements: (i) an employment
agreement substantially in the form attached as Exhibit 10.14 to this quarterly
report, (ii) a phantom unit agreement substantially in the form attached as
Exhibit 10.15 to this quarterly report and (iii) our general partner’s customary
indemnification agreement substantially in the form filed as Exhibit 10.7 to our
Registration Statement on Form S-1 (Reg. No. 333-141196), filed May 25,
2007.  In addition, prior to his appointment as our general partner’s
Chief Accounting Officer, Mr. Griffin entered into a retention agreement with
our general partner, a copy of which is attached as Exhibit 10.16 to this
quarterly report.  Each of the employment agreement, phantom unit
agreement and retention agreement is discussed in more detail
below.
  Employment
Agreement
  Pursuant
to his employment agreement, Mr. Griffin will be paid an initial annual
base salary of $210,000. The employment agreement and the corresponding base
salary amount was approved by the compensation committee of the
Board.
  The
employment agreement has a two year term and will renew automatically for
additional one year terms unless either party gives 90 days prior notice. In
addition, Mr. Griffin is eligible for discretionary bonus awards and
long-term incentives which may be made from time to time in the sole discretion
of the Board. The employment agreement also provides that Mr. Griffin is
eligible to participate in any employee benefit plans maintained by our general
partner and is entitled to reimbursement for certain out-of-pocket expenses.
Mr. Griffin has agreed not to disclose any confidential information
obtained by him while employed under the agreement. In addition, the employment
agreement contains payment obligations that may be triggered by a termination
after a Change of Control as described below.
  Under the
employment agreement, the General Partner may be required to pay certain amounts
upon a Change of Control of us or our general partner or upon the termination of
Mr. Griffin’s employment in certain circumstances.
  Except in
the event of termination for Cause, termination by Mr. Griffin other than
for Good Reason, or termination after the expiration of the term of the
employment agreement, the employment agreement provides for payment of any
unpaid base salary and vested benefits under any incentive plans, a lump sum
payment equal to twelve months of base salary and continued participation in our
general partner’s welfare benefit programs for the longer of the remainder of
the term of the employment agreement or one year after termination. Upon such an
event, Mr. Griffin would be entitled to a lump sum payment of $210,000, in
addition to continued participation in the General Partner’s welfare benefit
programs and the amounts of unpaid base salary and benefits under any incentive
plans.
  If within
one year after a Change of Control occurs Mr. Griffin is terminated by our
general partner without Cause or Mr. Griffin terminates the agreement for
Good Reason, 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 our general partner’s welfare benefit
programs for the longer of the remainder of the term of the employment agreement
or one year after termination. Upon such an event, Mr. Griffin would be
entitled to a lump sum payment of $420,000, in addition to continued
participation in our general partner’s welfare benefit programs and the amounts
of unpaid base salary and benefits under any incentive plans.
  For
purposes of the employment agreement:
  “Cause”
means (i) conviction of the officer by a court of competent jurisdiction of
any felony or a crime involving moral turpitude; (ii) the officer’s willful
and intentional failure or willful intentional refusal to follow reasonable and
lawful instructions of the Board of our general partner; (iii) the
officer’s material breach or default in the performance of his obligations under
the employment agreement; or (iv) the officer’s act of misappropriation,
embezzlement, intentional fraud or similar conduct involving our general
partner.
  “Good
Reason” means (i) a material reduction in the officer’s base salary;
(ii) a material diminution of the officer’s duties, authority or
responsibilities as in effect immediately prior to such diminution; or
(iii) the relocation of the officer’s principal work location to a location
more than 50 miles from its current location.
  “Change
of Control” means any of the following events: (i) any person or group
other than SemGroup, L.P., Manchester Securities Corp., Alerian Finance
Partners, LP, or their respective affiliates, shall become the beneficial owner,
by way of merger, consolidation, recapitalization, reorganization or otherwise,
of 50% or more of the combined voting power of the equity interests in us or in
our general partner; (ii) our limited partners approve, in one or a series
of transactions, a plan of complete liquidation of the partnership;
(iii) the sale or other disposition by either our general partner or us of
all or substantially all of the assets of our general partner or us in one or
more transactions to any person other than our general partner and its
affiliates; or (iv) a transaction resulting in a person other than our
general partner or an affiliate of our general partner being our general
partner.
  Phantom
Unit Agreement
  Pursuant
to the phantom unit agreement, Mr. Griffin was granted 30,000 phantom units
under the Plan.  The entering into the phantom unit agreement and the
granting of these 30,000 phantom units to Mr. Griffin was approved by the
compensation committee of the Board.
  Phantom
Units granted to Mr. Griffin pursuant to the phantom unit agreement vest in
one-third increments over a three year period, subject to earlier vesting on a
change of control or upon a termination without cause or due to death or
disability. Mr. Griffin will receive one common unit upon vesting of each
phantom unit. In addition, the phantom units have distribution equivalent rights
for each fiscal quarter in which our quarterly cash distribution to our
subordinated and common unitholders for such quarter equals or exceeds $0.39 per
unit (or $1.56 per unit on an annualized basis). Pursuant to the distribution
equivalent right, Mr. Griffin will be entitled to receive a cash payment with
respect to each phantom unit then outstanding equal to the product of
(i) the per unit cash distributions paid to our unitholders during such
fiscal quarter, if any, multiplied by (ii) the number of unvested phantom
units.
  Retention
Agreement
  Pursuant
to the retention agreement, Mr. Griffin is entitled to payments totaling up
to $180,000 (the “Retention Amount”) if he is employed by our general partner on
certain dates.  Mr. Griffin received 25% of the Retention Amount, or
$45,000, for continued employment on October 30, 2008.  Mr. Griffin
will be entitled to receive the remaining 75% of the Retention Amount, or
$135,000, if (i) he is employed by our general partner on July 31, 2009 or (ii)
his employment is terminated by our general partner other than for Cause (as
defined above) or he terminates his employment for Good Reason (as defined
above) prior to July 31, 2009.  Provided Mr. Griffin meets the terms
and conditions contained in the retention agreement, he will be entitled to
these payments in addition to any payments made to him pursuant to his
employment agreement or otherwise.


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.


87
 Table of Contents




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:March23,
      2009
            
            
            
            By:
            
            /s/
      Alex G. StallingsAlex
      G. Stallings
              Chief
      Financial Officer and SecretaryDate: March
      23, 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
                                      
                                      Purchase
      and Sale Agreement, dated as of May 12, 2008, by and between SemCrude,
      L.P. and SemGroup Energy Partners, L.L.C. (filed as Exhibit 2.1 to the
      Partnership’s Current Report on Form 8-K, filed May 15, 2008, and
      incorporated herein by reference).10.2
                                      
                                      Purchase
      and Sale Agreement, dated as of May 20, 2008, by and between SemGroup
      Energy Partners, L.L.C. and SemCrude, L.P. (filed as Exhibit 2.1 to the
      Partnership’s Current Report on Form 8-K, filed May 23, 2008, and
      incorporated herein by reference).10.3
                                      
                                      Form
      of Phantom Unit Grant Agreement (filed as Exhibit 10.1 to the
      Partnership’s Current Report on Form 8-K, filed on June 24, 2008, and
      incorporated herein by reference)10.4
                                      
                                      Form
      of Phantom Unit Grant Agreement (filed as Exhibit 10.2 to the
      Partnership’s Current Report on Form 8-K, filed on June 24, 2008, and
      incorporated herein by reference)10.5
                                      
                                      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).10.6
                                      
                                      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).10.7
                                      
                                      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).10.8
                                      
                                      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).10.9
                                      
                                      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).10.10
                                      
                                      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).10.11
                                      
                                      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).10.12
                                      
                                      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).10.13
                                      
                                      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.10.14*
                                      
                                      Form
      of Employment Agreement.10.15*
                                      
                                      Form
      of Phantom Unit Agreement.10.16*
                                      
                                      Retention
      Agreement.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.