UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549


Form
10-K/A


Amendment
No. 2





R
            Annual Report Pursuant to
      Section 13 or 15(d) of the Securities Exchange Act of
      1934


For the fiscal year ended December 31,
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 001-33055




BreitBurn
Energy Partners L.P.


(Exact
name of registrant as specified in its charter)





Delaware
              74-3169953(State
      or other jurisdiction of
              (I.R.S.
      Employerincorporation
      or organization)
              Identification
      Number)515
      South Flower Street, Suite 4800Los
      Angeles, California
              90071(Address
      of principal executive offices)
              (Zip
      Code)





Registrant’s
telephone number, including area code: (213) 225-5900





Securities
registered pursuant to Section 12(b) of the Act:





Title
      of Each Class
                
                Name
      of Each Exchange on Which RegisteredCommon
      Units Representing Limited Partner Interests
                
                Nasdaq
      Global Select Market




Securities
registered pursuant to Section 12(g) of the Act: None





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.     Yes  ̈     No þ


Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange
Act.     Yes  ̈     No þ


Indicate
by check mark whether 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 þ     No  ̈


Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.      þ


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





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


As of
February 27, 2009, there were 52,770,011 Common Units
outstanding.  The aggregate market value of the Common Units held by
non-affiliates of the registrant (98.69 percent) was approximately
$1,124,000,000 for the Common Units on June 30, 2008 based on
$21.63 per unit, the last reported sales price of the Common Units on the
Nasdaq Global Select Market on such date. The calculation of the aggregate
market value of the Common Units held by non-affiliates of the registrant is
based on an assumption that Quicksilver Resources Inc., which owns 21,347,972
Common Units, representing 40.56 percent of the outstanding Common Units, is a
non-affiliate of the registrant.





Documents
Incorporated By Reference:


Portions
of our definitive Proxy Statement for our 2009 Annual Meeting of Unitholders are
hereby incorporated by reference into Part III hereof.





EXPLANATORY
NOTE




BreitBurn
Energy Partners L.P. is filing this Amendment No. 2 on Form 10-K/A (this
“Amendment”) to amend its Annual Report on Form 10-K for the year ended December
31, 2008, filed with the Securities and Exchange Commission (the “SEC”) on March
2, 2009 (the “Original 10-K”).




This
Amendment is being filed to amend the Original 10-K solely (i) to correct the
certifications by our Principal Executive Officers and Principal Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 due to the
omission of the phrase “and internal control over financial reporting (as
defined in Exchange Rules 13a-15(f) and 15d-15(f))” in the introductory portion
of paragraph 4 of the certifications and the phrase “(the registrant’s fourth
fiscal quarter in the case of an annual report)” in paragraph 4(d) of the
certifications, (ii) to remove the inappropriate inclusion of the phrase “the
audit committee of the board of directors of the registrant’s general partner”
and replace it with the phrase “the audit committee of the registrant’s board of
directors (or persons performing equivalent functions)” in paragraph 5 of the
certifications, and (iii) to replace the phrase “Annual Report” with the word
“report” in paragraphs 1, 2, 3 and 4(a) of the certifications.  This
amendment includes new certifications by our Principal Executive Officers and
Principal Financial Officer pursuant to Sections 302 and 906 of the
Sarbanes-Oxley Act of 2002, filed as Exhibits 31.1, 31.2, 31.3, 32.1, 32.2 and
32.3 hereto.  Each certification was true and correct as of the date
of the filing of the Original 10-K.




Pursuant
to interpretation 246.13 in the Regulation S-K section of the SEC’s “Compliance
& Disclosure Interpretations,” we are also filing full Item 9A disclosures
and our consolidated financial statements as part of this Amendment
(collectively “Other Information”).  Such Other Information was
complete and correct as of the date of the filing of the Original
10-K.





Except as
described above, we have not modified or updated other disclosures contained in
the Original 10-K, including without limitation the Other
Information.  Accordingly, this Amendment, with the exception of the
foregoing, does not reflect events occurring after the date of filing of the
Original 10-K, or modify or update those disclosures affected by subsequent
events.  Consequently, all other information not affected by the
corrections described above is unchanged and reflects the disclosures and other
information made at the date of the filing of the Original 10-K and should be
read in conjunction with our filings with the SEC subsequent to the filing of
the Original 10-K, including amendments to those filings, if any.




1


Item
9A.  Controls and Procedures.





Evaluation
of Disclosure Controls and Procedures





We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in the reports that we file or submit under
the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms, and that such information is accumulated and
communicated to management, including our principal executive officers and
principal financial officer, as appropriate, to allow timely decisions regarding
required disclosures.  See “Management’s Report to Unitholders on
Internal Control Over Financial Reporting” and “Reports of Independent
Registered Public Accounting Firm” on page F-2 and F-3, respectively, of the
consolidated financial statements.





Our general partner’s Chief Executive
Officers and Chief Financial Officer, after evaluating the effectiveness of our
“disclosure controls and procedures” (as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act), as of December 31, 2008, concluded that our
disclosure controls and procedures 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 December 31, 2008 that materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.




2


PART IV





Item 15.  Exhibits
and Financial Statement Schedules.




(a)
            (1)
            Financial
      Statements




See “Index to the Consolidated
Financial Statements” set forth on Page F-1.





(2)
              Financial Statement
      Schedules




All
schedules are omitted because they are not applicable or the required
information is presented in the financial statements or notes
thereto.




(3)
              Exhibits





NUMBER
                              
                              DOCUMENT3.1
                              
                              Certificate
      of Limited Partnership of BreitBurn Energy Partners L.P. (incorporated
      herein by reference to Exhibit 3.1 to Amendment No. 1 to Form S-1 filed on
      July 13, 2006).3.2
                              
                              First
      Amended and Restated Agreement of Limited Partnership of BreitBurn Energy
      Partners L.P. (incorporated herein by reference to Exhibit 3.1 to the
      Current Report on Form 8-K dated October 10, 2006 and filed on October 16,
      2006).3.3
                              
                              Amendment
      No. 1 to the First Amended and Restated Agreement of Limited Partnership
      of BreitBurn Energy Partners L.P. (incorporated herein by reference to
      Exhibit 3.1 to the Current Report on Form 8-K dated June 17, 2008 and
      filed on June 23, 2008).3.4
                              
                              Second
      Amendment and Restated Limited Liability Company Agreement of BreitBurn
      GP, LLC (incorporated herein by reference to Exhibit 3.2 to the Current
      Report on Form 8-K dated June 17, 2008 and filed on June 23,
      2008).4.1
                              
                              Registration
      Rights Agreement, dated as of November 1, 2007, by and among BreitBurn
      Energy Partners L.P. and Quicksilver Resources Inc. (incorporated herein
      by reference to Exhibit 4.2 to the Current Report on Form 8-K dated
      November 1, 2007 and filed on November 6, 2007).4.2
                              
                              Unit
      Purchase Rights Agreement, dated as of December 22, 2008, between
      BreitBurn Energy Partners L.P. and American Stock Transfer & Trust
      Company LLC (incorporated herein by reference to Exhibit 4.1 to the
      Current Report on Form 8-K dated December 22, 2008 and filed on December
      23, 2008).10.1
                              
                              Amended
      and Restated Agreement of Limited Partnership of BreitBurn Energy Partners
      I, L.P. dated May 5, 2003 (incorporated herein by reference to Exhibit
      10.2 to the Current Report on Form 8-K dated May 25, 2007 and filed May
      29, 2007).10.2
                              
                              Contribution,
      Conveyance and Assumption Agreement, dated as of October 10, 2006, by
      and among Pro GP Corp., Pro LP Corp., BreitBurn Energy Corporation,
      BreitBurn Energy Company L.P., BreitBurn Management Company, LLC,
      BreitBurn GP, LLC, BreitBurn Energy Partners L.P., BreitBurn Operating GP,
      LLC and BreitBurn Operating L.P. (incorporated herein by reference to
      Exhibit 10.2 to the Current Report on Form 8-K dated October 10, 2006 and
      filed on October 16, 2006).10.3
                              
                              Administrative
      Services Agreement, dated as of October 10, 2006, by and among
      BreitBurn GP, LLC, BreitBurn Energy Partners L.P., BreitBurn Operating
      L.P. and BreitBurn Management Company, LLC (incorporated herein by
      reference to Exhibit 10.4 to the Current Report on Form 8-K dated October
      10, 2006 and filed on October16,
2006).


3





NUMBER
                                                                      
                                                                      DOCUMENT10.4†
                                                                      
                                                                      BreitBurn
      Energy Partners L.P. 2006 Long-Term Incentive Plan effective as of October
      10, 2006 (incorporated herein by reference to Exhibit 10.5 to Amendment
      No. 3 to Form S-1 for BreitBurn Energy Partners L.P. filed on September
      19, 2006).10.5†
                                                                      
                                                                      BreitBurn
      Energy Company L.P. Unit Appreciation Plan for Officers and Key
      Individuals (incorporated herein by reference to Exhibit 10.6 to Amendment
      No. 3 to Form S-1 for BreitBurn Energy Partners L.P. filed on September
      19, 2006).10.6†
                                                                      
                                                                      BreitBurn
      Energy Company L.P. Unit Appreciation Plan for Employees and Consultants
      (incorporated herein by reference to Exhibit 10.7 to Amendment No. 3 to
      Form S-1 for BreitBurn Energy Partners L.P. filed on September 19,
      2006).10.7†
                                                                      
                                                                      Amendment
      No. 1 to the BreitBurn Energy Company L.P. Unit Appreciation Plan for
      Officers and Key Individuals (incorporated herein by reference to Exhibit
      10.14 to Amendment No. 5 to Form S-1 for BreitBurn Energy Partners L.P.
      filed on October 2, 2006).10.8†
                                                                      
                                                                      Amendment
      to the BreitBurn Energy Company L.P. Long-Term Incentive Plan
      (incorporated herein by reference to Exhibit 10.15 to Amendment No. 5 to
      Form S-1 for BreitBurn Energy Partners L.P. filed on October 2,
      2006).10.9†
                                                                      
                                                                      BreitBurn
      Energy Company L.P. Long Term-Incentive Plan (incorporated herein by
      reference to Exhibit 10.8 to Amendment No. 3 to Form S-1 for BreitBurn
      Energy Partners L.P. filed on September 19, 2006).10.10†
                                                                      
                                                                      Form
      of BreitBurn Energy Partners L.P. 2006 Long-Term Incentive Plan Restricted
      Phantom Units Award Agreement (for Directors) (incorporated herein by
      reference to Exhibit 10.16 to the Annual Report on Form 10-K for the year
      ended December 31, 2006 and filed on April 2, 2007).10.11†
                                                                      
                                                                      Form
      of BreitBurn Energy Partners L.P. 2006 Long-Term Incentive Plan
      Performance Unit-Based Award Agreement (incorporated herein by reference
      to Exhibit 10.17 to the Annual Report on Form 10-K for the year ended
      December 31, 2006 and filed on April 2, 2007).10.12
                                                                      
                                                                      Amended
      and Restated Asset Purchase Agreement, dated as of May 16, 2007, by and
      among BreitBurn Operating L.P. and Calumet Florida, LLC (incorporated
      herein by reference to Exhibit 10.2 to the Current Report on Form 8-K
      dated May 24, 2007 and filed on May 31, 2007).10.13
                                                                      
                                                                      Unit
      Purchase Agreement, dated as of May 16, 2007, by and among BreitBurn
      Energy Partners L.P. and each of the Purchasers set forth therein
      (incorporated herein by reference to Exhibit 10.1 to the Current Report on
      Form 8-K dated May 24, 2007 and filed on May 31, 2007).10.14
                                                                      
                                                                      Unit
      Purchase Agreement, dated as of May 25, 2007, by and among BreitBurn
      Energy Partners L.P. and each of the Purchasers set forth therein
      (incorporated herein by reference to Exhibit 10.3 to the Current Report on
      Form 8-K dated May 25, 2007 and filed on May 29, 2007).10.15
                                                                      
                                                                      ORRI
      Distribution Agreement Limited Partner Interest Purchase and Sale
      Agreement, dated as of May 24, 2007, by and among BreitBurn Operating L.P.
      and TIFD X-III LLC (incorporated herein by reference to Exhibit 10.1 to
      the Current Report on Form 8-K dated May 25, 2007 and filed May 29,
      2007).10.16
                                                                      
                                                                      Contribution
      Agreement, dated as of September 11, 2007, between Quicksilver Resources
      Inc. and BreitBurn Operating L.P. (incorporated herein by reference to
      Exhibit 10.4 to the Current Report on Form 8-K dated November 1, 2007 and
      filed November 6, 2007).10.17
                                                                      
                                                                      Amendment
      to Contribution Agreement, dated effective as of November 1, 2007, between
      Quicksilver Resources Inc. and BreitBurn Operating L.P. (incorporated
      herein by reference to Exhibit 10.5 to the Current Report on Form 8-K
      dated November 1, 2007 and filed November 6, 2007).10.18
                                                                      
                                                                      Amended
      and Restated Unit Purchase Agreement, dated as of October 26, 2007, by and
      among BreitBurn Energy Partners L.P. and each of the Purchasers set forth
      therein (incorporated herein by reference to Exhibit 10.1 to the Current
      Report on Form 8-K dated November 1, 2007 and filed November 6,
      2007).




4




NUMBER
                                                                    
                                                                    DOCUMENT10.19
                                                                    
                                                                    Amended
      and Restated Credit Agreement, dated November 1, 2007, by and among
      BreitBurn Operating L.P., as borrower, BreitBurn Energy Partners L.P., as
      parent guarantor, and Wells Fargo Bank, National Association, as
      administrative agent (incorporated herein by reference to Exhibit 10.3 to
      the Current Report on Form 8-K dated November 1, 2007 and filed November
      6, 2007).10.20†
                                                                    
                                                                    Employment
      Agreement dated December 26, 2007 among BreitBurn Management Company,
      LLC, BreitBurn GP, LLC, Pro GP Corp. and Mark L. Pease (incorporated
      herein by reference to Exhibit 10.1 to the Current Report on Form 8-K
      dated December 26, 2007 and filed December 27, 2007).10.21†
                                                                    
                                                                    First
      Amendment to the BreitBurn Energy Partners L.P. 2006 Long-Term Incentive
      Plan dated December 26, 2007 (incorporated herein by reference to
      Exhibit 10.1 to the Current Report on Form 8-K dated November 5, 2007 and
      filed December 28, 2007).10.22†
                                                                    
                                                                    Form
      of BreitBurn Energy Partners L.P. 2006 Long-Term Incentive Plan Restricted
      Phantom Unit Agreement (Executive Form) (incorporated herein by reference
      to Exhibit 10.1 to the Current Report on Form 8-K dated March 5, 2008 and
      filed March 11, 2008).10.23†
                                                                    
                                                                    Form
      of BreitBurn Energy Partners L.P. 2006 Long-Term Incentive Plan Restricted
      Phantom Unit Agreement (Non-Executive Form) (incorporated herein by
      reference to Exhibit 10.2 to the Current Report on Form 8-K dated March 5,
      2008 and filed March 11, 2008).10.24†
                                                                    
                                                                    Second
      Amended and Restated Employment Agreement dated December 31, 2007 among
      BreitBurn Management Company, LLC, BreitBurn GP, LLC, Pro GP Corp. and
      Halbert Washburn.10.25†
                                                                    
                                                                    Second
      Amended and Restated Employment Agreement dated December 31, 2007 among
      BreitBurn Management Company, LLC, BreitBurn GP, LLC, Pro GP Corp. and
      Randall Breitenbach.10.26†
                                                                    
                                                                    Employment
      Agreement date January 29, 2008 among BreitBurn Management Company, LLC,
      BreitBurn GP, LLC, Pro GP Corp. and Gregory C. Brown.10.27†
                                                                    
                                                                    Form
      of BreitBurn Energy Partners L.P. 2006 Long-Term Incentive Plan Restricted
      Phantom Units Directors’ Award Agreement.10.28
                                                                    
                                                                    Purchase
      Agreement dated June 17, 2008 by and among Pro LP Corporation, Pro GP
      Corporation and BreitBurn Energy Partners L.P. (incorporated herein by
      reference to Exhibit 10.1 to the Current Report on Form 8-K dated June 17,
      2008 and filed on June 23, 2008).10.29
                                                                    
                                                                    Purchase
      Agreement dated June 17, 2008 by and among Pro LP Corporation, Pro GP
      Corporation and BreitBurn Energy Partners L.P. (incorporated herein by
      reference to Exhibit 10.2 to the Current Report on Form 8-K dated June 17,
      2008 and filed on June 23, 2008).10.30
                                                                    
                                                                    Contribution
      Agreement dated June 17, 2008 by and among BreitBurn Management Company
      LLC, BreitBurn Energy Corporation and BreitBurn Energy Partners L.P.
      (incorporated herein by reference to Exhibit 10.3 to the Current Report on
      Form 8-K dated June 17, 2008 and filed on June 23,
  2008).10.31
                                                                    
                                                                    First
      Amendment to Amended and Restated Credit Agreement, Limited Waiver and
      Consent and First Amendment to Security Agreement by and among BreitBurn
      Operating LP, BreitBurn Energy Partners L.P., as Parent Guarantor, its
      subsidiaries as guarantors, the Lenders and Wells Fargo Bank, National
      Association, as administrative agent for the Lenders (incorporated herein
      by reference to Exhibit 10.4 to the Current Report on Form 8-K dated June
      17, 2008 and filed on June 23,
2008).




5





NUMBER
                                          
                                          DOCUMENT10.32
                                          
                                          Amendment
      No. 1 to the Operations and Proceeds Agreement, relating to the Dominguez
      Field and dated October 10, 2006 entered into on June 17, 2008 by and
      between BreitBurn Energy Company L.P. and BreitBurn Operating L.P.
      (incorporated herein by reference to Exhibit 10.6 to the Current Report on
      Form 8-K dated June 17, 2008 and filed on June 23,
  2008).10.33
                                          
                                          Amendment
      No. 1 to the Surface Operating Agreement dated October 10, 2006 entered
      into on June 17, 2008 by and between BreitBurn Energy Company L.P. and its
      predecessor BreitBurn Energy Corporation and BreitBurn Operating L.P.
      (incorporated herein by reference to Exhibit 10.7 to the Current Report on
      Form 8-K dated June 17, 2008 and filed on June 23,
  2008).10.34†
                                          
                                          Employment
      Agreement Form for grant of Convertible Phantom units pursuant and subject
      to the terms and conditions of the Convertible Phantom Unit Agreement and
      the Partnership's 2006 Long-Term Incentive Plan (incorporated herein by
      reference to Exhibit 10.9 to the Quarterly Report on Form 10-Q dated June
      30, 2008 and filed on August 11, 2008).10.35†
                                          
                                          Non-Employment
      Agreement Form for grant of Convertible Phantom units pursuant and subject
      to the terms and conditions of the Convertible Phantom Unit Agreement and
      the Partnership's 2006 Long-Term Incentive Plan (incorporated herein by
      reference to Exhibit 10.10 to the Quarterly Report on Form 10-Q dated June
      30, 2008 and filed on August 11, 2008).10.36†
                                          
                                          Amended
      and Restated Employment Agreement dated August 15, 2008 entered into by
      and between BreitBurn Management Company, LLC, BreitBurn GP, LLC and James
      Jackson (incorporated herein by reference to Exhibit 10.1 to the Current
      Report on Form 8-K dated August 15, 2008 and filed on August 18,
      2008).10.37
                                          
                                          Second
      Amended and Restated Administrative Services Agreement dated August 26,
      2008 entered into by and between BreitBurn Energy Company L.P. and
      BreitBurn Management Company, LLC (incorporated herein by reference to
      Exhibit 10.1 to the Current Report on Form 8-K dated August 26, 2008 and
      filed on September 02, 2008).10.38
                                          
                                          Omnibus
      Agreement, dated August 26, 2008, by and among BreitBurn Energy
      Holdings LLC, BEC (GP) LLC, BreitBurn Energy Company L.P, BreitBurn GP,
      LLC, BreitBurn management Company, LLC and BreitBurn Energy Partners L.P.
      (incorporated herein by reference to Exhibit 10.2 to the Current Report on
      Form 8-K dated August 26, 2008 and filed on September 02,
      2008).14.1
                                          
                                          BreitBurn
      Energy Partners L.P. and BreitBurn GP, LLC Code of Ethics for Chief
      Executive Officers and Senior Officers (as amended and restated on
      February 28, 2007) (incorporated herein by reference to Exhibit 14.1 to
      the Current Report on Form 8-K dated February 28, 2007 and filed on March
      5, 2007).21.1
                                          
                                          List
      of subsidiaries of BreitBurn Energy Partners L.P (incorporated herein by
      reference to Exhibit 21.1 to the Annual Report on Form 10-K for the year
      ended December 31, 2008 and filed on March 2, 2009).23.1*
                                          
                                          Consent
      of PricewaterhouseCoopers LLP23.2*
                                          
                                          Consent
      of Netherland, Sewell & Associates, Inc.23.3*
                                          
                                          Consent
      of Schlumberger Data and Consulting Services31.1*
                                          
                                          Certification
      of Registrant’s Co-Chief Executive Officer pursuant to Rule 13a-14(a) of
      the Securities Exchange Act of 1934 and Section 302 of the Sarbanes-Oxley
      Act of 2002.31.2*
                                          
                                          Certification
      of Registrant’s Co-Chief Executive Officer pursuant to Rule 13a-14(a) of
      the Securities Exchange Act of 1934 and Section 302 of the Sarbanes-Oxley
      Act of 2002.31.3*
                                          
                                          Certification
      of Registrant’s Chief Financial Officer pursuant to Rule 13a-14(a) of the
      Securities Exchange Act of 1934 and Section 302 of the Sarbanes-Oxley Act
      of
2002.


6





NUMBER
                  
                  DOCUMENT32.1**
                  
                  Certification
      of Registrant’s Co-Chief Executive Officer pursuant to Rule 13a-14(b) of
      the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as created
      by Section 906 of the Sarbanes-Oxley Act of 2002.32.2**
                  
                  Certification
      of Registrant’s Co-Chief Executive Officer pursuant to Rule 13a-14(b) of
      the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as created
      by Section 906 of the Sarbanes-Oxley Act of 2002.32.3**
                  
                  Certification
      of Registrant’s Chief Financial Officer pursuant to Rule 13a-14(b) of the
      Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as created by
      Section 906 of the Sarbanes-Oxley Act of
2002.





* Filed
herewith.


**
Furnished herewith.


†
Management contract or compensatory plan or arrangement.


7


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.





BREITBURN
      ENERGY PARTNERS L.P.By:
                BREITBURN
      GP, LLC,its
      General PartnerDated:  March
      17, 2010
                By:
                /s/ Halbert S. WashburnHalbert
      S. WashburnCo-Chief
      Executive OfficerDated:  March
      17, 2010
                By:
                /s/ Randall H.
  BreitenbachRandall
      H. BreitenbachCo-Chief
      Executive Officer




8





BreitBurn
Energy Partners L.P. and Subsidiaries


INDEX
TO THE CONSOLIDATED FINANCIAL STATEMENTS





Management's
      Report to Unitholders on Internal Control over Financial
      Reporting
                F-2Reports
      of Independent Registered Public Accounting Firm
                F-3Consolidated
      Statements of Operations
                F-5Consolidated
      Balance Sheets
                F-6Consolidated
      Statements of Cash Flows
                F-7Consolidated
      Statements of Partners’ Equity
                F-8Notes
      to Consolidated Financial Statements
                F-9




F-1





Management’s Report to
Unitholders on Internal Control Over Financial Reporting





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of
the Securities Exchange Act of 1934, as amended.  Internal control
over financial reporting is a process designed by, or under the supervision of,
the management of BreitBurn Energy Partners L.P., designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles. A partnership's internal control over financial
reporting includes those policies and procedures that (i) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the partnership; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the partnership are
being made only in accordance with authorizations of management and directors of
the partnership; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
partnership's assets that could have a material effect on the financial
statements.





Internal
control over financial reporting, no matter how well designed, has inherent
limitations. Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation to the effectiveness of future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may
deteriorate.





Management
assessed the effectiveness of our internal control over financial reporting as
of December 31, 2008 using the criteria established in “Internal Control – Integrated
Framework” issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Based on this assessment, management has concluded
that, as of December 31, 2008, we maintained effective internal control over
financial reporting.





The
effectiveness of our internal control over financial reporting as of December
31, 2008 has been audited by PricewaterhouseCoopers LLP, an independent
registered public accounting firm, as stated in their report which appears on
page F-3.





/s/ Halbert S. Washburn
                
                /s/ Randall H.
  BreitenbachHalbert
      S. Washburn
                
                Randall
      H. BreitenbachCo-Chief
      Executive Officer of BreitBurn GP, LLC
                
                Co-Chief
      Executive Officer of BreitBurn GP, LLC/s/ James G. JacksonJames
      G. JacksonChief
      Financial Officer of BreitBurn GP, LLC




F-2


Report
of Independent Registered Public Accounting Firm





To
the Board of Directors of BreitBurn GP, LLC and Unitholders of BreitBurn Energy
Partners L.P.





In our
opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, partners’ equity and cash flows present
fairly, in all material respects, the financial position of BreitBurn Energy
Partners L.P. and its subsidiaries (“successor”) (“the Partnership”) at December
31, 2008 and 2007, and the results of their operations and their cash flows for
the years ended  December 31, 2008 and 2007 and the period from
October 10, 2006 to December 31, 2006 in conformity with accounting principles
generally accepted in the United States of America.  Also in our opinion,
the Partnership maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2008, based on criteria established
in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO).  The Partnership's management is
responsible for these financial statements, for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying
Management's Report to Unitholders on Internal Control Over Financial
Reporting.  Our responsibility is to express opinions on these financial
statements and on the Partnership's internal control over financial reporting
based on our audits (which were integrated audits in 2008 and 2007).  We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects.  Our audits of the financial statements included examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation.  Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk.  Our audits also included performing such other
procedures as we considered necessary in the circumstances.  We
believe that our audits provide a reasonable basis for our
opinions.




As
discussed in Note 14 to the financial statements, the Partnership changed the
manner in which it accounts for recurring fair value measurements of financial
instruments in 2008.




A
partnership’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles.  A partnership’s
internal control over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of
the partnership; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the partnership are being made only in accordance with
authorizations of management and directors of the partnership; and
(iii) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the partnership’s assets
that could have a material effect on the financial statements.





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




/s/ PricewaterhouseCoopers
    LLPPricewaterhouseCoopers
      LLPLos
      Angeles, CaliforniaMarch
      2, 2009




F-3


Report
of Independent Registered Public Accounting Firm





To
the Board of Directors of BreitBurn GP, LLC and Unitholders of BreitBurn Energy
Partners L.P.





In our
opinion, the accompanying consolidated statements of operations, partners’
equity and cash flows present fairly, in all material respects, the results of
operations and cash flows of BreitBurn Energy Company L.P. and its subsidiaries
(“predecessor”) (the “Partnership”) for the period from January 1, 2006 to
October 9, 2006 in conformity with accounting principles generally accepted in
the United States of America.  These financial statements are the
responsibility of the Partnership’s management.  Our responsibility is to
express an opinion on these financial statements based on our audit.  We
conducted our audit of these statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States).  Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement.  An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation.  We believe that our audit provides a
reasonable basis for our opinion.




As
discussed in note 15 to the consolidated financial statements, the Partnership
changed the manner in which it accounts for stock based compensation as of
January 1, 2006.




/s/ PricewaterhouseCoopers
    LLPPricewaterhouseCoopers
      LLPLos
      Angeles, CaliforniaApril
      2, 2007




F-4





BreitBurn
Energy Partners L.P. and Subsidiaries


Consolidated
Statements of Operations





Successor
                        
                        
                        PredecessorYear Ended
                        
                        
                        October 10 to
                        
                        
                        January 1 toDecember 31,
                        
                        
                        December 31,
                        
                        
                        October 9,Thousands of dollars, except per unit amounts
                        
                        2008
                        
                        
                        2007
                        
                        
                        2006(1)
                        
                        
                        2006Revenues
      and other income items:Oil,
      natural gas and natural gas liquid sales
                        
                        $
                        467,381
                        
                        
                        $
                        184,372
                        
                        
                        $
                        18,452
                        
                        
                        $
                        110,329Gains
      (losses) on commodity derivative instruments, net (note
14)
                        
                        
                        332,102
                        
                        
                        
                        (110,418
                        )
                        
                        
                        882
                        
                        
                        
                        2,291Other
      revenue, net (note 10)
                        
                        
                        2,920
                        
                        
                        
                        1,037
                        
                        
                        
                        170
                        
                        
                        
                        923Total
      revenues and other income items
                        
                        
                        802,403
                        
                        
                        
                        74,991
                        
                        
                        
                        19,504
                        
                        
                        
                        113,543Operating
      costs and expenses:Operating
      costs
                        
                        
                        149,681
                        
                        
                        
                        70,329
                        
                        
                        
                        7,159
                        
                        
                        
                        34,893Depletion,
      depreciation and amortization (note 5)
                        
                        
                        179,933
                        
                        
                        
                        29,422
                        
                        
                        
                        2,506
                        
                        
                        
                        10,903General
      and administrative expenses
                        
                        
                        43,435
                        
                        
                        
                        30,588
                        
                        
                        
                        7,938
                        
                        
                        
                        18,849Total
      operating costs and expenses
                        
                        
                        373,049
                        
                        
                        
                        130,339
                        
                        
                        
                        17,603
                        
                        
                        
                        64,645Operating
      income (loss)
                        
                        
                        429,354
                        
                        
                        
                        (55,348
                        )
                        
                        
                        1,901
                        
                        
                        
                        48,898Interest
      and other financing costs, net
                        
                        
                        29,147
                        
                        
                        
                        6,258
                        
                        
                        
                        72
                        
                        
                        
                        2,651Loss
      on interest rate swaps (note 14)
                        
                        
                        20,035
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Other
      (income) expenses, net
                        
                        
                        (191
                        )
                        
                        
                        (111
                        )
                        
                        
                        (2
                        )
                        
                        
                        (275
                        )Income
      (loss) before taxes and minority interest
                        
                        
                        380,363
                        
                        
                        
                        (61,495
                        )
                        
                        
                        1,831
                        
                        
                        
                        46,522Income
      tax expense (benefit) (note 6)
                        
                        
                        1,939
                        
                        
                        
                        (1,229
                        )
                        
                        
                        (40
                        )
                        
                        
                        90Minority
      interest (note 20)
                        
                        
                        188
                        
                        
                        
                        91
                        
                        
                        
                        -
                        
                        
                        
                        (1,039
                        )Net
      income (loss) before change in accounting principle
                        
                        
                        378,236
                        
                        
                        
                        (60,357
                        )
                        
                        
                        1,871
                        
                        
                        
                        47,471Cumulative
      effect of change in accounting principle (note 15)
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        577Net
      income (loss)
                        
                        
                        378,236
                        
                        
                        
                        (60,357
                        )
                        
                        
                        1,871
                        
                        
                        $
                        48,048General
      Partner's interest in net income (loss)
                        
                        
                        (2,019
                        )
                        
                        
                        (672
                        )
                        
                        
                        37Limited
      Partners' interest in net income (loss)
                        
                        $
                        380,255
                        
                        
                        $
                        (59,685
                        )
                        
                        $
                        1,834Basic
      net income (loss) per unit (note 2)
                        
                        $
                        6.42
                        
                        
                        $
                        (1.83
                        )
                        
                        $
                        0.08
                        
                        
                        $
                        0.27Diluted
      net income (loss) per unit (note 2)
                        
                        $
                        6.28
                        
                        
                        $
                        (1.83
                        )
                        
                        $
                        0.08
                        
                        
                        $
                        0.27





(1)  Reflects
activity since closing of initial public offering on October 10,
2006.  There was no activity from inception on March 23, 2006 to
October 10, 2006.





The
accompanying notes are an integral part of these consolidated financial
statements.


F-5





BreitBurn
Energy Partners L.P. and Subsidiaries


Consolidated
Balance Sheets





December 31,
                    
                    
                    December 31,Thousands of dollars, except unit amounts
                    
                    2008
                    
                    
                    2007ASSETSCurrent
      assets:Cash
                    
                    $
                    2,546
                    
                    
                    $
                    5,929Accounts
      receivable, net (note 2)
                    
                    
                    47,221
                    
                    
                    
                    44,202Derivative
      instruments (note 14)
                    
                    
                    76,224
                    
                    
                    
                    948Related
      party receivables (note 7)
                    
                    
                    5,084
                    
                    
                    
                    35,568Inventory
      (note 8)
                    
                    
                    1,250
                    
                    
                    
                    5,704Prepaid
      expenses
                    
                    
                    5,300
                    
                    
                    
                    2,083Intangibles
      (note 9)
                    
                    
                    2,771
                    
                    
                    
                    3,169Other
      current assets
                    
                    
                    170
                    
                    
                    
                    160Total
      current assets
                    
                    
                    140,566
                    
                    
                    
                    97,763Equity investments (note
10)
                    
                    
                    9,452
                    
                    
                    
                    15,645Property,
      plant and equipmentOil
      and gas properties (note 4)
                    
                    
                    2,057,531
                    
                    
                    
                    1,910,941Non-oil
      and gas assets (note 4)
                    
                    
                    7,806
                    
                    
                    
                    5682,065,337
                    
                    
                    
                    1,911,509Accumulated
      depletion and depreciation (note 5)
                    
                    
                    (224,996
                    )
                    
                    
                    (47,022
                    )Net
      property, plant and equipment
                    
                    
                    1,840,341
                    
                    
                    
                    1,864,487Other
      long-term assetsIntangibles
      (note 9)
                    
                    
                    495
                    
                    
                    
                    3,228Derivative
      instruments (note 14)
                    
                    
                    219,003
                    
                    
                    
                    -Other
      long-term assets
                    
                    
                    6,977
                    
                    
                    
                    5,433Total
      assets
                    
                    $
                    2,216,834
                    
                    
                    $
                    1,986,556LIABILITIES
      AND PARTNERS' EQUITYCurrent
      liabilities:Accounts
      payable
                    
                    $
                    28,302
                    
                    
                    $
                    13,910Book
      overdraft
                    
                    
                    9,871
                    
                    
                    
                    1,920Derivative
      instruments (note 14)
                    
                    
                    10,192
                    
                    
                    
                    35,172Related
      party payables (note 7)
                    
                    
                    -
                    
                    
                    
                    10,137Revenue
      distributions payable
                    
                    
                    16,162
                    
                    
                    
                    21,266Derivative
      settlements payable
                    
                    
                    50
                    
                    
                    
                    2,775Salaries
      and wages payable
                    
                    
                    6,249
                    
                    
                    
                    28Accrued
      liabilities
                    
                    
                    9,164
                    
                    
                    
                    5,476Total
      current liabilities
                    
                    
                    79,990
                    
                    
                    
                    90,684Long-term
      debt (note 11)
                    
                    
                    736,000
                    
                    
                    
                    370,400Long-term
      related party payables (note 7)
                    
                    
                    -
                    
                    
                    
                    1,532Deferred
      income taxes (note 6)
                    
                    
                    4,282
                    
                    
                    
                    3,074Asset
      retirement obligation (note 12)
                    
                    
                    30,086
                    
                    
                    
                    27,819Derivative
      instruments (note 14)
                    
                    
                    10,058
                    
                    
                    
                    65,695Other
      long-term liabilities
                    
                    
                    2,987
                    
                    
                    
                    2,000Total  liabilities
                    
                    
                    863,403
                    
                    
                    
                    561,204Minority
      interest (note 20)
                    
                    
                    539
                    
                    
                    
                    544Partners'
      equity (note 13)Limited
      partners' interest (a)
                    
                    
                    1,352,892
                    
                    
                    
                    1,423,418General
      partner interest
                    
                    
                    -
                    
                    
                    
                    1,390Total
      liabilities and partners' equity
                    
                    $
                    2,216,834
                    
                    
                    $
                    1,986,556(a)
      Limited partner units outstanding
                    
                    
                    52,635,634
                    
                    
                    
                    67,020,641





The
accompanying notes are an integral part of these consolidated financial
statements.


F-6





BreitBurn Energy Partners L.P. and
Subsidiaries


Consolidated
Statements of Cash Flows





Successor
                      
                      
                      PredecessorYear Ended
                      
                      
                      October 10 to
                      
                      
                      January 1 toDecember 31,
                      
                      
                      December 31,
                      
                      
                      October 9,Thousands of dollars
                      
                      2008
                      
                      
                      2007
                      
                      
                      2006(1)
                      
                      
                      2006Cash
      flows from operating activitiesNet
      income (loss)
                      
                      $
                      378,236
                      
                      
                      $
                      (60,357
                      )
                      
                      $
                      1,871
                      
                      
                      $
                      48,048Adjustments
      to reconcile net income (loss) to cash flow from operating
      activities:Depletion,
      depreciation and amortization
                      
                      
                      179,933
                      
                      
                      
                      29,422
                      
                      
                      
                      2,506
                      
                      
                      
                      10,903Unit-based
      compensation expense
                      
                      
                      6,907
                      
                      
                      
                      12,999
                      
                      
                      
                      4,490
                      
                      
                      
                      7,979Unrealized
      (gain) loss on derivative instruments
                      
                      
                      (370,734
                      )
                      
                      
                      103,862
                      
                      
                      
                      1,299
                      
                      
                      
                      (5,983
                      )Distributions
      greater (less) than income from equity affiliates
                      
                      
                      1,198
                      
                      
                      
                      (28
                      )
                      
                      
                      32
                      
                      
                      
                      48Deferred
      income tax
                      
                      
                      1,207
                      
                      
                      
                      (1,229
                      )
                      
                      
                      (40
                      )
                      
                      
                      90Minority
      interest
                      
                      
                      188
                      
                      
                      
                      91
                      
                      
                      
                      -
                      
                      
                      
                      (1,039
                      )Cumulative
      effect of change in accounting principle
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (577
                      )Amortization
      of intangibles
                      
                      
                      3,131
                      
                      
                      
                      2,174
                      
                      
                      
                      -
                      
                      
                      
                      -Other
                      
                      
                      2,643
                      
                      
                      
                      2,182
                      
                      
                      
                      51
                      
                      
                      
                      950Changes
      in net assets and liablities:Accounts
      receivable and other assets
                      
                      
                      258
                      
                      
                      
                      (24,713
                      )
                      
                      
                      (5,873
                      )
                      
                      
                      (5,569
                      )Inventory
                      
                      
                      4,454
                      
                      
                      
                      4,829
                      
                      
                      
                      -
                      
                      
                      
                      -Net
      change in related party receivables and payables
                      
                      
                      32,688
                      
                      
                      
                      (39,202
                      )
                      
                      
                      (9,017
                      )
                      
                      
                      (3,694
                      )Accounts
      payable and other liabilities
                      
                      
                      (13,413
                      )
                      
                      
                      30,072
                      
                      
                      
                      3,425
                      
                      
                      
                      (3,576
                      )Net
      cash provided (used) by operating activities
                      
                      
                      226,696
                      
                      
                      
                      60,102
                      
                      
                      
                      (1,256
                      )
                      
                      
                      47,580Cash
      flows from investing activities(2)Capital
      expenditures
                      
                      
                      (131,082
                      )
                      
                      
                      (23,549
                      )
                      
                      
                      (1,248
                      )
                      
                      
                      (36,941
                      )Property
      acquisitions
                      
                      
                      (9,957
                      )
                      
                      
                      (996,561
                      )
                      
                      
                      -
                      
                      
                      
                      (79
                      )Proceeds
      from sale of assets, net
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      1,752Net
      cash used by investing activities
                      
                      
                      (141,039
                      )
                      
                      
                      (1,020,110
                      )
                      
                      
                      (1,248
                      )
                      
                      
                      (35,268
                      )Cash
      flows from financing activitiesIssuance
      of common units, net of discount
                      
                      
                      -
                      
                      
                      
                      663,338
                      
                      
                      
                      118,715
                      
                      
                      
                      -Purchase
      of common units
                      
                      
                      (336,216
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Redemptions
      of common units from predecessors
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (15,485
                      )
                      
                      
                      -Distributions
      to predecessor members concurrent with initialpublic
      offering
                      
                      
                      -
                      
                      
                      
                      581
                      
                      
                      
                      (63,230
                      )
                      
                      
                      -Distributions(3)
                      
                      
                      (121,349
                      )
                      
                      
                      (60,497
                      )
                      
                      
                      -
                      
                      
                      
                      (36,357
                      )Proceeds
      from the issuance of long-term debt
                      
                      
                      803,002
                      
                      
                      
                      574,700
                      
                      
                      
                      5,500
                      
                      
                      
                      86,700Repayments
      of long-term debt
                      
                      
                      (437,402
                      )
                      
                      
                      (205,800
                      )
                      
                      
                      (40,500
                      )
                      
                      
                      (67,200
                      )Book
      overdraft
                      
                      
                      7,951
                      
                      
                      
                      (116
                      )
                      
                      
                      2,036
                      
                      
                      
                      3,610Initial
      public offering costs
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (4,055
                      )
                      
                      
                      (2,845
                      )Long-term
      debt issuance costs
                      
                      
                      (5,026
                      )
                      
                      
                      (6,362
                      )
                      
                      
                      (400
                      )
                      
                      
                      -Cash
      contributed by minority interest
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      2,399Net
      cash provided (used) by financing activities
                      
                      
                      (89,040
                      )
                      
                      
                      965,844
                      
                      
                      
                      2,581
                      
                      
                      
                      (13,693
                      )Increase
      (decrease) in cash
                      
                      
                      (3,383
                      )
                      
                      
                      5,836
                      
                      
                      
                      77
                      
                      
                      
                      (1,381
                      )Cash
      beginning of period
                      
                      
                      5,929
                      
                      
                      
                      93
                      
                      
                      
                      16
                      
                      
                      
                      2,740Cash
      end of period
                      
                      $
                      2,546
                      
                      
                      $
                      5,929
                      
                      
                      $
                      93
                      
                      
                      $
                      1,359





(1)  Reflects
activity since closing of initial public offering.  There was no
activity from inception March 23, 2006 to October 10th, 2006.


(2)
Non-cash investing activity in 2007 was $700 million, reflecting the issuance of
21.348 million Common Units for the Quicksilver acquisition.


(3)
Includes distributions on equivalent units of $2.3 million





The
accompanying notes are an integral part of these consolidated financial
statements.


F-7





BreitBurn
Energy Partners L.P. and Subsidiaries


Consolidated
Statements of Partners' Equity





For
      the period from October 10, 2006 toDecember 31, 2008Thousands of dollars
                      
                      Limited
                        Partners
                      
                      
                      General
                        Partner
                      
                      
                      TotalBalance,
      October 10, 2006
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -Contributions
      (a)
                      
                      
                      136,035
                      
                      
                      
                      2,776
                      
                      
                      
                      138,811Initial
      public offering investment (b)
                      
                      
                      99,175
                      
                      
                      
                      -
                      
                      
                      
                      99,175Distributions
      to predecessor members concurrent withinitial
      public offering (c)
                      
                      
                      (62,649
                      )
                      
                      
                      -
                      
                      
                      
                      (62,649
                      )Net
      income
                      
                      
                      1,834
                      
                      
                      
                      37
                      
                      
                      
                      1,871Balance,
      December 31, 2006
                      
                      $
                      174,395
                      
                      
                      $
                      2,813
                      
                      
                      $
                      177,208Issuance
      of units (d)
                      
                      
                      700,000
                      
                      
                      
                      -
                      
                      
                      
                      700,000Private
      offering investment (e)
                      
                      
                      663,338
                      
                      
                      
                      -
                      
                      
                      
                      663,338Distributions
                      
                      
                      (59,746
                      )
                      
                      
                      (751
                      )
                      
                      
                      (60,497
                      )Unit-based
      compensation
                      
                      
                      5,133
                      
                      
                      
                      -
                      
                      
                      
                      5,133Net
      loss
                      
                      
                      (59,685
                      )
                      
                      
                      (672
                      )
                      
                      
                      (60,357
                      )Other
                      
                      
                      (17
                      )
                      
                      
                      -
                      
                      
                      
                      (17
                      )Balance,
      December 31, 2007
                      
                      $
                      1,423,418
                      
                      
                      $
                      1,390
                      
                      
                      $
                      1,424,808Redemtion
      of common units from predecessors (f)
                      
                      
                      (336,216
                      )
                      
                      
                      -
                      
                      
                      
                      (336,216
                      )Distributions
                      
                      
                      (118,580
                      )
                      
                      
                      (427
                      )
                      
                      
                      (119,007
                      )Distributions
      paid on unissued units under incentive plans
                      
                      
                      (2,335
                      )
                      
                      
                      (7
                      )
                      
                      
                      (2,342
                      )Unit-based
      compensation
                      
                      
                      7,383
                      
                      
                      
                      -
                      
                      
                      
                      7,383Net
      income (loss) (g)
                      
                      
                      380,255
                      
                      
                      
                      (2,019
                      )
                      
                      
                      378,236Contribution
      of general partner interest to the partnership
                      
                      
                      (1,063
                      )
                      
                      
                      1,063
                      
                      
                      
                      -Other
                      
                      
                      30
                      
                      
                      
                      -
                      
                      
                      
                      30Balance,
      December 31, 2008
                      
                      $
                      1,352,892
                      
                      
                      $
                      -
                      
                      
                      $
                      1,352,892





(a)  Represents
book value contributions from predecessor.


(b)  Net
of underwriting discount and initial public offering costs.


(c)  Includes
receivable due from sponsors of $581.


(d)
Reflects the issuance of 21.348 million Common Units for the Quicksilver
acquisition.


(e)
Reflects the issuance of 23.697 million Common Units in three private
placements.


(f)
Reflects the purchase of 14.405 million Common Units from subsidiaries of
Provident.


(g)
General partner interests were purchased as of June 17, 2008.





PredecessorFor the period from January 1, 2006 to October 9,
      2006Thousands of dollars
                  
                  Pro LP
                    Corp
                  
                  
                  Pro GP
                    Corp
                  
                  
                  Breitburn
                    S Corp
                  
                  
                  TotalBalance,
      January 1, 2006
                  
                  $
                  230,352
                  
                  
                  $
                  960
                  
                  
                  $
                  8,713
                  
                  
                  $
                  240,025Distributions
      paid or accrued
                  
                  
                  (34,628
                  )
                  
                  
                  (146
                  )
                  
                  
                  (1,619
                  )
                  
                  
                  (36,393
                  )Net
      income
                  
                  
                  45,718
                  
                  
                  
                  192
                  
                  
                  
                  2,138
                  
                  
                  
                  48,048Balance,
      October 9, 2006
                  
                  $
                  241,442
                  
                  
                  $
                  1,006
                  
                  
                  $
                  9,232
                  
                  
                  $
                  251,680





The
accompanying notes are an integral part of these consolidated financial
statements.


F-8


Notes
to Consolidated Financial Statements





Note
1.  Organization and Operations





BreitBurn
Energy Partners L.P.





The
Partnership is a Delaware limited partnership formed on March 23,
2006.  In October 2006, we completed an initial public offering of
6,000,000 Common Units and completed the sale of an additional 900,000 Common
Units to cover over-allotments in the initial public offering at $18.50 per
unit, or $17.205 per unit, after deducting the underwriting discount. On May 24,
2007, we sold 4,062,500 Common Units in a private placement at $32.00 per unit,
resulting in proceeds of approximately $130 million.  The net proceeds
of this private placement were used to acquire certain interests in oil leases
and related assets located in Florida from Calumet Florida L.L.C. and to
reduce indebtedness under our credit facility. On May 25, 2007, we sold
2,967,744 Common Units in a private placement at $31.00 per unit, resulting in
proceeds of approximately $92 million.  The net proceeds of this
private placement were used to acquire a 99 percent limited partner interest in
BreitBurn Energy Partners I, L.P. (“BEPI”) from TIFD X-III LLC which owned
interests in the Sawtelle and East Coyote oil fields located in California, and
to terminate existing hedges related to future production from
BEPI.  On November 1, 2007, we sold 16,666,667 Common Units in a
private placement at $27.00 per unit, resulting in proceeds of approximately
$450 million.  The net proceeds from this private placement were used
to fund a portion of the cash consideration for our acquisition from Quicksilver
of properties located in Michigan, Indiana and Kentucky (the “Quicksilver
Acquisition”).  Also on November 1, 2007, we issued 21,347,972 Common
Units to Quicksilver as partial consideration for the Quicksilver Acquisition as
a private placement.





Our
general partner is BreitBurn GP, a Delaware limited liability company, also
formed on March 23, 2006.  The board of directors of our General
Partner has sole responsibility for conducting our business and managing our
operations. We conduct our operations through a wholly owned subsidiary, BOLP
and BOLP’s general partner BOGP.  We own all of the ownership
interests in BOLP and BOGP.





Our
wholly owned subsidiary BreitBurn Management manages our assets and performs
other administrative services for us such as accounting, corporate development,
finance, land administration, legal and engineering.  See Note 7 for
information regarding our relationship with BreitBurn Management.





On June
17, 2008, we purchased 14,404,962 Common Units from subsidiaries of Provident at
$23.26 per unit, for a purchase price of approximately $335 million (the “Common
Unit Purchase”). These units have been cancelled and are no longer
outstanding.  This purchase was accounted for as a repurchase of
issued Common Units and a cancellation of those Common Units. It increased debt
by $336.2 million and decreased equity by $336.2 million, including $1.2 million
in capitalized transaction costs.





On June
17, 2008, we also purchased Provident’s 95.55 percent limited liability company
interest in BreitBurn Management, which owned the General Partner, for a
purchase price of approximately $10 million (the “BreitBurn Management
Purchase”).  See Note 4 for the purchase price allocation for this
transaction.  Also on June 17, 2008, we entered into a contribution
agreement (the “Contribution Agreement”) with the General Partner, BreitBurn
Management and BreitBurn Corporation, which is wholly owned by the Co-Chief
Executive Officers of the General Partner, Halbert S. Washburn and Randall H.
Breitenbach, pursuant to which BreitBurn Corporation contributed its 4.45
percent limited liability company interest in BreitBurn Management to us in
exchange for 19,955 Common Units, the economic value of which was equivalent to
the value of their combined 4.45 percent interest in BreitBurn Management, and
BreitBurn Management contributed its 100 percent limited liability company
interest in the General Partner to us. On the same date, we entered into
Amendment No. 1 to the First Amended and Restated Agreement of Limited
Partnership of the Partnership, pursuant to which the economic portion of the
General Partner’s 0.66473 percent general partner interest in us was eliminated
and our limited partners holding Common Units were given a right to nominate and
vote in the election of directors to the Board of Directors of the General
Partner.  As a result of these transactions (collectively, the
“Purchase, Contribution and Partnership Transactions”), the General Partner and
BreitBurn Management became our wholly owned subsidiaries.




F-9


On June
17, 2008, in connection with the Purchase, Contribution and Partnership
Transactions, we and our wholly owned subsidiaries entered into the First
Amendment to Amended and Restated Credit Agreement, Limited Waiver and Consent
and First Amendment to Security Agreement (“Amendment No. 1 to the Credit
Agreement”), with Wells Fargo Bank, National Association, as administrative
agent. Amendment No. 1 to the Credit Agreement increased the borrowing base
available under the Amended and Restated Credit Agreement dated November 1, 2007
from $750 million to $900 million.  We used borrowings under Amendment
No. 1 to the Credit Agreement to finance the Common Unit Purchase and the
BreitBurn Management Purchase.





On June
17, 2008, in connection with the Purchase, Contribution and Partnership
Transactions, the Omnibus Agreement, dated October 10, 2006, among us, the
General Partner, Provident, Pro GP and BEC was terminated in all
respects.





As of
December 31, 2008, the public unitholders, the institutional investors in our
private placements and Quicksilver owned 98.69 percent of the Common Units.
BreitBurn Corporation owned 690,751 Common Units, representing a 1.31 percent
limited partner interest. We own 100 percent of the General Partner, BreitBurn
Management and BOLP.





On August
26, 2008, members of our senior management, in their individual capacities,
together with Metalmark Capital Partners (“Metalmark”), Greenhill Capital
Partners (“Greenhill”) and a third-party institutional investor, completed the
acquisition of BEC, our Predecessor.  This transaction included the
acquisition of a 96.02 percent indirect interest in BEC, previously owned by
Provident, and the remaining indirect interests in BEC, previously owned by
Randall H. Breitenbach, Halbert S. Washburn and other members of the
our senior management.  BEC was a separate U.S. subsidiary of
Provident and was our Predecessor.





In
connection with the acquisition of Provident’s ownership in BEC by members of
senior management, Metalmark, Greenhill and a third party institutional
investor, BreitBurn Management has entered into a five-year Administrative
Services Agreement to manage BEC's properties. In addition, we have entered into
an Omnibus Agreement with BEC detailing rights with respect to business
opportunities and providing us with a right of first offer with respect to the
sale of assets by BEC.





2.  Summary
of Significant Accounting Policies





Principles
of consolidation





The
consolidated financial statements include our accounts and the accounts of our
wholly owned subsidiaries and our predecessor.  Investments in
affiliated companies with a 20 percent or greater ownership interest, and in
which we do not have control, are accounted for on the equity
basis.  Investments in affiliated companies with less than a 20
percent ownership interest, and in which we do not have control, are accounted
for on the cost basis.  Investments in which we own greater than 50
percent interest are consolidated.  Investments in which we own less
than a 50 percent interest but are deemed to have control or where we have a
variable interest in an entity where we will absorb a majority of the entity’s
expected losses or receive a majority of the entity’s expected residual returns
or both, however, are consolidated.  The effects of all intercompany
transactions have been eliminated.





Use
of estimates





The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period.  Actual results could differ from those
estimates.  The financial statements are based on a number of
significant estimates including oil and gas reserve quantities, which are the
basis for the calculation of depletion, depreciation, amortization, asset
retirement obligations and impairment of oil and gas properties.





We
account for business combinations using the purchase method, in accordance with
SFAS No. 141 Accounting for
Business Combinations.  We use estimates to record the assets
and liabilities acquired.  All purchase price allocations are
finalized within one year from the acquisition date.




F-10


Basis
of Presentation





Our
financial statements are prepared in conformity with U.S. generally accepted
accounting principles. Certain items included in the prior year financial
statements have been reclassified to conform to the 2008
presentation.





Business
segment information





SFAS No.
131, Disclosures about
Segments of an Enterprise and Related Information, establishes standards
for reporting information about operating segments.  Segment reporting
is not applicable because our oil and gas operating areas have similar economic
characteristics and meet the criteria for aggregation as defined in SFAS No.
131.  We acquire, exploit, develop and explore for and produce oil and
natural gas in the United States.  Corporate management administers
all properties as a whole rather than as discrete operating
segments.  Operational data is tracked by area; however, financial
performance is measured as a single enterprise and not on an area-by-area
basis.  Allocation of capital resources is employed on a
project-by-project basis across our entire asset base to maximize profitability
without regard to individual areas.





Revenue
recognition





Revenues
associated with sales of our crude oil and natural gas are recognized when title
passes from us to our customer.  Revenues from properties in which we
have an interest with other partners are recognized on the basis of our working
interest (‘‘entitlement’’ method of accounting).  We generally market
most of our natural gas production from our operated properties and pay our
partners for their working interest shares of natural gas production
sold.  As a result, we have no material natural gas producer imbalance
positions.





Cash
and cash equivalents





We
consider all investments with original maturities of three months or less to be
cash equivalents.  At December 31, 2008 and 2007 we had no such
investments.





Accounts
Receivable





Our accounts receivable are primarily
from purchasers of crude oil and natural gas and counterparties to our financial
instruments.  Crude oil receivables are generally collected within 30
days after the end of the month.  Natural gas receivables are
generally collected within 60 days after the end of the month.  We
review all outstanding accounts receivable balances and record a reserve for
amounts that we expect will not be fully recovered.  Actual balances
are not applied against the reserve until substantially all collection efforts
have been exhausted.  During 2008 we terminated our crude oil
derivative instruments with Lehman Brothers due to their bankruptcy, and at
December 31, 2008, we had an allowance of $4.6 million related to these
contracts.  As of December 31, 2007, we did not carry an allowance for
doubtful accounts receivable.





Inventory





Oil
inventories are carried at the lower of cost to produce or market
price.  We match production expenses with crude oil
sales.  Production expenses associated with unsold crude oil inventory
are recorded as inventory.





Investments
in Equity Affiliates





Income
from equity affiliates is included as a component of operating income, as the
operations of these affiliates are associated with the processing and
transportation of our natural gas production.





Property,
plant and equipment





Oil
and gas properties





We follow
the successful efforts method of accounting.  Lease acquisition and
development costs (tangible and intangible) incurred, including internal
acquisition costs, relating to proved oil and gas properties are
capitalized.  Delay and surface rentals are charged to expense as
incurred.  Dry hole costs incurred on exploratory wells are
expensed.  Dry hole costs associated with developing proved fields are
capitalized.  Geological and geophysical costs related to exploratory
operations are expensed as incurred.


F-11




Upon sale
or retirement of proved properties, the cost thereof and the accumulated
depletion, depreciation and amortization (“DD&A”) are removed from the
accounts and any gain or loss is recognized in the statement of
operations.  Maintenance and repairs are charged to operating
expenses.  DD&A of proved oil and gas properties, including the
estimated cost of future abandonment and restoration of well sites and
associated facilities, are computed on a property-by-property basis and
recognized using the units-of-production method net of any anticipated proceeds
from equipment salvage and sale of surface rights.  Other gathering
and processing facilities are recorded at cost and are depreciated using
straight line, generally over 20 years.





Non-oil
and gas assets





Buildings
and non-oil and gas assets are recorded at cost and depreciated using the
straight-line method over their estimated useful lives, which range from 3 to 30
years.





Oil
and natural gas reserve quantities





Reserves
and their relation to estimated future net cash flows impact our depletion and
impairment calculations.  As a result, adjustments to depletion are
made concurrently with changes to reserve estimates.  We disclose
reserve estimates, and the projected cash flows derived from these reserve
estimates, in accordance with SEC guidelines.  The independent
engineering firms adhere to the SEC definitions when preparing their reserve
reports.





Asset
retirement obligations





We have
significant obligations to plug and abandon oil and natural gas wells and
related equipment at the end of oil and natural gas production
operations.  The computation of our asset retirement obligations
(“ARO”) is prepared in accordance with Statement of Financial Accounting
Standards (‘‘SFAS’’) No. 143, Accounting for Asset Retirement
Obligations.  This accounting standard applies to the fair
value of a liability for an asset retirement obligation that is recorded when
there is a legal obligation associated with the retirement of a tangible
long-lived asset and the liability can be reasonably estimated.  Over
time, changes in the present value of the liability are accreted and
expensed.  The capitalized asset costs are depreciated over the useful
lives of the corresponding asset.  Recognized liability amounts are
based upon future retirement cost estimates and incorporate many assumptions
such as: (1) expected economic recoveries of crude oil and natural gas, (2) time
to abandonment, (3) future inflation rates and (4) the risk free rate of
interest adjusted for our credit costs.  Future revisions to ARO
estimates will impact the present value of existing ARO liabilities and
corresponding adjustments will be made to the capitalized asset retirement costs
balance.





Impairment
of assets





Long-lived
assets with recorded values that are not expected to be recovered through future
cash flows are written-down to estimated fair value in accordance with
SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived
Assets,” as amended.  Under SFAS 144, a long-lived asset is
tested for impairment when events or circumstances indicate that its carrying
value may not be recoverable.  The carrying value of a long-lived
asset is not recoverable if it exceeds the sum of the undiscounted cash flows
expected to result from the use and eventual disposition of the
asset.  If the carrying value exceeds the sum of the undiscounted cash
flows, an impairment loss equal to the amount by which the carrying value
exceeds the fair value of the asset is recognized.  Fair value is
generally determined from estimated discounted future net cash
flows.  For purposes of performing an impairment test, the
undiscounted cash flows are forecast using five-year NYMEX forward strip prices
at the end of the period and escalated thereafter at 2.5 percent.  For
impairment charges, the associated property’s expected future net cash flows are
discounted using a rate of approximately ten percent. Reserves are calculated
based upon reports from third-party engineers adjusted for acquisitions or other
changes occurring during the year as determined to be appropriate in the good
faith judgment of management.  Because of the low commodity prices
that existed at year end 2008, and the uncertainty surrounding future commodity
prices and costs, we performed impairment tests on our long-lived assets at
December 31, 2008.





We assess
our long-lived assets for impairment generally on a field-by-field basis where
applicable.  In 2008, we recorded $51.9 million in impairments and
$34.5 million in price related depletion and depreciation
adjustments.  See Note 5 – Impairments and Price Related Depletion and
Depreciation Adjustments.  We did not record an impairment charge in
2007 and we recorded an impairment charge of $0.3 million in the fourth quarter
of 2006 for one of our Wyoming properties.  The charge was included in
DD&A on the consolidated statement of operations.


F-12




Debt
issuance costs





The costs
incurred to obtain financing have been capitalized.  Debt issuance
costs are amortized using the straight-line method over the term of the related
debt.  Use of the straight-line method does not differ materially from
the “effective interest” method of amortization.





Equity-based
compensation





BreitBurn
Management and the Predecessor had various forms of equity-based compensation
outstanding under employee compensation plans that are described more fully in
Note 15.  Prior to January 1, 2006, the Predecessor applied the
recognition and measurement principles of Accounting Principles Board (‘‘APB’’)
Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations in accounting for
those plans.  The Predecessor used the method prescribed under
Financial Accounting Standards Board (‘‘FASB’’) Interpretation No. 28, Accounting for Stock Appreciation
Rights and Other Variable Stock Option or Award Plans—and interpretation of APB
Opinions No. 15 and 25, to calculate the expenses associated with its
awards.





Effective
January 1, 2006, the Predecessor adopted the fair value recognition provisions
of SFAS No. 123 (revised 2004) (SFAS No. 123(R)), Share Based Payments, using
the modified-prospective transition method.  Under this transition
method, equity-based compensation expense for the periods after January 1, 2006
includes compensation expense for all equity-based compensation awards granted
prior to, but not yet vested as of January 1, 2006, based on the grant date fair
value estimated in accordance with the provisions of SFAS No. 123, Accounting for Stock-Based
Compensationand for options granted subsequent to January 1, 2006 in
accordance with the provisions of SFAS No. 123(R).  Unit based
compensation awards granted prior to but not yet vested as of January 1, 2006
that are classified as liabilities were charged to compensation expense based on
the fair value provisions of SFAS No. 123(R).  We and the Predecessor
recognized these compensation costs on a graded-vesting method.  Under
the graded-vesting method a company recognizes compensation cost over the
requisite service period for each separately vesting tranche of the award as
though the award was, in substance, multiple awards.





Awards
classified as equity are valued on the grant date and are recognized as
compensation expense over the vesting period.





Fair
market value of financial instruments





The
carrying amount of our cash, accounts receivable, accounts payable, and accrued
expenses, approximate their respective fair value due to the relatively short
term of the related instruments.  The carrying amount of long-term
debt approximates fair value; however, changes in the credit markets at year-end
may impact our ability to enter into future credit facilities at similar
terms.





Accounting
for business combinations





We and
our Predecessor have accounted for all business combinations using the purchase
method, in accordance with SFAS No. 141, Accounting for Business
Combinations.  Under the purchase method of accounting, a
business combination is accounted for at a purchase price based upon the fair
value of the consideration given, whether in the form of cash, assets, equity or
the assumption of liabilities.  The assets and liabilities acquired
are measured at their fair values, and the purchase price is allocated to the
assets and liabilities based upon these fair values.  The excess of
the fair value of assets acquired and liabilities assumed over the cost of an
acquired entity, if any, is allocated as a pro rata reduction of the amounts
that otherwise would have been assigned to certain acquired
assets.  We and our Predecessor have not recognized any goodwill from
any business combinations.


F-13


Concentration
of credit risk




We maintain our cash accounts primarily
with a single bank and invest cash in money market accounts, which we believe to
have minimal risk.  As operator of jointly owned oil and gas
properties, we sell oil and gas production to U.S. oil and gas purchasers and
pay vendors on behalf of joint owners for oil and gas services.  We
periodically monitor our major purchasers’ credit ratings.





Derivatives





SFAS No.
133, Accounting for Derivative
Instruments and Hedging Activities, as amended, establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and hedging activities.  It
requires the recognition of all derivative instruments as assets or liabilities
in our balance sheet and measurement of those instruments at fair
value.  The accounting treatment of changes in fair value is dependent
upon whether or not a derivative instrument is designated as a hedge and if so,
the type of hedge.  For derivatives designated as cash flow hedges,
changes in fair value are recognized in other comprehensive income, to the
extent the hedge is effective, until the hedged item is recognized in
earnings.  Hedge effectiveness is measured based on the relative
changes in fair value between the derivative contract and the hedged item over
time.  Any change in fair value resulting from ineffectiveness, as
defined by SFAS No.133, is recognized immediately in earnings.  Gains
and losses on derivative instruments not designated as hedges are currently
included in earnings.  The resulting cash flows are reported as cash
from operating activities.  We currently do not designate any of our
derivatives as hedges for accounting purposes.





Effective
January 1, 2008, we adopted SFAS No. 157, “Fair Value
Measurements.”  SFAS No. 157 defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value
measurements.  Fair value measurement under SFAS No. 157 is based upon
a hypothetical transaction to sell an asset or transfer a liability at the
measurement date, considered from the perspective of a market participant that
holds the asset or owes the liability.  The objective of fair value
measurement as defined in SFAS No. 157 is to determine the price that would be
received in selling the asset or transferring the liability in an orderly
transaction between market participants at the measurement date.  If
there is an active market for the asset or liability, the fair value measurement
shall represent the price in that market whether the price is directly
observable or otherwise obtained using a valuation technique.





Income
taxes





Our
subsidiaries are mostly partnerships or limited liability companies treated as
partnerships for federal tax purposes with essentially all taxable income or
loss being passed through to the members.  As such, no federal income
tax for these entities has been provided.





We have
three wholly owned subsidiaries, which are subject to corporate income
taxes.  We account for the taxes associated with one entity in
accordance with SFAS No. 109, “Accounting for Income
Taxes.”  Deferred income taxes are recorded under the asset and
liability method.  Where material, deferred income tax assets and
liabilities are computed for differences between the financial statement and
income tax bases of assets and liabilities that will result in taxable or
deductible amounts in the future.  Such deferred income tax asset and
liability computations are based on enacted tax laws and rates applicable to
periods in which the differences are expected to affect taxable
income.  Income tax expense is the tax payable or refundable for the
period plus or minus the change during the period in deferred income tax assets
and liabilities.





Effective
January 1, 2007, we implementedFASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes — An Interpretation of FASB
Statement No. 109 (“FIN 48”), which clarifies the accounting
for uncertainty in income taxes recognized in a company’s financial
statements.  A company can only recognize the tax position in the
financial statements if the position is more-likely-than-not to be upheld on
audit based only on the technical merits of the tax position.  This
accounting standard also provides guidance on thresholds, measurement,
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition that is intended to provide better
financial-statement comparability among different companies.





We
performed evaluations as of January 1, 2007, December 31, 2007 and December 31,
2008 and concluded that there were no uncertain tax positions requiring
recognition in its financial statements.  The adoption of this
standard did not have an impact on our financial position, results of operations
or cash flows.


F-14


Net
Income or loss per unit





Weighted
average units outstanding for computing basic and diluted net income or loss per
unit were:





Successor
                    
                    
                    PredecessorYear Ended
                    
                    
                    October 10 to
                    
                    
                    January 1 toDecember 31,
                    
                    
                    December 31,
                    
                    
                    October 9,2008
                    
                    
                    2007
                    
                    
                    2006
                    
                    
                    2006Weighted
      average number of Common Units used to calculate basic and diluted net
      income or loss per unit:Basic
                    
                    
                    59,238,588
                    
                    
                    
                    32,577,429
                    
                    
                    
                    21,975,758
                    
                    
                    
                    179,795,294Dilutive
      (a)
                    
                    
                    1,322,107
                    
                    
                    
                    -
                    
                    
                    
                    43,150
                    
                    
                    
                    -Diluted
                    
                    
                    60,560,695
                    
                    
                    
                    32,577,429
                    
                    
                    
                    22,018,908
                    
                    
                    
                    179,795,294





(a) 2007
does not include 310,513 potential anti-dilutive units issuable under the
compensation plans.





We had 6,700,000 Common Units
authorized for issuance under our long-term incentive compensation plans and
there were approximately 1,422,171 partnership-based units outstanding that are
eligible for receiving Common Units upon vesting at December 31,
2008.





Environmental
expenditures





We
review, on an annual basis, our estimates of the cleanup costs of various
sites.  When it is probable that obligations have been incurred and
where a reasonable estimate of the cost of compliance or remediation can be
determined, the applicable amount is accrued.  For other potential
liabilities, the timing of accruals coincides with the related ongoing site
assessments.  We do not discount any of these
liabilities.  At December 31, 2008 and 2007, we had a $2.0 million
environmental liability related to a closure of a drilling pit in Michigan,
which we assumed in the Quicksilver Acquisition.





3.  Accounting
Pronouncements





SFAS No. 157, Fair Value
Measurements.In September 2006, the Financial Accounting
Standards Board (“FASB”) issued SFAS No. 157, which defines fair value,
establishes a framework for measuring fair value and expands disclosures about
fair value measurements.  The Statement does not require any new fair
value measurements but would apply to assets and liabilities that are required
to be recorded at fair value under other accounting standards.  SFAS
No. 157 is effective for financial statements issued for fiscal years beginning
after November 12, 2007.  In February 2008, the FASB issued FASB Staff
Position (“FSP”) 157-2, “Effective Date of FASB Statement
No. 157,” which defers the effective date of SFAS No. 157 for
nonfinancial assets and nonfinancial liabilities, except for items that are
recognized or disclosed at fair value in an entity’s financial statements on a
recurring basis (at least annually), to fiscal years beginning after November
15, 2008, and interim periods within those fiscal years.  Earlier
adoption is permitted, provided the company has not yet issued financial
statements, including for interim periods, for that fiscal
year.  Effective January 1, 2008, we adopted SFAS No. 157, as amended
by FSP 157-2. Adoption of SFAS No. 157 did not have a material impact on our
results from operations or financial position.





SFAS No. 159 “The Fair Value Option
for Financial Assets and Financial Liabilities — including an amendment of
FAS 115” (“SFAS No. 159”).  In February 2007, the FASB issued
SFAS No. 159 which allows entities to choose, at specified election dates, to
measure eligible financial assets and liabilities at fair value in situations in
which they are not otherwise required to be measured at fair
value.  If a company elects the fair value option for an eligible
item, changes in that item’s fair value in subsequent reporting periods must be
recognized in current earnings.  The provisions of SFAS No. 159 became
effective for us on January 1, 2008.  We have elected not to adopt the
fair value option allowed by SFAS No. 159, and, therefore, it had no impact on
our financial position, results from operations or cash
flows.


F-15


SFAS No. 141(revised 2007) “Business
Combinations” (“SFAS No. 141R”).In December 2007, the FASB
issued SFAS No. 141R which replaces SFAS No. 141.  SFAS No. 141R
establishes principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, any non-controlling interest in the acquiree and the
goodwill acquired.  SFAS No. 141R was issued in an effort to continue
the movement toward the greater use of fair values in financial reporting and
increased transparency through expanded disclosures. It changes how business
acquisitions are accounted for and will impact financial statements at the
acquisition date and in subsequent periods. Certain of these changes will
introduce more volatility into earnings. The acquirer must now record all assets
and liabilities of the acquired business at fair value, and related transaction
and restructuring costs will be expensed rather than the previous method of
being capitalized as part of the acquisition. SFAS No. 141R also impacts
the goodwill impairment test associated with acquisitions, including those that
close before the effective date of SFAS No. 141R. The definitions of a
“business” and a “business combination” have been expanded, resulting in more
transactions qualifying as business combinations. SFAS No. 141R is
effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 31, 2008 and earlier adoption is prohibited.
We may experience a financial statement impact depending on the nature and
extent of any new business combinations entered into after the effective date of
SFAS No. 141R.





SFAS No. 160“Noncontrolling Interests in
Consolidated Financial Statements — an amendment of ARB No. 51”
(“SFAS No.
160”).  In December 2007, the FASB issued SFAS No. 160 which
requires that accounting and reporting for minority interests be recharacterized
as noncontrolling interests and classified as a component of
equity.  SFAS No. 160 also establishes reporting requirements
that provide sufficient disclosures that clearly identify and distinguish
between the interests of the parent and the interests of the noncontrolling
owners.  SFAS No. 160 applies to all entities that prepare
consolidated financial statements, except not-for-profit organizations, but will
affect only those entities that have an outstanding noncontrolling interest in
one or more subsidiaries or that deconsolidate a subsidiary.  This
statement is effective for fiscal years beginning after December 15,
2008.  The adoption of SFAS No. 160 is not expected to have a material
impact on our results from operations or financial position.





SFAS No. 161, “Disclosures about
Derivative Instruments and Hedging Activities – an amendment of FASB Statement
No. 133” (“SFAS No. 161”).  In March 2008, the FASB issued SFAS
No. 161 which requires enhanced disclosures about how and why an entity uses
derivative instruments, how derivative instruments and related hedge items are
accounted for under Statement 133 and its related interpretations, and how
derivative instruments and related hedged items affect an entity’s financial
position, financial performance, and cash flows. SFAS No. 161 has the same scope
as Statement 133, and, accordingly, applies to all entities.  SFAS No.
161 is effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008. This statement will require the
additional disclosures detailed above.





FSP 142-3, “Determination of the
Useful Life of Intangible Assets” (“FSP 142-3”). In April 2008, the FASB
issued FSP 142-3, which 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.” The intent of this FSP is to improve consistency between the
useful life of a recognized intangible asset under SFAS No. 142 and the period
of expected cash flows used to measure the fair value of the asset under SFAS
No. 141 (revised 2007), “Business Combination” and
other U.S. generally accepted accounting principles.  FSP 142-3 is
effective for fiscal years beginning after December 15, 2008.  We do
not expect the adoption of FSP 142-3 to have a material impact on our financial
position, results of operations or cash flows.





SFAS No. 162, “The Hierarchy of
Generally Accepted Accounting Principles” (“SFAS No. 162”).  In
May 2008, the FASB issued SFAS No. 162 which identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (GAAP) in
the United States (the GAAP hierarchy). SFAS No. 162 became effective November
13, 2008.  The adoption of SFAS No. 162 did not have an impact on our
results from operations or financial position.





FSP EITF 03-6-1, “Determining
Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities” (“FSP EITF 03-6-1”). In June 2008, the FASB
issued FSP EITF 03-6-1. Under this FSP, unvested share-based payment awards that
contain non-forfeitable rights to dividends or dividend equivalents, whether
they are paid or unpaid, are considered participating securities and should be
included in the computation of earnings per share pursuant to the two-class
method. FSP EITF 03-6-1 is effective for financial statements issued for fiscal
years beginning after December 15, 2008, and interim periods within those
years. In addition, all prior period earnings per share data presented should be
adjusted retrospectively and early application is not permitted.  We
are currently evaluating the impact adoption of FSP EITF 03-6-1 may have on our
earnings per share disclosures.


F-16





On
December 31, 2008, the SEC issued Release No. 33-8995 for guidelines on new
reserves estimate calculations and related disclosures. The new reserve estimate
disclosures apply to all annual reports for fiscal years ending on or after
December 31, 2009 and thereafter, and to all registration statements filed after
that date.  It does not permit companies to voluntarily comply at an
earlier date.  The revised proved reserve definition incorporates a
new definition of “reasonable certainty” using the PRMS (Petroleum Resource
Management System) standard of “high degree of confidence” for deterministic
method estimates, or a 90 percent recovery probability for probabilistic methods
used in estimating proved reserves. The guideline also permits a company to
establish undeveloped reserves as proved with appropriate degrees of reasonable
certainty established absent actual production tests and without artificially
limiting such reserves to spacing units adjacent to a producing well. For
reserve reporting purposes, it also replaces the end-of-the-year oil and gas
reserve pricing with an unweighted average first-day-of-the-month pricing for
the past 12 fiscal months. This would impact depletion calculations. Costs
associated with reserves will continue to be measured on the last day of the
fiscal year. A revised tabular presentation of reserves by development category,
final product type, and oil and gas activity disclosure by geographic regions
and significant fields and a general disclosure of the internal controls a
company uses to assure objectivity in reserves estimation will be
required.  The adoption of SEC release No. 33-8995 is expected to have
a material impact, which cannot be quantified at this point, on the calculation
of our crude oil and natural gas reserves.





4.  Acquisitions





On
January 23, 2007, we completed the purchase of certain oil and gas properties,
known as the “Lazy JL Field” in the Permian Basin of Texas, including related
property and equipment.  The purchase price for the Lazy JL Field
acquisition was approximately $29.0 million in cash, and was financed through
borrowings under our revolving credit facility.  The transaction was
accounted for using the purchase method in accordance with SFAS No. 141 and was
effective January 1, 2007.  The purchase price was allocated to the
assets acquired and liabilities assumed as follows:





Thousands of dollarsOil
      and gas properties
                      
                      $
                      29,233Current
      assets
                      
                      
                      2Asset
      retirement obligation
                      
                      
                      (206
                      )$
                      29,029




In March
2007, we completed the purchase of certain oil and gas properties in California
for approximately $1.0 million in cash.





In April
2007, we completed the purchase of additional interests in a certain oil and gas
property in Wyoming for approximately $0.9 million in cash.


F-17


On May
24, 2007, BOLP entered into an Amended and Restated Asset Purchase Agreement
with Calumet Florida, L.L.C. (“Calumet”), to acquire certain interests in oil
leases and related assets located along the Sunniland Trend in South Florida
through the acquisition of a limited liability company that owned all of the
purchased assets (the “Calumet Acquisition” or “Calumet
Properties”).  The Calumet Properties are comprised of five separate
oil fields, one 23-mile pipeline serving one field, one storage terminal and
rights in a shipping terminal.  The transaction closed on May 24,
2007.  The purchase price was $100.0 million with an effective date of
January 1, 2007.  After adjustments for costs and revenues for the
period between the effective date and the closing, including interest paid to
the seller and after taking into account approximately 218,000 barrels of crude
oil held in storage as of the closing date, and including acquisition related
costs, our purchase price was approximately $109.9 million.  The
acquisition was financed through our sale of Common Units through a private
placement (see Note 13 for additional information on the private
placement).  The acquiring subsidiary is a partnership and thus no
deferred taxes were recognized for this transaction.  The purchase
price of $109.9 million, including approximately $0.4 million in acquisition
costs was allocated to the assets acquired and liabilities assumed as
follows:





Thousands of dollarsInventories
                    
                    $
                    10,533Intangible
      assets
                    
                    
                    3,377Oil
      and gas properties
                    
                    
                    100,584Asset
      retirement obligation
                    
                    
                    (3,843
                    )Other
      current liabilities
                    
                    
                    (729
                    )$
                    109,922




The
purchase price allocation is based on discounted cash flows, quoted market
prices and estimates made by management, the most significant assumptions
related to the estimated fair values assigned to oil and gas properties with
proved reserves.  To estimate the fair values of these properties,
estimates of oil and gas reserves were prepared by management.  We
applied estimated future prices to the estimated reserve quantities acquired,
and estimated future operating and development costs, to arrive at estimates of
future net revenues.  For estimated proved reserves, the future net
revenues were discounted using a rate of approximately 10
percent.  There were no estimated quantities of hydrocarbons other
than proved reserves allocated in the purchase price of the Calumet
Acquisition.  The purchase price included the fair value attributable
to the oil inventories held in storage at the closing date.  We
assumed certain crude oil sales contracts for the remainder of 2007 and for 2008
through 2010.  An intangible asset was established to value the
portion of the crude oil contracts that were above market at closing in the
purchase price allocation.  Realized gains or losses from these
contracts are recognized as part of oil sales and the intangible asset is being
amortized over the life of the contracts.




On May
25, 2007, BOLP entered into a Purchase and Sale Agreement with TIFD X-III LLC
(“TIFD”), pursuant to which it acquired TIFD’s 99 percent limited partner
interest in BreitBurn Energy Partners I, L.P. (“BEPI”) for a total purchase
price of approximately $82 million (the “BEPI Acquisition”).  BEPI
owns properties in the East Coyote and Sawtelle Fields in the Los Angeles Basin
in California.  The general partner of BEPI is an affiliate of our
general partner in which we have no ownership interest.  As part of
the transaction, BEPI distributed to an affiliate of TIFD a 1.5 percent
overriding royalty interest in the oil and gas produced by BEPI from the two
fields.  The burden of the 1.5 percent override will be borne solely
through our interest in BEPI.  In connection with the acquisition, we
also paid approximately $10.4 million to terminate existing hedge contracts
related to future production from BEPI.


F-18


The BEPI
Acquisition, including the termination of existing hedge contracts, was financed
through our sale of Common Units in a private placement (see Note 13 for
additional information on the private placement).  The acquiring
subsidiary is a partnership and thus no deferred taxes were recognized for this
transaction.  We allocated the purchase price of $92.5 million
including approximately $0.1 million in acquisition costs to the assets acquired
and liabilities assumed as follows:





Thousands of dollarsCurrent
      assets
                    
                    $
                    2,813Oil
      and gas properties
                    
                    
                    92,980Current
      liabilities
                    
                    
                    (2,281
                    )Asset
      retirement obligation
                    
                    
                    (582
                    )Other
                    
                    
                    (398
                    )$
                    92,532





The
purchase price allocation is based on discounted cash flows, quoted market
prices and estimates made by management, the most significant assumptions
related to the estimated fair values assigned to oil and gas properties with
proved reserves.  To estimate the fair values of these properties,
estimates of oil and gas reserves were prepared by management.  We
applied estimated future prices to the estimated reserve quantities acquired,
and estimated future operating and development costs, to arrive at estimates of
future net revenues.  For estimated proved reserves, the future net
revenues were discounted using a rate of approximately ten
percent.  There were no quantities of hydrocarbons other than proved
reserves identified with the BEPI Acquisition.





On
November 1, 2007, we completed the acquisition of certain assets (the “QRI
Assets”) and equity interests (the “Equity Interests”) in certain entities from
Quicksilver Resources Inc. (“Quicksilver” or “QRI”) in exchange for $750 million
in cash and 21,347,972 Common Units (the “Quicksilver
Acquisition”).  The issuance of Common Units to QRI was made in
reliance upon an exemption from the registration requirements of the Securities
Act of 1933 pursuant to Section 4(2) thereof.  Pursuant to the terms
and conditions of the Contribution Agreement entered into by BOLP and QRI, dated
as of September 11, 2007 (the “Contribution Agreement”), BOLP completed the
Quicksilver Acquisition.  BOLP acquired all of QRI’s natural gas, oil
and midstream assets in Michigan, Indiana and Kentucky.  The midstream
assets in Michigan, Indiana and Kentucky consist of gathering, transportation,
compression and processing assets that transport and process our production and
third party gas.





The
purchase price allocations are based on reserve reports, quoted market prices
and estimates by management.  To estimate the fair values of acquired
oil and gas reserves, we utilized the reserve engineers’ estimates of oil and
natural gas proved reserves to arrive at estimates of future cash flows net of
operating and development costs.  The estimated future net cash flows
were discounted using a rate of approximately ten percent.  Included
in the purchase price allocation is a $5.2 million intangible asset related to
retention bonuses.  In connection with the acquisition, we entered
into an agreement with QRI which provides for QRI to fund retention bonuses
payable for 139 retained employees from QRI in the event these employees remain
continuously employed by us from November 1, 2007 through November 1, 2009 or in
the event of termination without cause, disability or death.





Our final
purchase price allocation including approximately $9.1 million of acquisition
costs is presented below:





Thousands of dollarsCurrent
      assets
                    
                    $
                    1,148Investment
                    
                    
                    10,481Intangible
      asset
                    
                    
                    5,193Oil
      and gas properties - proved
                    
                    
                    1,132,955Oil
      and gas properties - unproved
                    
                    
                    209,873Pipelines
      and processing facilities
                    
                    
                    112,726Long-term
      liabilities
                    
                    
                    (4,678
                    )Asset
      retirement obligation
                    
                    
                    (8,248
                    )$
                    1,459,450


F-19





In
December 2007, we acquired an additional interest in an oil and gas field
located in Michigan for approximately $3.4 million.





Pro Forma
Information





The
following unaudited pro forma financial information presents a summary of our
consolidated results of operations for 2007 and 2006, assuming the Calumet, BEPI
and Quicksilver Acquisitions had been completed as of the beginning of each
year, including adjustments to reflect the allocation of the purchase price to
the acquired net assets.  The pro forma financial information assumes
that the initial public offering that occurred in 2006 occurred January 1,
2006.  As such, the 2006 results are presented on a comparable basis
to the Successor and are not presented as pro forma for the
Predecessor.  The pro forma financial information also assumes our
2007 private placements of Common Units (see Note 13) were completed as of the
beginning of the year, since the private placements were contingent on two of
the acquisitions.  The revenues and expenses of these three
acquisitions are included in the 2007 consolidated results of the Partnership
effective May 24, May 25 and November 1, 2007.  The pro forma
financial information is not necessarily indicative of the results of operations
if the acquisitions had been effective as of these dates.





Pro Forma Year Ended
                                              December 31,Thousands of dollars, except per unit amounts
                                            
                                            2007(1)
                                            
                                            
                                            2006(1)Revenues
                                            
                                            $
                                            233,761
                                            
                                            
                                            $
                                            315,302Net
      income (loss)
                                            
                                            
                                            (43,966
                                            )
                                            
                                            
                                            66,720Net
      income (loss) per unitBasic
                                            
                                            $
                                            (0.65
                                            )
                                            
                                            $
                                            0.99Diluted
                                            
                                            
                                            (0.65
                                            )
                                            
                                            
                                            0.99(1)
      Results include losses on derivative instruments of  $101.0
      million for the year ended December 31, 2007 and $0.3 million for the year
      ended December 31,
2006.





On June 17, 2008, we purchased
Provident’s 95.55 percent limited liability company interest in BreitBurn
Management for a purchase price of approximately $10.0 million.  This
transaction resulted in BreitBurn Management becoming our wholly owned
subsidiary and was accounted for as a business combination.  The
following table presents the purchase price allocation of the BreitBurn
Management Purchase:





Thousands of dollarsRelated
      party receivables - current, net
                    
                    $
                    10,662Other
      current assets
                    
                    
                    21Oil
      and gas properties
                    
                    
                    8,451Non-oil
      and gas assets
                    
                    
                    4,343Related
      party receivables - non-current
                    
                    
                    6,704Current
      liabilities
                    
                    
                    (13,510
                    )Long-term
      liabilities
                    
                    
                    (6,704
                    )$
                    9,967





Certain
of the current and long-term related party receivables are with the Partnership,
so they are now eliminated in consolidation.





5.  Impairments
and Price Related Depletion and Depreciation Adjustments





Because of the low commodity prices at
year end 2008, and the uncertainty surrounding future commodity prices as well
as future costs, we performed impairment tests on our long-lived assets at
December 31, 2008.  For the year ended December 31, 2008, we recorded
approximately $51.9 million for total impairments and $34.5 million for price
related adjustments to depletion and depreciation expense.


F-20




We assess our developed and undeveloped
oil and gas properties and other long-lived assets for possible impairment
whenever events or changes in circumstances indicate that the carrying value of
the assets may not be recoverable. Such indicators include changes in business
plans, changes in commodity prices and, for crude oil and natural gas
properties, significant downward revisions of estimated proved-reserve
quantities. If the carrying value of an asset exceeds the future undiscounted
cash flows expected from the asset, an impairment charge is recorded for the
excess of carrying value of the asset over its estimated fair
value.





Determination as to whether and how
much an asset is impaired involves management estimates on highly uncertain
matters such as future commodity prices, the effects of inflation and technology
improvements on operating expenses, production profiles, and the outlook for
market supply and demand conditions for crude oil and natural gas. The
impairment reviews and calculations are based on assumptions that are consistent
with our business plans. See “Impairment of Assets” in Note 2.  The
low commodity price environment that existed at December 31, 2008 influenced our
future commodity price projections.  As a result, the expected
discounted cash flows for many of our fields (i.e., fair values) were negatively
impacted resulting in a charge to depletion and depreciation expense of
approximately $51.9 million for field impairments for the year ended December
31, 2008.





An estimate as to the sensitivity to
earnings for these periods if other assumptions had been used in impairment
reviews and calculations is not practicable, given the number of assumptions
involved in the estimates. That is, favorable changes to some assumptions might
have avoided the need to impair any assets in these periods, whereas unfavorable
changes might have caused an additional unknown number of other assets to become
impaired.





Lower commodity prices also negatively
impacted our oil and gas reserves in the fourth quarter of 2008 resulting in
significant price related adjustments to our depletion and depreciation expense
in the fourth quarter of 2008 as compared to the fourth quarter of 2007. These
price related reserve reductions in 2008 resulted in additional depletion and
depreciation charges of approximately $34.5 million for the fourth quarter and
for the year ended December 31, 2008.





6.  Income
Taxes





We, our
predecessor and all of our subsidiaries, with the exception of Phoenix
Production Company, Alamitos Company and BreitBurn Management, are partnerships
or limited liability companies treated as partnerships for federal and state
income tax purposes.  Essentially all of our taxable income or loss,
which may differ considerably from the net income or loss reported for financial
reporting purposes, is passed through to the federal income tax returns of our
partners.  As such, we have not recorded any federal income tax
expense for those pass-through entities.  State income tax expenses
are recorded for certain operations that are subject to state taxation in
various states, primarily Michigan, California and Texas.  The total
state taxes paid were $0.5 million in 2008 and less than $0.1 million in
2007.





Our
wholly-owned subsidiary, Phoenix Production Company, is a tax-paying
corporation.  We record an income tax provision in accordance with
SFAS No. 109 “Accounting for Income Taxes.”  In 2008 and 2007, Phoenix
Production Company recorded $0.1 million and less than $0.1 million,
respectively, for alternative minimum taxes.  Phoenix Production
Company also recorded a deferred federal income tax expense of $1.2 million in
2008 and a deferred federal income tax benefit of $1.3 million in
2007.  The following is a reconciliation for Phoenix Production
Company of federal income taxes at the statutory rates to federal income tax
expense or benefit as reported in the consolidated statements of
operations.





Year EndedDecember 31,Thousands of dollars
                  
                  2008
                  
                  
                  2007Income
      (loss) before taxes and minority interest
                  
                  $
                  380,363
                  
                  
                  $
                  (61,495
                  )Partnership
      income not subject to tax
                  
                  
                  376,459
                  
                  
                  
                  (56,997
                  )Income
      (loss) subject to tax
                  
                  
                  3,904
                  
                  
                  
                  (4,498
                  )Federal
      income tax rate
                  
                  
                  34
                  %
                  
                  
                  34
                  %Income
      tax at statutory rate
                  
                  
                  1,327
                  
                  
                  
                  (1,529
                  )Other
                  
                  
                  -
                  
                  
                  
                  300Income
      tax expense (benefit)
                  
                  $
                  1,327
                  
                  
                  $
                  (1,229
                  )


F-21





At
December 31, 2008 and 2007, a net deferred federal income tax liability of $4.3
million and $3.1 million, respectively, was included in our consolidated balance
sheet for Phoenix Production Company.  As shown in the table below,
the net deferred federal income tax liability primarily consisted of the tax
effect of book and tax basis differences of certain assets and liabilities and
the deferred federal income tax asset for net operating loss carry
forwards.  Management expects to utilize $2.3 million of estimated
unused operating loss carry forwards to offset future taxable
income.  As such, no valuation allowance has been recorded against the
deferred federal income tax asset.





December 31,Thousands of dollars
                  
                  2008
                  
                  
                  2007Deferred
      tax assets:Net
      operating loss carryforwards
                  
                  $
                  767
                  
                  
                  $
                  726Asset
      retirement obligation
                  
                  
                  337
                  
                  
                  
                  428Unrealized
      hedge loss
                  
                  
                  -
                  
                  
                  
                  1,104Other
                  
                  
                  103
                  
                  
                  
                  74Deferred
      tax liabilities:Depreciation,
      depletion and intangible drilling costs
                  
                  
                  (3,404
                  )
                  
                  
                  (5,356
                  )Other
                  
                  
                  (2,085
                  )
                  
                  
                  (50
                  )Net
      deferred tax liability
                  
                  $
                  (4,282
                  )
                  
                  $
                  (3,074
                  )





In 2008,
our other wholly-owned tax-paying corporation, Alamitos Company, incurred a
current federal tax expense of $0.1 million.  No deferred federal or
state income tax is recognized for this company as the temporary differences
between the tax basis and the reported financial amounts of its assets and
liabilities are immaterial.  BreitBurn Management became our
wholly-owned subsidiary and a taxable entity on June 17,
2008.  However, no federal or state income tax expense is expected due
to the nature of its business as expenses incurred are essentially offset by
amounts recovered for services provided to the operating
companies.





Cash paid
for federal and state income taxes was $0.6 million in 2008, $0.1 million in
2007 and an immaterial amount in 2006.





New
Accounting Pronouncement





Effective
January 1, 2007, we implementedFASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes — An Interpretation of FASB
Statement No. 109 (“FIN 48”), which clarifies the accounting
for uncertainty in income taxes recognized in a company’s financial
statements.  A company can only recognize the tax position in the
financial statements if the position is more-likely-than-not to be upheld on
audit based only on the technical merits of the tax position.  This
accounting standard also provides guidance on thresholds, measurement,
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition that is intended to provide better
financial-statement comparability among different companies.





We
performed evaluations as of January 1, 2007, December 31, 2007 and December 31,
2008 and concluded that there were no uncertain tax positions requiring
recognition in its financial statements.  The adoption of this
standard did not have an impact on our financial position, results of operations
or cash flows.





7.  Related
Party Transactions





BreitBurn
Management operates our assets and performs other administrative services for us
such as accounting, corporate development, finance, land administration, legal
and engineering.  All of our employees, including our executives, are
employees of BreitBurn Management.  Prior to June 17, 2008, BreitBurn
Management provided services to us and to BEC, and allocated its expenses
between the two entities.  On June 17, 2008, in connection with the
Purchase, Contribution and Partnership Transactions, BreitBurn Management became
our wholly owned subsidiary and entered into an Amended and Restated
Administrative Services Agreement with BEC, pursuant to which BreitBurn
Management agreed to continue to provide administrative services to BEC, in
exchange for a monthly fee of $775,000 for indirect expenses. In addition to the
monthly fee, BreitBurn Management agreed to continue to charge BEC for direct
expenses including incentive plan costs and direct payroll and administrative
costs.  Beginning on June 17, 2008, all of the costs charged to BOLP
are consolidated with our results.


F-22


During
2007, we incurred approximately $30.2 million in direct and indirect general and
administrative expenses from BreitBurn Management, including accruals related to
incentive compensation.  We reimbursed BreitBurn Management $23.8
million under the Administrative Services Agreement during 2007.  At
December 31, 2007, we had a net short-term payable to BreitBurn Management of
$9.2 million and a long-term payable of $1.5 million with both primarily
relating to incentive compensation.





On August
26, 2008, members of our senior management, in their individual capacities,
together with Metalmark, Greenhill and a third-party institutional investor,
completed the acquisition of BEC, our Predecessor.  This transaction
included the acquisition of a 96.02 percent indirect interest in BEC previously
owned by Provident and the remaining indirect interests in BEC previously owned
by Randall H. Breitenbach, Halbert S. Washburn and other members of
our senior management.  BEC was an indirectly owned subsidiary of
Provident.





In
connection with the acquisition of Provident’s ownership in BEC by members of
senior management, Metalmark, Greenhill and a third party institutional
investor, BreitBurn Management entered into a five year Administrative Services
Agreement to manage BEC's properties. The monthly fee charged to BEC remained
$775,000 for indirect expenses through December 31, 2008.  We expect
this fee to be renegotiated annually during the term of the agreement and expect
a monthly fee of less than $775,000 in 2009.  In addition, we have
entered into an Omnibus Agreement with BEC detailing rights with respect to
business opportunities and providing us with a right of first offer with respect
to the sale of assets by BEC.





At
December 31, 2008, we had current receivables of $4.4 million due from BEC
related to the Administrative Services Agreement, outstanding liabilities for
employee related costs and oil and gas sales made by BEC on our behalf from
certain properties. At December 31, 2007, we had current receivables of $1.0
million due from BEC related to oil and gas sales made by BEC on our behalf from
certain properties.  In 2008 and 2007, total oil and gas sales made on
our behalf for these properties were approximately $2.1 million and $1.7
million, respectively.





Mr. Greg
L. Armstrong is the Chairman of the Board and Chief Executive Officer of Plains
All American GP LLC (“PAA”). Mr. Armstrong was a director of our General Partner
until March 26, 2008 when his resignation became effective.  We sell
all of the crude oil produced from our Florida properties to Plains Marketing,
L.P., a wholly owned subsidiary of PAA.  In 2008, prior to Mr.
Armstrong’s resignation on March 26, 2008, we sold $19.3 million of our crude
oil to Plains Marketing, L.P.  At December 31, 2007, the receivable
from Plains Marketing, L.P. was $10.5 million, which was collected in the first
quarter of 2008.





Through a
transition services agreement through March 2008, Quicksilver provided services
to us for accounting, land administration, and marketing and charged us $0.9
million for the first three months of 2008 and $0.6 million for the year ended
December 31, 2007.  These charges were included in general and
administrative expenses on the consolidated statements of operations. At
December 31, 2007, the net receivable from Quicksilver was approximately $22.7
million which reflected cash collections made on our behalf net of
advances.  In 2008, we collected these outstanding receivables from
Quicksilver.  Quicksilver also buys natural gas from us in
Michigan.  For the year ended December 31, 2008, total net gas sales
to Quicksilver were approximately $8.0 million and the related receivable was
$0.6 million as of December 31, 2008.





At
December 31, 2008, we had a receivable of $0.1 million for management fees due
from equity affiliates and operational expenses incurred on behalf of equity
affiliates.  At December 31, 2007, we had a receivable of $1.4
million, which primarily included a $1.3 million receivable for a cash advance
made to an equity affiliate that was repaid in 2008.





On June
17, 2008, in connection with the Purchase, Contribution and Partnership
Transactions, the Omnibus Agreement, dated October 10, 2006, among us, the
General Partner, Provident, Pro GP and BEC was terminated in all respects and
Provident is no longer considered a related party.  At December 31,
2007, we had a payable to Provident of $0.9 million relating primarily to the
management agreement and insurance costs that were provided by Provident on our
behalf.


F-23


8.  Inventory





Our crude
oil inventory from our Florida operations at December 31, 2008 and December 31,
2007 was $1.3 million and $5.5 million respectively.  At December 31,
2007, we had an additional $0.2 million in non-crude oil inventory. Inventories
purchased through the Calumet Acquisition (see Note 4) were $10.5 million, which
were sold and charged to the consolidated statement of operations as inventory
cost during the year ended December 31, 2007. For the year ended December
31, 2008, we sold 762 MBbls of crude oil and produced 707 MBbls from our Florida
operations.  Crude oil inventory additions are at cost and represent
our production costs.  We match production expenses with crude oil
sales.  Production expenses associated with unsold crude oil inventory
are recorded to inventory.  Crude oil sales are a function of the
number and size of crude oil shipments in each quarter and thus crude oil sales
do not always coincide with volumes produced in a given quarter.





We carry inventory at the lower of cost
or market.  When using lower of cost or market to value inventory, market
should not exceed the net realizable value or the estimated selling price less
costs of completion and disposal.  During the fourth quarter of 2008,
commodity prices decreased substantially.  As a result, we assessed
our crude oil inventory for possible write-down, and recorded $1.2 million to
write-down the Florida crude oil inventory to our net realizable value at
December 31, 2008.





For our
properties in Florida, there are a limited number of alternative methods of
transportation for our production.  Substantially all of our oil
production is transported by pipelines, trucks and barges owned by third
parties.  The inability or unwillingness of these parties to provide
transportation services for a reasonable fee could result in our having to find
transportation alternatives, increased transportation costs, or involuntary
curtailment of our oil production in Florida, which could have a negative impact
on our future consolidated financial position, results of operations or cash
flows.





9.  Intangibles





In May
2007, we acquired certain interests in oil leases and related assets through the
acquisition of a limited liability company from Calumet Florida, L.L.C. As part
of this acquisition, we assumed certain crude oil sales contracts for the
remainder of 2007 and for 2008 through 2010.  A $3.4 million
intangible asset was established to value the portion of the crude oil contracts
that were above market at closing in the purchase price
allocation.  Realized gains or losses from these contracts are
recognized as part of oil sales and the intangible asset will be amortized over
the life of the contracts.  As of December 31, 2008, our intangible
asset related to the crude oil sales contracts was $1.6 million.





In
November 2007, we acquired oil and gas properties and facilities from
Quicksilver. Included in the Quicksilver purchase price was a $5.2 million
intangible asset related to retention bonuses. In connection with the
acquisition, we entered into an agreement with Quicksilver which provides for
Quicksilver to fund retention bonuses payable to 139 former Quicksilver
employees in the event these employees remain continuously employed by BreitBurn
Management from November 1, 2007 through November 1, 2009 or in the event of
termination without cause, disability or death. The amortization expense of $2.1
million for 2008 and $1.4 million for 2007 are included in the total operating
expenses line on the consolidated statement of operations.  As of
December 31, 2008, our intangible asset related to Quicksilver retention bonuses
was $1.7 million.





10.  Equity
Investments





We had
equity investments at December 31, 2008 and December 31, 2007 of $9.5 million
and $15.6 million, respectively.  These investments are reported in
the “Equity investments” line caption on the consolidated balance sheet and
primarily represent investments in natural gas processing
facilities.  For the years ended December 31, 2008 and 2007, we
recorded $0.8 million and $0.3 million, respectively, in earnings from equity
investments.  Earnings from equity investments are reported in the
“Other Revenue” line caption on the consolidated statement of
operations.


At
December 31, 2008, our equity investments consisted primarily of a 24.5 percent
limited partner interest and a 25.5 percent general partner interest in
Wilderness Energy Services LP, with a combined carrying value of $8.2
million.  The remaining $1.3 million consists of smaller interests in
several other investments.  At December 31, 2007, our equity
investment totaled $15.6 million. The decrease in 2008 is primarily due to the
final purchase price allocations related to our Quicksilver asset
purchase.





11.  Long-Term
Debt





On
November 1, 2007, in connection with the Quicksilver Acquisition, BOLP, as
borrower, and we and our wholly owned subsidiaries, as guarantors, entered into
a four year, $1.5 billion amended and restated revolving credit facility with
Wells Fargo Bank, N.A., Credit Suisse Securities (USA) LLC and a syndicate of
banks (the “Amended and Restated Credit Agreement”).


F-24





The
initial borrowing base of the Amended and Restated Credit Agreement was $700
million and was increased to $750 million on April 10, 2008.  Under
the Amended and Restated Credit Agreement, borrowings were allowed to be used
(i) to pay a portion of the purchase price for the Quicksilver Acquisition, (ii)
for standby letters of credit, (iii) for working capital purposes, (iv) for
general company purposes and (v) for certain permitted acquisitions and payments
enumerated by the credit facility.  Borrowings under the Amended and
Restated Credit Agreement are secured by first-priority liens on and security
interests in substantially all of the Partnership’s and certain of its
subsidiaries’ assets, representing not less than 80 percent of the total value
of their oil and gas properties.





The
Amended and Restated Credit Agreement contains (i) financial covenants,
including leverage, current assets and interest coverage ratios, and (ii)
customary covenants, including restrictions on the Partnership’s ability to:
incur additional indebtedness; make certain investments, loans or advances; make
distributions to unitholders or repurchase units if aggregated letters of credit
and outstanding loan amounts exceed 90 percent of its borrowing base; make
dispositions; or enter into a merger or sale of its property or assets,
including the sale or transfer of interests in its subsidiaries.





The
events that constitute an Event of Default (as defined in the Amended and
Restated Credit Agreement) include: payment defaults; misrepresentations;
breaches of covenants; cross-default and cross-acceleration to certain other
indebtedness; adverse judgments against the Partnership in excess of a specified
amount; changes in management or control; loss of permits; failure to perform
under a material agreement; certain insolvency events; assertion of certain
environmental claims; and occurrence of a material adverse effect.  At
December 31, 2008 and December 31, 2007, the Partnership was in compliance with
the credit facility’s covenants.





On June
17, 2008, in connection with the Purchase, Contribution and Partnership
Transactions, we and our wholly owned subsidiaries entered into Amendment No. 1
to the Amended and Restated Credit Agreement, with Wells Fargo Bank, National
Association, as administrative agent (the “Agent”). Amendment No. 1 to the
Credit Agreement increased the borrowing base available under the Amended and
Restated Credit Agreement, from $750 million to $900 million. In addition,
Amendment No. 1 to the Credit Agreement enacted certain additional amendments,
waivers and consents to the Amended and Restated Credit Agreement and the
related Security Agreement, dated November 1, 2007, among BOLP, certain of its
subsidiaries and the Agent, necessary to permit the Amendment No. 1 to the First
Amended and Restated Limited Partnership Agreement and the transactions
consummated in the Purchase, Contribution and Partnership
Transactions.  Under Amendment No. 1 to the Credit Agreement, the
interest margins applicable to borrowings, the letter of credit fee and the
commitment fee under the Amended and Restated Credit Agreement were increased by
amounts ranging from 12.5 to 25 basis points.





As of December 31, 2008, approximately
$736.0 million in indebtedness was outstanding under the Amended and Restated
Credit Agreement.  The credit facility will mature on November 1,
2011.  At December 31, 2008, the LIBOR interest rate, a weighted
average interest rate of our four outstanding LIBOR loans, was 2.350 percent on
the LIBOR portion of $736.0 million.





As of
December 31, 2007, approximately $370.4 million in indebtedness was outstanding
under the Amended and Restated Credit Agreement.  At December 31,
2007, the interest rate was the Prime Rate of 7.625 percent on the Prime Debt
portion of $3.4 million and the LIBOR rate of 6.595 percent on the LIBOR portion
of $367.0 million.





The
credit facility contains customary covenants, including restrictions on our
ability to: incur additional indebtedness; make certain investments, loans or
advances; make distributions to our unitholders (including the restriction in
our ability to make distributions if aggregated letters of credit and
outstanding loan amounts exceed 90 percent of our borrowing base); make
dispositions or enter into sales and leasebacks; or enter into a merger or sale
of our property or assets, including the sale or transfer of interests in our
subsidiaries.





As of
December 31, 2008 and 2007, we were in compliance with the credit facility’s
covenants.  At December 31, 2008 and 2007, we had $0.3 million and
$0.3 million, respectively, in letters of credit outstanding.





Previous
to the amended and restated credit agreement, we had in place a $400 million
revolving credit facility with Wells Fargo Bank, N.A., as lead arranger,
administrative agent, and issuing lender, and a syndicate of
banks.  We entered the $400 million credit facility on October 10,
2006, in connection with our initial public offering.  The credit
facility’s initial borrowing base was $90 million and was increased to $100
million in December 2006.  At December 31, 2006, the interest rate was
the Prime Rate of 8.5 percent on the Prime Debt portion of $1.5
million.


F-25





Our
interest expense is detailed in the following table:





Successor
                    
                    
                    PredecessorYear Ended
                    
                    
                    October 10 to
                    
                    
                    January 1 toDecember 31,
                    
                    
                    December 31,
                    
                    
                    October 9,Thousands of dollars
                    
                    2008
                    
                    
                    2007
                    
                    
                    2006
                    
                    
                    2006Credit
      facility
                    
                    $
                    25,487
                    
                    
                    $
                    5,373
                    
                    
                    $
                    11
                    
                    
                    $
                    2,510Commitment
      fees
                    
                    
                    1,047
                    
                    
                    
                    503
                    
                    
                    
                    61
                    
                    
                    
                    141Amortization
      of discount and deferred issuance costs
                    
                    
                    2,613
                    
                    
                    
                    382
                    
                    
                    
                    -
                    
                    
                    
                    -Total
                    
                    $
                    29,147
                    
                    
                    $
                    6,258
                    
                    
                    $
                    72
                    
                    
                    $
                    2,651Cash
      paid for interest on Credit facility (including realized losses on
      interest rate swaps)
                    
                    $
                    29,767
                    
                    
                    $
                    3,545
                    
                    
                    $
                    72
                    
                    
                    $
                    2,651





12.  Asset
Retirement Obligation





Our asset
retirement obligation is based on our net ownership in wells and facilities and
our estimate of the costs to abandon and remediate those wells and facilities as
well as our estimate of the future timing of the costs to be
incurred.  The total undiscounted amount of future cash flows required
to settle our asset retirement obligations is estimated to be $256.8 million at
December 31, 2008 and was $225.2 million at December 31, 2007.  The
increase from prior year is attributable to increased cost estimates primarily
for California fields.  Payments to settle asset retirement
obligations occur over the operating lives of the assets, estimated to be from 7
to 50 years.  Estimated cash flows have been discounted at our credit
adjusted risk free rate of 7 percent and adjusted for inflation using a rate of
2 percent.  Changes in the asset retirement obligation for the years
ended December 31, 2008 and 2007 are presented in the following
table:





Year Ended December 31,Thousands of dollars
                    
                    2008
                    
                    
                    2007Carrying
      amount, beginning of period
                    
                    $
                    27,819
                    
                    
                    $
                    10,253Liabilities
      settled in the current period
                    
                    
                    (1,054
                    )
                    
                    
                    (367
                    )Revisions
      (1)
                    
                    
                    1,363
                    
                    
                    
                    3,950Acquisitions
                    
                    
                    -
                    
                    
                    
                    12,955Accretion
      expense
                    
                    
                    1,958
                    
                    
                    
                    1,028Carrying
      amount, end of period
                    
                    $
                    30,086
                    
                    
                    $
                    27,819





(1)
Increased cost estimates and revisions to reserve life.





13.  Partners’
Equity





At
December 31, 2008, we had 52,635,634 Common Units outstanding.





On June
17, 2008, we purchased 14,404,962 Common Units from subsidiaries of Provident at
$23.26 per unit, for a purchase price of approximately $335 million. These units
have been cancelled and are no longer outstanding.  This transaction
was accounted for as a repurchase of issued Common Units and a cancellation of
those Common Units.  This transaction decreased equity by $336.2
million, including $1.2 million in capitalized transaction costs.  We
also purchased Provident’s 95.55 percent limited liability company interest in
BreitBurn Management, which owned the General Partner.  Also on June
17, 2008, we entered into a Contribution Agreement with the General Partner,
BreitBurn Management and BreitBurn Corporation, pursuant to which BreitBurn
Corporation contributed its 4.45 percent limited liability company interest in
BreitBurn Management to us in exchange for 19,955 Common Units and BreitBurn
Management contributed its 100 percent limited liability company interest in the
General Partner to us.  On the same date, we entered into Amendment
No. 1 to the First Amended and Restated Agreement of Limited Partnership of the
Partnership, pursuant to which the economic portion of the General Partner’s
0.66473 percent general partner interest in us was eliminated.  As a
result of these transactions, the General Partner and BreitBurn Management
became our wholly owned subsidiaries.


F-26





On
December 22, 2008, we entered into a Unit Purchase Rights Agreement, dated as of
December 22, 2008 (the “Rights Agreement”), between us and American Stock
Transfer & Trust Company LLC, as Rights Agent.  Under the Rights
Agreement, each holder of Common Units at the close of business on December 31,
2008 automatically received a distribution of one unit purchase right (a
“Right”), which entitles the registered holder to purchase from us one
additional Common Unit at a price of $40.00 per Common Unit, subject to
adjustment. We entered into the Rights agreement to increase the likelihood that
our unitholders receive fair and equal treatment in the event of a takeover
proposal.





The
issuance of the Rights was not taxable to the holders of the Common Units, had
no dilutive effect, will not affect our reported earnings per Common Unit, and
will not change the method of trading the Common Units. The Rights will not
trade separately from the Common Units unless the Rights become
exercisable.  The Rights will become exercisable if a person or group
acquires beneficial ownership of 20 percent or more of the outstanding Common
Units or commences, or announces its intention to commence, a tender offer that
could result in beneficial ownership of 20 percent or more of the outstanding
Common Units. If the Rights become exercisable, each Right will entitle holders,
other than the acquiring party, to purchase a number of Common Units having a
market value of twice the then-current exercise price of the Right. Such
provision will not apply to any person who, prior to the adoption of the Rights
Agreement, beneficially owns 20 percent or more of the outstanding Common Units
until such person acquires beneficial ownership of any additional Common
Units.





The
Rights Agreement has a term of three years and will expire on December 22, 2011,
unless the term is extended, the Rights are earlier redeemed or we terminate the
Rights Agreement.





Cash
Distributions





The
partnership agreement requires us to distribute all of our available cash
quarterly.  Available cash is cash on hand, including cash from
borrowings, at the end of a quarter after the payment of expenses and the
establishment of reserves for future capital expenditures and operational
needs.  We may fund a portion of capital expenditures with additional
borrowings or issuances of additional units.  We may also borrow to
make distributions to unitholders, for example, in circumstances where we
believe that the distribution level is sustainable over the long term, but
short-term factors have caused available cash from operations to be insufficient
to pay the distribution at the current level.  The partnership
agreement does not restrict our ability to borrow to pay
distributions.  The cash distribution policy reflects a basic judgment
that unitholders will be better served by us distributing our available cash,
after expenses and reserves, rather than retaining it.





Distributions
are not cumulative.  Consequently, if distributions on Common Units
are not paid with respect to any fiscal quarter at the initial distribution
rate, our unitholders will not be entitled to receive such payments in the
future.





Distributions
are paid within 45 days of the end of each fiscal quarter to holders of record
on or about the first or second week of each such month.  If the
distribution date does not fall on a business day, the distribution will be made
on the business day immediately preceding the indicated distribution
date.





We do not
have a legal obligation to pay distributions at any rate except as provided in
the partnership agreement.  Our distribution policy is consistent with
the terms of our partnership agreement, which requires that we distribute all of
our available cash quarterly.  Under the partnership agreement,
available cash is defined to generally mean, for each fiscal quarter, cash
generated from our business in excess of the amount of reserves the General
Partner determines is necessary or appropriate to provide for the conduct of the
business, to comply with applicable law, any of its debt instruments or other
agreements or to provide for future distributions to its unitholders for any one
or more of the upcoming four quarters.  The partnership agreement
provides that any determination made by the General Partner in its capacity as
general partner must be made in good faith and that any such determination will
not be subject to any other standard imposed by the partnership agreement, the
Delaware limited partnership statute or any other law, rule or regulation or at
equity.





On
February 14, 2008, we paid a cash distribution of approximately $30.5
million to our General Partner and common unitholders of record as of the close
of business on February 11, 2008.  The distribution that was paid
to unitholders was $0.4525 per Common Unit.





On May
15, 2008, we paid a cash distribution of approximately $33.7 million to our
General Partner and common unitholders of record as of the close of business on
May 9, 2008.  The distribution that was paid to unitholders was $0.50
per Common Unit.


F-27





On August
14, 2008, we paid a cash distribution of approximately $27.4 million to our
common unitholders of record as of the close of business on August 11,
2008.  The distribution that was paid to unitholders was $0.52 per
Common Unit.





On
November 14, 2008, we paid a cash distribution of approximately $27.4 million to
our common unitholders of record as of the close of business on November 10,
2008.  The distribution that was paid to unitholders was $0.52 per
Common Unit.





During
the year ended December 31, 2008, we made payments equivalent to the
distributions made to unitholders of $2.3 million on Restricted Phantom Units
and Convertible Phantom Units issued under our Long-Term Incentive
Plans.





2007 Private
Placements





On May
24, 2007, we sold 4,062,500 Common Units, at a negotiated purchase price of
$32.00 per unit, to certain investors (the “Purchasers”).  We used
$108 million from such sale to fund the cash consideration for the Calumet
Acquisition and the remaining $22 million of the proceeds was used to repay
indebtedness under our credit facility.  Most of the debt repaid was
associated with our first quarter 2007 acquisition of the Lazy JL Field
properties in West Texas.





On May
25, 2007, we sold an additional 2,967,744 Common Units to the same
Purchasers at a negotiated purchase price of $31.00 per unit.  We used
the proceeds of approximately $92 million to fund the BEPI Acquisition,
including the termination of existing hedge contracts related to future
production from BEPI.





On
November 1, 2007, we sold 16,666,667 Common Units, at a negotiated purchase
price of $27.00 per unit, to certain investors in a third private
placement.  We used the proceeds from such sale to fund a portion of
the cash consideration for the Quicksilver Acquisition. Also on November 1,
2007, we issued 21,347,972 Common Units to Quicksilver as partial consideration
for the Quicksilver Acquisition as a private placement.





In
connection with the private placements of Common Units to finance the
Quicksilver Acquisition, we entered into registration rights agreements with the
institutional investors in our private placements and Quicksilver to file shelf
registration statements to register the resale of the Common Units sold or
issued in the Private Placements and to use our commercially reasonable efforts
to cause the registration statements to become effective with respect to the
Common Units sold to the institutional investors not later than August 2, 2008
and, with respect to the Common Units issued to Quicksilver, within one year
from November 1, 2007.  Quicksilver is prohibited from selling any of
the Common Units issued to it prior to the first anniversary of November 1, 2007
or more than 50 percent of such Common Units prior to eighteen months after
November 1, 2007.  In addition, the agreements give the institutional
investors and Quicksilver piggyback registration rights under certain
circumstances.  These registration rights are transferable to
affiliates of the institutional investors and Quicksilver and, in certain
circumstances, to third parties.





On July
31, 2008, the registration statement relating to the resale of the Common Units
issued in the private placement to the institutional investors was declared
effective.  On October 28, 2008, the registration statement relating
to the resale of the Common Units issued in the private placement to Quicksilver
was declared effective.


F-28


14.  Financial
Instruments





Fair
Value of Financial Instruments





Our
commodity price risk management program is intended to reduce our exposure to
commodity prices and to assist with stabilizing cash flow and
distributions.  Routinely, we utilize derivative financial instruments
to reduce this volatility.  During 2008, there has been extreme
volatility and disruption in the capital and credit markets which has
reached unprecedented levels and may adversely affect the financial
condition of our derivative counterparties.  Although each of our
derivative counterparties carried an S&P credit rating of A or above
at December 31, 2008, we could be exposed to losses if a counterparty fails
to perform in accordance with the terms of the contract.  This risk is
managed by diversifying the derivative portfolio among counterparties meeting
certain financial criteria.





Commodity
Activities





The
derivative instruments we utilize are based on index prices that may and often
do differ from the actual crude oil and natural gas prices realized in our
operations.  These variations often result in a lack of adequate
correlation to enable these derivative instruments to qualify for cash flow
hedges under SFAS No. 133.  Accordingly, we do not attempt to account
for our derivative instruments as cash flow hedges and instead recognize changes
in the fair value immediately in earnings.  For the year ended
December 31, 2008 we had realized losses of $55.9 million and unrealized gains
of $388.0 million relating to our market based commodity
contracts.  We had net financial instruments receivable relating to
our commodity contracts of $292.3 million at December 31, 2008.





For the
year ended December 31, 2007, we had realized losses of $6.6 million and
unrealized losses of $103.9 million relating to our market based commodity
contracts.  We had net financial instruments payable of $99.9 million
at December 31, 2007. For the period October 10, 2006 to December 31, 2006, we
had realized gains of $2.2 million and unrealized losses of $1.3 million
relating to our market based commodity contracts.  We had net
financial instruments receivable of $3.9 million at December 31,
2006.





For the
period from January 1, 2006 to October 9, 2006, the predecessor had realized
losses of $3.7 million and unrealized gains of $6.0 million relating to various
market based contracts.





On
September 19, 2008, due to Lehman Brothers’ bankruptcy, we terminated our crude
oil derivative instruments with Lehman Brothers.  Our derivative
contract with Lehman Brothers, commonly referred to as a “zero cost collar,” was
for oil volumes of 1,000 Bbls/d for the full year 2011. This represented
approximately 8 percent of our total 2011 oil and natural gas hedge portfolio.
The floor price for the collar was $105.00 per Bbl and the ceiling price was
$174.50 per Bbl.  This contract was replaced with contracts by
substantially similar terms, with different counterparties, for oil volumes of
1,000 Bbls/d covering January 1, 2011 to January 31, 2011 and March 1, 2011 to
December 31, 2011.


F-29


We had
the following contracts in place at December 31, 2008:





Year
                          
                          
                          Year
                          
                          
                          Year
                          
                          
                          Year2009
                          
                          
                          2010
                          
                          
                          2011
                          
                          
                          2012Gas
      Positions:Fixed
      Price Swaps:Hedged
      Volume (MMBtu/d)
                          
                          
                          45,802
                          
                          
                          
                          43,869
                          
                          
                          
                          25,955
                          
                          
                          
                          19,129Average
      Price ($/MMBtu)
                          
                          $
                          8.14
                          
                          
                          $
                          8.20
                          
                          
                          $
                          9.21
                          
                          
                          $
                          10.12Collars:Hedged
      Volume (MMBtu/d)
                          
                          
                          1,740
                          
                          
                          
                          3,405
                          
                          
                          
                          16,016
                          
                          
                          
                          19,129Average
      Floor Price ($/MMBtu)
                          
                          $
                          9.00
                          
                          
                          $
                          9.00
                          
                          
                          $
                          9.00
                          
                          
                          $
                          9.00Average
      Ceiling Price ($/MMBtu)
                          
                          $
                          16.36
                          
                          
                          $
                          12.79
                          
                          
                          $
                          11.28
                          
                          
                          $
                          11.89Total:Hedged
      Volume (MMMBtu/d)
                          
                          
                          47,542
                          
                          
                          
                          47,275
                          
                          
                          
                          41,971
                          
                          
                          
                          38,257Average
      Price ($/MMBtu)
                          
                          $
                          8.17
                          
                          
                          $
                          8.26
                          
                          
                          $
                          9.13
                          
                          
                          $
                          9.56Oil
      Positions:Fixed
      Price Swaps:Hedged
      Volume (Bbls/d)
                          
                          
                          1,838
                          
                          
                          
                          2,308
                          
                          
                          
                          2,116
                          
                          
                          
                          1,939Average
      Price ($/Bbl)
                          
                          $
                          75.51
                          
                          
                          $
                          83.12
                          
                          
                          $
                          88.26
                          
                          
                          $
                          90.00Participating
      Swaps: (a)Hedged
      Volume (Bbls/d)
                          
                          
                          2,847
                          
                          
                          
                          1,993
                          
                          
                          
                          1,439
                          
                          
                          
                          -Average
      Price ($/Bbl)
                          
                          $
                          62.86
                          
                          
                          $
                          64.40
                          
                          
                          $
                          61.29
                          
                          
                          $
                          -Average
      Part. %
                          
                          
                          60.9
                          %
                          
                          
                          55.5
                          %
                          
                          
                          53.2
                          %
                          
                          
                          -Collars:Hedged
      Volume (Bbls/d)
                          
                          
                          594
                          
                          
                          
                          1,279
                          
                          
                          
                          2,048
                          
                          
                          
                          3,077Average
      Floor Price ($/Bbl)
                          
                          $
                          92.31
                          
                          
                          $
                          102.84
                          
                          
                          $
                          103.43
                          
                          
                          $
                          110.00Average
      Ceiling Price ($/Bbl)
                          
                          $
                          122.92
                          
                          
                          $
                          136.16
                          
                          
                          $
                          152.61
                          
                          
                          $
                          145.39Floors:Hedged
      Volume (Bbls/d)
                          
                          
                          500
                          
                          
                          
                          500
                          
                          
                          
                          -
                          
                          
                          
                          -Average
      Floor Price ($/Bbl)
                          
                          $
                          100.00
                          
                          
                          $
                          100.00
                          
                          
                          $
                          -
                          
                          
                          $
                          -Total:Hedged
      Volume (Bbls/d)
                          
                          
                          5,778
                          
                          
                          
                          6,080
                          
                          
                          
                          5,603
                          
                          
                          
                          5,016Average
      Price ($/Bbl)
                          
                          $
                          73.12
                          
                          
                          $
                          82.52
                          
                          
                          $
                          86.88
                          
                          
                          $
                          102.27


(a) A
participating swap combines a swap and a call option with the same strike
price.





Interest
Rate Activities





We are
subject to interest rate risk associated with loans under our credit facility
that bear interest based on floating rates.  As of December 31, 2008,
our total debt outstanding was $736.0 million.  In order to mitigate
our interest rate exposure, we had the following interest rate swaps in place at
December 31, 2008, to fix a portion of floating LIBOR-base debt on our credit
facility:





Notional amounts in thousands of dollars
                  
                  Notional Amount
                  
                  
                  Fixed RatePeriod
      CoveredJanuary
      1, 2009 to January 8, 2009
                  
                  $
                  50,000
                  
                  
                  
                  3.6200
                  %January
      1, 2009 to January 20, 2009
                  
                  
                  200,000
                  
                  
                  
                  3.6825
                  %January
      1, 2009 to July 8, 2009
                  
                  
                  50,000
                  
                  
                  
                  3.0450
                  %January
      1, 2009 to January 8, 2010
                  
                  
                  100,000
                  
                  
                  
                  3.3873
                  %January
      20, 2009 to July 20, 2009
                  
                  
                  250,000
                  
                  
                  
                  3.6825
                  %July
      20, 2009 to December 20, 2010
                  
                  
                  300,000
                  
                  
                  
                  3.6825
                  %December
      20, 2010 to October 20, 2011
                  
                  
                  200,000
                  
                  
                  
                  2.9900
                  %


F-30





On
September 19, 2008, due to Lehman Brothers’ bankruptcy, we terminated, at no
cost, our interest rate swap with Lehman Brothers on $50 million at a fixed rate
of 3.438 percent, which covered the period from January 8, 2008 to July 8, 2009.
On October 2, 2008, we entered into a new interest rate swap on $50 million at a
fixed rate of 3.0450 percent, for the period from September 8, 2008 to July 8,
2009.  These transactions are reflected in the table
above.





For the
year ended December 31, 2008, we had realized losses of $2.7 million and
unrealized losses of $17.3 million relating to our interest rate
swaps.  We had net financial instruments payable related to our
interest rate swaps of $17.3 million at December 31, 2008.





Balance
Sheet presentation of commodity and interest derivatives is as
follows:





Thousands of dollars
                    
                    Oil
                      Commodity
                      Derivatives
                    
                    
                    Natural Gas
                      Commodity
                      Derivatives
                    
                    
                    Interest Rate
                      Derivatives
                    
                    
                    Total Financial
                      InstrumentsBalance,
      December 31, 2008Short-term
      assets
                    
                    $
                    44,086
                    
                    
                    $
                    32,138
                    
                    
                    $
                    -
                    
                    
                    $
                    76,224Long-term
      assets
                    
                    
                    145,061
                    
                    
                    
                    73,942
                    
                    
                    
                    -
                    
                    
                    
                    219,003Total
      assets
                    
                    
                    189,147
                    
                    
                    
                    106,080
                    
                    
                    
                    -
                    
                    
                    
                    295,227Short-term
      liabilities
                    
                    
                    (1,115
                    )
                    
                    
                    -
                    
                    
                    
                    (9,077
                    )
                    
                    
                    (10,192
                    )Long-term
      liabilities
                    
                    
                    (1,820
                    )
                    
                    
                    -
                    
                    
                    
                    (8,238
                    )
                    
                    
                    (10,058
                    )Total
      liabilities
                    
                    
                    (2,935
                    )
                    
                    
                    -
                    
                    
                    
                    (17,315
                    )
                    
                    
                    (20,250
                    )Net
      assets (liabilities)
                    
                    $
                    186,212
                    
                    
                    $
                    106,080
                    
                    
                    $
                    (17,315
                    )
                    
                    $
                    274,977





While our
commodity price risk management program is intended to reduce our exposure to
commodity prices and assist with stabilizing cash flow and distributions, to the
extent we have hedged a significant portion of our expected production and the
cost for goods and services increases, our margins would be adversely
affected.





Effective
January 1, 2008, we adopted SFAS No. 157, “Fair Value
Measurements.”  SFAS No. 157 defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value
measurements.  Fair value measurement under SFAS No. 157 is based upon
a hypothetical transaction to sell an asset or transfer a liability at the
measurement date, considered from the perspective of a market participant that
holds the asset or owes the liability.  The objective of fair value
measurement as defined in SFAS No. 157 is to determine the price that would be
received in selling the asset or transferring the liability in an orderly
transaction between market participants at the measurement date.  If
there is an active market for the asset or liability, the fair value measurement
shall represent the price in that market whether the price is directly
observable or otherwise obtained using a valuation technique.





SFAS No.
157 requires valuation techniques consistent with the market approach, income
approach or the cost approach to be used to measure fair value.  The
market approach uses prices and other relevant information generated by market
transactions involving identical or comparable assets or
liabilities.  The income approach uses valuation techniques to convert
future cash flows or earnings to a single present value amount and is based upon
current market expectations about those future amounts.  The cost
approach, sometimes referred to as the current replacement cost approach, is
based upon the amount that would currently be required to replace the service
capacity of an asset.




We
principally use the income approach for our recurring fair value measurements
and strive to use the best information available.  We use valuation
techniques that maximize the use of observable inputs and obtain the majority of
our inputs from published objective sources or third party market
participants.  We incorporate the impact of nonperformance risk,
including credit risk, into our fair value measurements.
  SFAS No.
157 also establishes a fair value hierarchy that prioritizes the inputs to
valuation techniques into three broad levels based upon how observable those
inputs are.  The highest priority of Level 1 is given to unadjusted
quoted prices in active markets for identical assets or liabilities and the
lowest priority of Level 3 is given to unobservable inputs.  We
categorize our fair value financial instruments based upon the objectivity of
the inputs and how observable those inputs are.  The three levels of
inputs as defined in SFAS No. 157 are described further as
follows:


F-31




Level 1 –
Unadjusted quoted prices in active markets for identical assets or liabilities
as of the reporting date. Active markets are markets in which transactions for
the asset or liability occur with sufficient frequency and volume to provide
pricing information on an ongoing basis.  An example of a Level 1
input would be quoted prices for exchange traded commodity futures
contracts.





Level 2 –
Inputs other than quoted prices that are included in Level 1.  Level 2
includes financial instruments that are actively traded but are valued using
models or other valuation methodologies.  These models include
industry standard models that consider standard assumptions such as quoted
forward prices for commodities, interest rates, volatilities, current market and
contractual prices for underlying assets as well as other relevant
factors.  Substantially all of these inputs are evident in the market
place throughout the terms of the financial instruments and can be derived by
observable data, including third party data providers.  These inputs
may also include observable transactions in the market place.  We
consider the over the counter (OTC) commodity and interest rate swaps in our
portfolio to be Level 2.  These are assets and liabilities that can be
bought and sold in active markets and quoted prices are available from multiple
potential counterparties.





Level 3 –
Inputs that are not directly observable for the asset or liability and are
significant to the fair value of the asset or liability.  These inputs
generally reflect management’s estimates of the assumptions market participants
would use when pricing the instruments.  Level 3 includes financial
instruments that are not actively traded and have little or no observable data
for input into industry standard models.  Level 3 instruments
primarily include derivative instruments for which we do not have sufficient
corroborating market evidence, such as binding broker quotes, to support
classifying the asset or liability as Level 2.  Level 3 also
includes complex structured transactions that sometimes require the use of
non-standard models.





Certain
OTC derivatives that trade in less liquid markets or contain limited observable
model inputs are currently included in Level 3.  We include these
assets and liabilities in Level 3 as required by current interpretations of SFAS
157.  As of December 31, 2008, our Level 3 assets and liabilities
consisted entirely of OTC commodity put and call options.





Financial
assets and liabilities that are categorized in Level 3 may later be
reclassified to the Level 2 category at the point we are able to obtain
sufficient binding market data or the interpretation of Level 2 criteria is
modified in practice to include non-binding market corroborated
data.





As
mentioned in Note 7, our wholly owned subsidiary BreitBurn Management provides
us with general management services, including risk management
activities.  Pursuant to a transition services agreement that
terminated on December 31, 2008, BreitBurn Management contracted with Provident
for the risk management services provided to us.





Provident’s
risk management group calculated the fair values of our commodity swaps using
risk management software that marks to market monthly fixed price delivery swap
volumes using forward commodity price curves and market interest
rates.  This pricing approach is commonly used by market participants
to value commodity swap contracts for sale to the market.  Inputs are
obtained from third party data providers and are verified to published data
where available (e.g., NYMEX).





Fair
value measurements for our interest rate swaps were also provided by
Provident.  Monthly outstanding notional amounts are marked to market
for each specific swap using forward interest rate curves.  This
pricing approach is commonly used by market participants to value interest rate
swap contracts for sale to the market.  Inputs are obtained from third
party data providers and are verified to published data where available (e.g.,
LIBOR).





Provident’s
risk management group used industry standard option pricing models contained in
their risk management software to calculate the fair values associated with our
commodity options.  Inputs to the option pricing models included fixed
monthly commodity strike prices and volumes from each specific contract,
commodity prices from commodity forward price curves, volatility and interest
rate factors and time to expiry.  Model inputs were obtained from
third party data providers and are verified to published data where available
(e.g., NYMEX).





We
reviewed the fair value calculations for our derivative instruments that we
received from Provident’s risk management group on a monthly
basis.  We also compared these fair value amounts to the fair value
amounts that we receive from the counterparties to our derivative
instruments.  We investigated differences and resolve and recorded any
required changes prior to the issuance of our financial
statements.


F-32





Financial
assets and liabilities carried at fair value on a recurring basis are presented
in the table below.  Our assessment of the significance of an input to
its fair value measurement requires judgment and can affect the valuation of the
assets and liabilities as well as the category within which they are
categorized.





Recurring
fair value measurements were:





As of December 31, 2008Thousands of dollars
                
                Level 1
                
                
                Level 2
                
                
                Level 3
                
                
                TotalAssets
      (Liabilities):Commodity
      Derivatives (swaps, put and call options)
                
                $
                -
                
                
                $
                139,074
                
                
                $
                153,218
                
                
                $
                292,292Other
      Derivatives (interest rate swaps)
                
                
                -
                
                
                
                (17,315
                )
                
                
                -
                
                
                
                (17,315
                )Total
                
                $
                -
                
                
                $
                121,759
                
                
                $
                153,218
                
                
                $
                274,977





The
following table sets forth a reconciliation of our derivative instruments
classified as Level 3:





Thousands of dollars
                  
                  Year Ended
                    December 31, 2008Assets
      (Liabilities):Beginning
      balance
                  
                  $
                  44,236Realized
      and unrealized gains (losses)
                  
                  
                  106,154Purchases
      and issuances
                  
                  
                  7,452Settlements
                  
                  
                  (4,624
                  )Balance
      at December 31, 2008
                  
                  $
                  153,218





Following the termination of the Lehman
Brothers interest rate swap and crude oil zero cost collar, we entered into
similar contracts with other counterparties.  Our net cost to replicate the
terminated Lehman contracts was $4.2 million and we have recorded a provision
related to the contract default in 2008. We have a claim of approximately
$4.6 million in the Lehman bankruptcy case relating to the
terminations.





Unrealized gains of $112.2 million for
the year ended December 31, 2008 related to our derivative instruments
classified as Level 3 are included in gains (losses) on commodity derivative
instruments, net on the consolidated statements of operations. Realized losses
of $6.0 million for the year ended December 31, 2008 related to our derivative
instruments classified as Level 3 are also included in gains (losses) on
commodity derivative instruments, net on the consolidated statements of
operations.  Determination of fair values incorporates various factors
as required by SFAS No. 157 including but not limited to the credit standing of
the counterparties, the impact of guarantees as well as our own abilities to
perform on our liabilities.





15.  Unit
and Other Valuation-Based Compensation Plans





BreitBurn Management operates our
assets and performs other administrative services for us such as accounting,
corporate development, finance, land administration, legal and
engineering.  All of our employees, including our executives, are
employees of BreitBurn Management.  On June 17, 2008, in connection
with the Purchase, Contribution and Partnership Transactions, BreitBurn
Management became our wholly owned subsidiary and entered into an Amended and
Restated Administrative Services Agreement with BEC, pursuant to which BreitBurn
Management agreed to continue to provide administrative services to BEC, in
exchange for a monthly fee of $775,000 for indirect expenses. In addition to the
monthly fee, BreitBurn Management agreed to continue to charge BEC for direct
expenses including incentive plan costs and direct payroll and administrative
costs.  Beginning on June 17, 2008, all of BMC’s costs that were not
charged to BEC are consolidated with our results.


F-33


Prior to
June 17, 2008, BreitBurn Management provided services to us and to BEC, and
allocated its expenses between the two entities.  We were managed by
our General Partner, the executive officers of which were and are employees of
BreitBurn Management.  We had entered into an Administrative Services
Agreement with BreitBurn Management.  Under the Administrative
Services Agreement, we reimbursed BreitBurn Management for all direct and
indirect expenses it incurred in connection with the services it performed on
our behalf (including salary, bonus, certain incentive compensation and other
amounts paid to executive officers and other employees).





Effective
on the initial public offering date of October 10, 2006, BreitBurn Management
adopted the existing Long-Term Incentive Plan (BreitBurn Management LTIP) and
the Unit Appreciation Rights Plan (UAR plan) of the predecessor as previously
amended. The predecessor’s Executive Phantom Option Plan, Unit Appreciation Plan
for Officers and Key Individuals (Founders Plan), and the Performance Trust
Units awarded to the Chief Financial Officer during 2006 under the BreitBurn
Management LTIP, were adopted by BreitBurn Management with amendments at the
initial public offering date as described in the subject plan discussions
below.





We may
terminate or amend the long-term incentive plan at any time with respect to any
units for which a grant has not yet been made.  We also have the right
to alter or amend the long-term incentive plan or any part of the plan from time
to time, including increasing the number of units that may be granted subject to
the requirements of the exchange upon which the Common Units are listed at that
time.  However, no change in any outstanding grant may be made that
would materially reduce the rights or benefits of the participant without the
consent of the participant.  The plan will expire when units are no
longer available under the plan for grants or, if earlier, its termination by
us.





Unit
Based Compensation





Prior to
January 1, 2006, our predecessor applied the recognition and measurement
principles of Accounting Principles Board (‘‘APB’’) Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for those
plans.  Our predecessor used the method prescribed under FASB
Interpretation No. 28, Accounting for Stock Appreciation
Rights and Other Variable Stock Option or Award Plans—and interpretation of APB
Opinions No. 15 and 25, to calculate compensation expense associated with
its awards.





Effective
January 1, 2006, our predecessor adopted the fair value recognition provisions
of SFAS No. 123(R), Share-Based Payments, using
the modified-prospective transition method.  BreitBurn Management as
successor is following the same method as BEC, our predecessor.  Under
this transition method, equity-based compensation expense for the January 1,
2006 to October 9, 2006 period and October 10, 2006 to December 31, 2006 period
included compensation expense for all equity-based compensation awards granted
prior to, but not yet vested as of January 1, 2006, based on the grant date fair
value estimated in accordance with the provisions of SFAS No. 123 and for
options granted subsequent to January 1, 2006 in accordance with the provisions
of SFAS No. 123(R).  Unit based compensation awards granted prior to
but not yet vested as of January 1, 2006 that are classified as liabilities were
charged to compensation expense based on the fair value provisions of SFAS No.
123(R).  For the liability-based plans, we and our predecessor
recognize these compensation expenses on a graded-vesting
method.  Under the graded-vesting method, a company recognizes
compensation expense over the requisite service period for each separately
vesting tranche of the award as though the award were, in substance, multiple
awards.  For our RPU and CPU equity-based plans, we recognize our
compensation expense on a straight line basis over the annual vesting periods as
prescribed in the award agreements.





Awards
classified as liabilities are revalued at each reporting period using the
Black-Scholes option pricing model and changes in the fair value of the options
are recognized as compensation expense over the vesting schedules of the
awards.  Awards classified as equity are valued on the grant date and
are recognized as compensation expense over the vesting
period(s).  Option awards outstanding at the end of 2008 are
liability-classified because the awards are settled in cash or have the option
of being settled in cash or units at the choice of the holder, and they are
indexed to either our Common Units or to Provident Trust Units.  The
liability-classified option awards are distribution-protected awards through
either an Adjustment Ratio as defined in the plan or the holders receive
cumulative distribution amounts upon vesting equal to the actual distribution
amounts per Common Unit of the underlying notional Units.  In the
Black-Scholes option pricing model, the expected volatilities are based
primarily on the historical volatility of Provident’s units for Provident
indexed units and the Alerian MLP Index for Partnership indexed
units.  We and our predecessor use historical data to estimate option
exercises and employee terminations within the valuation model; separate groups
of employees that have similar historical exercise behavior are considered
separately for valuation purposes.  The expected term of options
granted is based on historical exercise behavior and represents the period of
time that options granted are expected to be outstanding.  The risk
free rate for periods within the contractual life of the option is based on U.S.
Treasury rates.  Due to the distribution protection provision of the
plans, zero distribution yield is assumed in the pricing model; however,
compensation cost is recognized based on the units adjusted for the Adjustment
Ratio and for certain plans, it includes distribution amounts accumulated to the
reporting date.


F-34





For the
period January 1, 2006 to October 9, 2006, the predecessor’s net income was
approximately $0.6 million higher than if the share based compensation was still
accounted for under APB 25.  The Predecessor’s cumulative effect of
adoption of SFAS No. 123(R) in 2006 was a benefit of approximately $0.6
million.





Executive
Phantom Option Plan





Effective
on the initial public offering date of October 10, 2006, the Phantom Options
awarded to the Co-Chief Executive Officers during 2006, were adopted by
BreitBurn Management and converted into three separate awards. The first award
represented a one and one half percent interest with respect to the operations
of the properties that were not transferred to us for the 2006 fiscal year. Its
unit value was determined on the basis of an assessment of the valuation of the
properties at the beginning of the fiscal period as compared to an assessment of
the valuation of the properties at the end of the fiscal period plus
distributions paid less a hurdle rate of eight percent. The second award
represented a one and one half percent interest with respect to the operations
of the properties that were transferred to us for the period of January 1, 2006
to the initial public offering date of October 10, 2006.  Its unit
value was determined on the basis of an assessment of the valuation of the
properties at the beginning of the fiscal period as compared to the valuation of
the properties at the end of the fiscal period as determined using the initial
public offering price plus distributions paid less a prorated hurdle rate. The
third award represented a one and one half percent interest with respect to the
operations of the properties that were transferred to us for the period
beginning on the initial public offering date of October 10, 2006 and ending on
December 31, 2006.  Its unit value was determined using the initial
public offering price of $18.50 at October 10, 2006 as compared to the closing
unit price of $24.10 on December 29, 2006 less a prorated hurdle rate. The first
two awards were charged to the predecessor as compensation expense during 2006.
The predecessor recorded compensation expense of $5.9 million for the period
January 1, 2006 to October 9, 2006. The third award was charged to us resulting
in an expense of $3.6 million for the period from October 10, 2006 to December
31, 2006.  All phantom options granted for each plan year were settled
in cash before March 1 of the following year.





Pursuant
to the employment agreements between the predecessor and the Co-Chief Executive
Officers, which were adopted by us and BreitBurn Management, at January 1, 2007,
the Co-Chief Executive Officers were each awarded 336,364 phantom option units
at a grant price of $24.10 per unit under the executive phantom option
plan.  These phantom units, in late 2007, were cancelled and
terminated in exchange for the right to receive a lump-sum payment of $2.4
million and 184,400 of Restricted Phantom Units (RPUs) at a grant price of
$31.68 per unit, which has a fair value of $5.8 million.  The RPUs
generally will vest and be paid in Common Units in three equal, annual
installments on each anniversary date of the vesting commencement date of the
award.  They will receive distributions quarterly at the same rate
payable to common unitholders immediately after grant.  For detailed
information on the RPUs, see discussions at the end of this note regarding
“Restricted Phantom Units and Convertible Phantom Units.”





The RPUs
are classified as equity awards.  Under the provisions of SFAS
No.123(R), we recorded compensation expense of $7.0 million for the exchange of
executive phantom options awards in 2007.  Of the total amount
expensed in 2007, $4.6 million was recorded to equity.  The remaining
fair value of the awards in the amount of $1.2 million will be expensed ratably
over a three-year period beginning in 2008 and is included later in this note
under the Restricted Phantom Units and Convertible Phantom Units
disclosure.





Founders
Plan





Under the
Founders Plan, participants received unit appreciation rights which provide cash
compensation in relation to the appreciation in the value of a specified number
of underlying notional phantom units.  The value of the unit
appreciation rights was determined on the basis of a valuation of the
predecessor at the end of the fiscal period plus distributions during the period
less the value of the predecessor at the beginning of the period.  The
base price and vesting terms were determined by BreitBurn Management at the time
of the grant.  Outstanding unit appreciation rights vest in the
following manner: one-third vest three years after the grant date, one-third
vest four years after the grant date and one-third vest five years after the
grant date and are subject to specified service requirements.


F-35


Effective
on the initial public offering date of October 10, 2006, all outstanding unit
appreciation rights under the Founders Plan were adopted by BreitBurn Management
and converted into three separate awards.  The first award represented
2.2 million unit appreciation rights at a weighted average grant price of $0.76
per unit with respect to the operations of the properties that were not
transferred to us.  The value of these unit appreciation rights at
year-end 2006 was determined on the basis of an assessment of the valuation of
the properties at the original grant date as compared to an assessment of the
valuation of the properties at the end of the fiscal period plus distributions
paid.  The second award represented 309,570 unit appreciation rights
at a weighted average grant price of $4.70 per unit with respect to the
operations of the properties that were transferred to us for the period from the
original date of grant to the initial public offering date of October 10,
2006.  The value of the unit appreciation rights was determined on the
basis of an assessment of the valuation of the properties at the original grant
date as compared to the valuation of the properties at the end of the fiscal
period as determined using the initial public offering price plus distributions
paid.  The aggregate values of the vested and unvested units for the
first two awards were $4 million and $2.4 million respectively, at December 31,
2006.  The predecessor had recorded $2.0 million of compensation
expense under the plan in the period ended October 9, 2006.





The third
award represented 309,570 Partnership unit appreciation rights at a base price
of $18.50 per unit with respect to the operations of the properties that were
transferred to us for the period beginning on the initial public offering date
of October 10, 2006.  The award is liability-classified and is being
charged to us as compensation expense over the remaining vesting
schedule.  The value of the outstanding Partnership unit appreciation
rights is remeasured each period using a Black-Scholes option pricing
model.  Market prices of $7.05 and $28.90 were used in the model for
the periods ending December 31, 2008 and December 31, 2007,
respectively.  Expected volatility ranged from 9 percent to 21 percent
and had a weighted average volatility of 9.8 percent. The average risk free rate
used was approximately 3.3 percent.  The expected option terms ranged
from one half year to two and one half years.





We
recorded approximately $(0.3), $ 2.7 and $0.3 million of compensation
expense/(income) under the plan for the year ended December 31, 2008, December
31, 2007 and the period ended December 31, 2006, respectively.  The
aggregate value of the vested unit appreciation rights was $0.4 million and the
unvested obligation was zero at December 31, 2008.





The
following table summarizes information about Appreciation Rights Units issued
under the Founders Plan:





December
      31,2008
                  
                  
                  2007
                  
                  
                  2006Number
      of
                  
                  
                  Weighted
                  
                  
                  Number
      of
                  
                  
                  Weighted
                  
                  
                  Number
      of
                  
                  
                  WeightedAppreciation
                  
                  
                  Average
                  
                  
                  Appreciation
                  
                  
                  Average
                  
                  
                  Appreciation
                  
                  
                  AverageRights
      Units
                  
                  
                  Exercise
      Price
                  
                  
                  Rights
      Units
                  
                  
                  Exercise
      Price
                  
                  
                  Rights
      Units
                  
                  
                  Exercise
      PriceOutstanding
      , beginning of period
                  
                  
                  214,107
                  
                  
                  $
                  18.50
                  
                  
                  
                  305,570
                  
                  
                  $
                  18.50
                  
                  
                  
                  305,570
                  
                  
                  $
                  18.50Exercised
                  
                  
                  (91,463
                  )
                  
                  
                  18.50
                  
                  
                  
                  (91,463
                  )
                  
                  
                  18.50
                  
                  
                  
                  -
                  
                  
                  
                  -Outstanding,
      end of period
                  
                  
                  122,644
                  
                  
                  $
                  18.50
                  
                  
                  
                  214,107
                  
                  
                  $
                  18.50
                  
                  
                  
                  305,570
                  
                  
                  $
                  18.50Exercisable,
      end of period
                  
                  
                  -
                  
                  
                  $
                  -
                  
                  
                  
                  -
                  
                  
                  $
                  -
                  
                  
                  
                  91,463
                  
                  
                  $
                  18.50




BreitBurn
Management LTIP and the Partnership LTIP





In
September 2005, certain employees of the predecessor were granted restricted
units (RTUs) and/or performance units (PTUs), both of which entitle the employee
to receive cash compensation in relation to the value of a specified number of
underlying notional trust units indexed to Provident Energy Trust
Units.  The grants are based on personal performance
objectives.  This plan replaced the Unit Appreciation Right Plan for
Employees and Consultants for the period after September 2005 and subsequent
years.  RTUs vest one third at the end of year one, one third at end
of year two and one third at the end of year three after grant.  In
general, cash payments equal to the value of the underlying notional units were
made on the anniversary dates of the RTU to the employees entitled to receive
them.  PTUs vest three years from the end of third year after grant
and payout can range from zero to two hundred percent of the initial grant
depending on the total return of the underlying notional units as compared to
the returns of selected peer companies.  The total return of the
Provident Energy Trust unit is compared with the return of 25 selected Canadian
trusts and funds.  The Provident indexed PTUs granted in 2005 and 2006
entitle employees to receive cash payments equal to the market price of the
underlying notional units.  Under our LTIP, Partnership indexed PTUs
were granted in 2007 and are payable in cash or may be paid in Common Units of
the Partnership if elected at least 60 days prior to vesting by the
grantees.  The total return of the Partnership unit is compared with
the return of 49 companies in the Alerian MLP Index for the payout
multiplier.  All of the grants are
liability-classified.  Underlying notional units are established based
on target salary LTIP threshold for each employee.  The awarded
notional units are adjusted cumulatively thereafter for distribution payments
through the use of an adjustment ratio.  The estimated fair value
associated with RTUs and PTUs is expensed in the statement of income over the
vesting period.


F-36





On June
17, 2008, we entered into the BreitBurn Management Purchase agreement with Pro
LP and Pro GP.  The BreitBurn Management Purchase Agreement contains
certain covenants of the parties relating to the allocation of responsibility
for liabilities and obligations under certain pre-existing equity-based
compensation plans adopted by BreitBurn Management, BEC and us.  The
pre-existing compensation plans include the outstanding 2005 and 2006 LTIP
grants which are indexed to the Provident Trust Units.  As a result,
we paid $0.9 million for our share of the 2005 LTIP grants that vested in June
2008 in accordance with the agreed allocation of liability.





In
September 2008, BreitBurn Management made an offer to holders of the 2006 LTIP
grants to cash out their Provident-indexed units at $10.32 per share before the
normal vesting date of December 31, 2008.  By the end of September
2008, the offer was accepted by all employees who had outstanding 2006 LTIP
grants.  Consequently, compensation expense was recognized for the
full amount of the remaining unvested liability during
2008.  BreitBurn Management paid employees $0.6 million in 2008 for
its share of the 2006 LTIP grants in accordance with the agreed allocation of
liability.





Under our
LTIP, Partnership-indexed restricted units (RTUs) and/or performance units
(PTUs) were granted in 2007 and are payable in cash or in Common Units of the
Partnership if elected by the grantee at least 60 days prior to the vesting
date.  For PTUs, a performance multiplier is applied and is determined
by comparing our total return to the returns of 49 companies in the Alerian MLP
Index.  All of the grants are
liability-classified.  Underlying notional units are established based
on target salary LTIP threshold for each employee.  The awarded
notional units are adjusted cumulatively thereafter for distribution payments
through the use of an adjustment ratio.  The estimated fair value
associated with RTUs and PTUs is expensed in the statement of income over the
vesting period.





We
recognized $(0.5), $2.5 and $0.3 million of compensation expense/(income) for
the years ended December 31, 2008, December 31, 2007 and for the period ended
December 31, 2006.  Our share of the aggregate liability under the
BreitBurn Management LTIP was $0.8 million at December 31, 2008.  The
aggregate value of the vested and unvested units under the plan was $0.6 million
and $0.2 million respectively, at December 31, 2008.





The following table summarizes
information about the restricted/performance units granted in 2005 and
2006:





Successor
                
                
                PredecessorBreitBurn
      Management Company
                
                
                BreitBurn
      Energy Company L.P.PVE
      indexed units
                
                
                PVE
      indexed unitsDecember
      31,
                
                
                October
      10 to
                
                
                January
      1 to2008
                
                
                2007
                
                
                December
      31, 2006
                
                
                October
      9, 2006Weighted
                
                
                
                
                
                Weighted
                
                
                
                
                
                Weighted
                
                
                
                
                
                WeightedNumber
      of
                
                
                Average
                
                
                Number
      of
                
                
                Average
                
                
                Number
      of
                
                
                Average
                
                
                Number
      of
                
                
                AverageUnits
                
                
                Grant
      Price
                
                
                Units
                
                
                Grant
      Price
                
                
                Units
      (a)
                
                
                Grant
      Price
                
                
                Units
      (a)
                
                
                Grant
      PriceOutstanding
      , beginning of period
                
                
                267,702
                
                
                $
                10.77
                
                
                
                318,389
                
                
                $
                10.82
                
                
                
                372,203
                
                
                $
                11.05
                
                
                
                232,740
                
                
                $
                9.91Granted
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                169,633
                
                
                
                12.41Exercised
                
                
                (267,351
                )
                
                
                10.77
                
                
                
                (36,203
                )
                
                
                10.87
                
                
                
                (13,289
                )
                
                
                12.41
                
                
                
                (22,615
                )
                
                
                9.91Cancelled
      (b)
                
                
                (351
                )
                
                
                10.73
                
                
                
                (14,484
                )
                
                
                11.53
                
                
                
                (40,525
                )
                
                
                12.41
                
                
                
                (7,555
                )
                
                
                9.97Outstanding,
      end of period
                
                
                -
                
                
                $
                10.77
                
                
                
                267,702
                
                
                $
                10.77
                
                
                
                318,389
                
                
                $
                10.82
                
                
                
                372,203
                
                
                $
                11.05Exercisable,
      end of period
                
                
                -
                
                
                $
                -
                
                
                
                -
                
                
                $
                -
                
                
                
                -
                
                
                $
                -
                
                
                
                -
                
                
                $
                -





(a)
Amounts exclude units attributable to the adjustment ratio.


(b)
Cancelled units for October 10 to December 31, 2006 includes 40,290 PVE indexed
units awarded to the Chief Financial Officer which were converted to Partnership
indexed units.




F-37


The
following table summarizes information about the restricted/performance units
granted in 2007.  Market prices of $7.05 and $28.90 were used in the
model for the periods ending December 31, 2008 and December 31, 2007,
respectively.  Expected volatility ranged from 9 percent to 15 percent
and had a weighted average volatility of 9.8 percent.  The average
risk free rate ranged from 2 to 3.3 percent.  The expected option
terms ranged from one year to two years.





PTUs
      and RTUsDecember
      31,2008
                  
                  
                  2007Weighted
                  
                  
                  
                  
                  
                  WeightedNumber
      of
                  
                  
                  Average
                  
                  
                  Number
      of
                  
                  
                  AverageUnits
                  
                  
                  Grant
      Price
                  
                  
                  Units
                  
                  
                  Grant
      PriceOutstanding
      , beginning of period
                  
                  
                  108,717
                  
                  
                  $
                  23.64
                  
                  
                  
                  20,483
                  
                  
                  $
                  21.67Granted
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  91,834
                  
                  
                  
                  24.10Exercised
                  
                  
                  (20,645
                  )
                  
                  
                  20.39
                  
                  
                  
                  (98
                  )
                  
                  
                  24.10Cancelled
                  
                  
                  (1,080
                  )
                  
                  
                  24.10
                  
                  
                  
                  (3,502
                  )
                  
                  
                  24.10Outstanding,
      end of period
                  
                  
                  86,992
                  
                  
                  $
                  24.10
                  
                  
                  
                  108,717
                  
                  
                  $
                  23.64Exercisable,
      end of period
                  
                  
                  -
                  
                  
                  $
                  -
                  
                  
                  
                  -
                  
                  
                  $
                  -





Unit
Appreciation Right Plan





In 2004,
the predecessor adopted the Unit Appreciation Right Plan for Employees and
Consultants (the ‘‘UAR Plan’’).  Under the UAR Plan, certain employees
of the predecessor were granted unit appreciation rights
(‘‘UARs’’).  The UARs entitle the employee to receive cash
compensation in relation to the value of a specified number of underlying
notional trust units of Provident (‘‘Phantom Units’’).  The exercise
price and the vesting terms of the UARs were determined at the sole discretion
of the Plan Administrator at the time of the grant.  The UAR Plan was
replaced with the BreitBurn Management LTIP at the end of September
2005.  The grants issued prior to the replacement of the UAR Plan
fully vested in 2008.





UARs vest
one third at the end of year one, one third at the end of year two and one third
at the end of year three after grant.  Upon vesting, the employee is
entitled to receive a cash payment equal to the excess of the market price of
Provident Energy Trust’s units (PVE units) over the exercise price of the
Phantom Units at the grant date, adjusted for an additional amount equal to any
Excess Distributions, as defined in the plan.  The predecessor settles
rights earned under the plan in cash.





The total
compensation expense for the UAR plan is allocated between us and our
predecessor.  Our share of expense was an immaterial amount in 2008,
$0.4 million in 2007 and $0.2 million for the period from October 10 to December
31, 2006 under the UAR Plan.  Our share of the aggregate liability
under the UAR Plan was approximately $0.1 million at December 31,
2008.  The liability primarily represents accrued expense related to
unpaid distributions on the fully vested UARs.  In the Black-Scholes
option pricing model for this plan, the expected volatility used was 29 percent
and the risk rate was 3.3 percent.  The expected option term is less
than one half year.





The following table summarizes the
information about UARs:





Successor
                
                
                PredecessorBreitBurn
      Management Company
                
                
                BreitBurn
      Energy Company L.P.PVE
      indexed units
                
                
                PVE
      indexed unitsDecember
      31,
                
                
                October
      10 to
                
                
                January
      1 to2008
                
                
                2007
                
                
                December
      31, 2006
                
                
                October
      9, 2006Number
      of
                
                
                Weighted
                
                
                Number
      of
                
                
                Weighted
                
                
                Number
      of
                
                
                Weighted
                
                
                Number
      of
                
                
                WeightedAppreciation
                
                
                Average
                
                
                Appreciation
                
                
                Average
                
                
                Appreciation
                
                
                Average
                
                
                Appreciation
                
                
                AverageRights
                
                
                Exercise
      Price
                
                
                Rights
                
                
                Exercise
      Price
                
                
                Rights
                
                
                Exercise
      Price
                
                
                Rights
                
                
                Exercise
      PriceOutstanding
      , beginning of period
                
                
                154,323
                
                
                $
                9.16
                
                
                
                474,521
                
                
                $
                8.41
                
                
                
                515,410
                
                
                $
                8.34
                
                
                
                770,026
                
                
                $
                8.34Exercised
                
                
                (69,994
                )
                
                
                9.18
                
                
                
                (316,183
                )
                
                
                8.96
                
                
                
                (40,889
                )
                
                
                8.20
                
                
                
                (241,951
                )
                
                
                8.20Cancelled
                
                
                -
                
                
                
                -
                
                
                
                (4,015
                )
                
                
                9.16
                
                
                
                -
                
                
                
                -
                
                
                
                (12,665
                )
                
                
                8.90Outstanding,
      end of period
                
                
                84,329
                
                
                $
                9.96
                
                
                
                154,323
                
                
                $
                9.65
                
                
                
                474,521
                
                
                $
                8.41
                
                
                
                515,410
                
                
                $
                8.39Exercisable,
      end of period
                
                
                84,329
                
                
                $
                9.96
                
                
                
                115,003
                
                
                $
                9.53
                
                
                
                86,882
                
                
                $
                8.47
                
                
                
                111,104
                
                
                $
                8.24




F-38


Director
Performance Units





Effective
with the initial public offering, we also made grants of Restricted Phantom
Units in the Partnership to the non-employee directors of our General
Partner.  Each phantom unit is accompanied by a distribution
equivalent unit right entitling the holder to an additional number of phantom
units with a value equal to the amount of distributions paid on each of our
Common Units until settlement.  Upon vesting, the majority of the
phantom units will be paid in Common Units, except for certain directors’ awards
which will be settled in cash.  The unit-settled awards are classified
as equity and the cash-settled awards are classified as
liabilities.  The estimated fair value associated with these phantom
units is expensed in the statement of income over the vesting
period.  The accumulated compensation expense for unit-settled awards
is reported in equity and for cash-settled grants, it is reflected as a
liability on the consolidated balance sheet.





We
recorded compensation expense for the director’s phantom units of approximately
$0.1 million in 2008 and $0.5 million in 2007.  Compensation expense
recorded for the period October 10, 2006 through December 31, 2006 amounted to
an immaterial amount.  Our aggregate liability under the outstanding
grants was $0.8 million at December 31, 2008 of which $0.4 million represents
the unvested portion.





The following table summarizes
information about the Director Performance Units:





December
      31,2008
                
                
                2007
                
                
                2006Number
      of
                
                
                Weighted
                
                
                Number
      of
                
                
                Weighted
                
                
                Number
      of
                
                
                WeightedPerformance
                
                
                Average
                
                
                Performance
                
                
                Average
                
                
                Performance
                
                
                AverageUnits
                
                
                Grant
      Price
                
                
                Units
                
                
                Grant
      Price
                
                
                Units
                
                
                Grant
      PriceOutstanding
      , beginning of period
                
                
                37,473
                
                
                $
                21.11
                
                
                
                20,026
                
                
                $
                18.50
                
                
                
                -
                
                
                $
                -Granted
                
                
                20,146
                
                
                
                27.35
                
                
                
                17,447
                
                
                
                24.10
                
                
                
                20,026
                
                
                
                18.50Exercised
                
                
                (22,190
                )
                
                
                23.05
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Outstanding,
      end of period
                
                
                35,429
                
                
                $
                23.44
                
                
                
                37,473
                
                
                $
                21.11
                
                
                
                20,026
                
                
                $
                18.50Exercisable,
      end of period
                
                
                -
                
                
                $
                -
                
                
                
                -
                
                
                $
                -
                
                
                
                -
                
                
                $
                -





Restricted
Phantom Units and Convertible Phantom Units





In
connection with the changes to BreitBurn Management’s executive compensation
program, the board of directors of our General Partner has approved two new
types of awards under our LTIP, namely, Restricted Phantom Units (RPUs) and
Convertible Phantom Units (CPUs).  In December 2007, seven executives
of our General Partner received 188,545 units of RPUs and 681,500 units of CPUs
at a grant price of $30.29 per Common Unit.  Each of the awards has
the vesting commencement date of January 1, 2008.  In November 2007,
the Co-Chief Executive Officers also received 184,400 of Restricted Phantom
Units (RPUs) at a grant price of $31.68 per Common Unit under our Long-Term
Incentive Plan.  Those executive officers received CPU grants because
they are in the best position to influence our operating results and, therefore,
the amount of distributions we make to holders of our Common
Units.  As discussed below, payments under CPUs are significantly tied
to the amount of distributions we make to holders of our Common
Units.  As discussed further below, the number of CPUs ultimately
awarded to each of these senior executives is based upon the level of
distributions to common unitholders achieved during the term of the
CPUs.  The CPU grants vest over a longer-term period of up to five
years.  Therefore, these grants will not be made on an annual
basis.  New grants could be made at the board’s discretion at a future
date after the present CPU grants have vested.  A holder of an RPU is
entitled to receive payments equal to quarterly distributions in cash at the
time they are made.  As a result, we believe that RPUs better
incentivize holders of these awards to grow stable distributions for our common
unitholders than do performance units.  In 2008, the board of
directors of the General Partner granted 245,290 RPUs to employees at a weighted
average price of $20.44.





Restricted Phantom Units
(RPUs).  RPUs are phantom equity awards that, to the extent
vested, represent the right to receive actual partnership units upon specified
payment events.  RPUs generally vest in three equal, annual
installments on each anniversary of the vesting commencement date of the
award.  In addition, each RPU is granted in tandem with a distribution
equivalent right that will remain outstanding from the grant of the RPU until
the earlier to occur of its forfeiture or the payment of the underlying unit,
and which entitles the grantee to receive payment of amounts equal to
distributions paid to each holder of an actual partnership unit during such
period.  RPUs that do not vest for any reason are forfeited upon a
grantee’s termination of employment.


F-39





Convertible Phantom Units
(CPUs).  CPUs vest on the earliest to occur of (i) January 1,
2013, (ii) the date on which the aggregate amount of distributions paid to
common unitholders for any four consecutive quarters during the term of the
award is greater than or equal to $3.10 per Common Unit and (iii) upon the
occurrence of the death or “disability” of the grantee or his or her termination
without “cause” or for “good reason” (as defined in the holder’s employment
agreement, if applicable).  Unvested CPUs are forfeited in the event
that the grantee ceases to remain in the service of BreitBurn
Management.





Prior to
vesting, a holder of a CPU is entitled to receive payments equal to the amount
of distributions made by us with respect to each of the Common Units multiplied
by the number of Common Unit equivalents underlying the CPUs at the time of the
distribution.  Initially, one Common Unit equivalent underlies each
CPU at the time it was awarded to the grantee.  However, the number of
Common Unit equivalents underlying the CPUs increase at a compounded rate of 25
percent upon the achievement of each 5 percent compounded increase in the
distributions paid by us to our common unitholders.  Conversely, the
number of Common Unit equivalents underlying the CPUs decrease at a compounded
rate of 25 percent if the distributions paid by us to our common unitholders
decreases at a compounded rate of 5 percent.





In the
event that the CPUs vest on January 1, 2013 or because the aggregate amount of
distributions paid to common unitholders for any four consecutive quarters
during the term of the award is greater than $3.10 per Common Unit, the CPUs
would convert into a number of Common Units equal to the number of Common Unit
equivalents underlying the CPUs at such time (calculated based upon the
aggregate amount of distributions made per Common Unit for the preceding four
quarters).





In the
event that CPUs vest due to the death or disability of the grantee or his or her
termination without cause or good reason, the CPUs would convert into a number
of Common Units equal to the number of Common Unit equivalents underlying the
CPUs at such time, pro-rated based on when the death or disability
occurred.  First, the number of Common Unit equivalents would be
calculated based upon the aggregate amount of distributions made per Common Unit
for the preceding four quarters or, if such calculation would provide for a
greater number of Common Unit equivalents, the most recently announced quarterly
distribution level by us on an annualized basis.  Then, this number
would be pro rated by multiplying it by a percentage equal to:





·
            if
      such termination occurs on or before December 31, 2008, a percentage equal
      to 40 percent;


·
            if
      such termination occurs on or before December 31, 2009, a percentage equal
      to 60 percent;


·
            if
      such termination occurs on or before December 31, 2010, a percentage equal
      to 80 percent; and


·
            if
      such termination occurs on or after January 1, 2011, a percentage equal to
      100 percent.





In 2008, we recognized compensation
expense of $7.5 million related to its CPUs and RPUs.





The following table summarizes
information about the CPUs and RPUs:





December
      31,2008
                
                
                2007
                
                
                2006Number
      of
                
                
                Weighted
                
                
                Number
      of
                
                
                Weighted
                
                
                Number
      of
                
                
                WeightedRPU
                
                
                Average
                
                
                RPU
                
                
                Average
                
                
                CPU
                
                
                AverageUnits
                
                
                Grant
      Price
                
                
                Units
                
                
                Grant
      Price
                
                
                Units
                
                
                Grant
      PriceOutstanding
      , beginning of period (a)
                
                
                372,945
                
                
                $
                30.98
                
                
                
                372,945
                
                
                $
                30.98
                
                
                
                681,500
                
                
                $
                30.29Granted
                
                
                245,290
                
                
                
                20.44
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Cancelled
                
                
                (10,972
                )
                
                
                20.83
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Outstanding,
      end of period
                
                
                607,263
                
                
                $
                26.91
                
                
                
                372,945
                
                
                $
                30.98
                
                
                
                681,500
                
                
                $
                30.29Exercisable,
      end of period
                
                
                -
                
                
                $
                -
                
                
                
                -
                
                
                $
                -
                
                
                
                -
                
                
                $
                -





(a) 2007
includes Co-Chief Executive Officers' 184,400 RPUs received as a result of the
termination of the executive phantom option plan in November
2007.


F-40


16.  Commitments
and Contingencies





Lease
Rental Obligations





We had
operating leases for office space and other property and equipment having
initial or remaining noncancelable lease terms in excess of one
year.  Our future minimum rental payments for operating leases at
December 31, 2008 are presented below:





Payments
      Due by YearThousands
      of dollars
                  
                  2009
                  
                  
                  2010
                  
                  
                  2011
                  
                  
                  2012
                  
                  
                  2013
                  
                  
                  after
      2013
                  
                  
                  TotalOperating
      leases
                  
                  $
                  2,232
                  
                  
                  $
                  2,126
                  
                  
                  $
                  1,989
                  
                  
                  $
                  1,656
                  
                  
                  $
                  1,272
                  
                  
                  $
                  2,143
                  
                  
                  $
                  11,418





BreitBurn
Management, our wholly owned subsidiary, has office, vehicle (primarily work
vehicles used in our field operations) and office equipment
leases.  Net rental payments made under non-cancelable operating
leases were $2.88 million in 2008, $0.4 million in 2007 and $0.1 million for the
period from October 10, 2006 to December 31, 2006.  For the period
from January 1, 2006 to October 9, 2006, the predecessor’s net rental payments
were $0.3 million.





Surety
Bonds and Letters of Credit





In the
normal course of business, we have performance obligations that are secured, in
whole or in part, by surety bonds or letters of credit.  These
obligations primarily cover self-insurance and other programs where governmental
organizations require such support.  These surety bonds and letters of
credit are issued by financial institutions and are required to be reimbursed by
us if drawn upon.  At December 31, 2008, we had $10.1 million in
surety bonds and we had $0.3 million in letters of credit
outstanding.  At December 31, 2007, we had $7.6 million in surety
bonds and $0.3 million in letters of credit outstanding.





Other





On
October 31, 2008, Quicksilver, an owner of more than five percent of our Common
Units, instituted a lawsuit in the District Court of Tarrant County, Texas
naming us as a defendant along with BreitBurn GP, BOLP, BOGP, Randall H.
Breitenbach, Halbert S. Washburn, Gregory J. Moroney, Charles S. Weiss, Randall
J. Findlay, Thomas W. Buchanan, Grant D. Billing and Provident.  On
December 12, 2008, Quicksilver filed an Amended Petition and asserted twelve
different counts against the various defendants.  The primary claims are as
follows:  Quicksilver alleges that BOLP breached the Contribution Agreement
with Quicksilver, dated September 11, 2007, based on allegations that we made
false and misleading statements relating to its relationship with
Provident.  Quicksilver also alleges common law and statutory fraud claims
against all of the defendants by contending that the defendants made false and
misleading statements to induce Quicksilver to acquire Common Units in us. 
Finally, Quicksilver alleges claims for breach of the Partnership’s First
Amended and Restated Agreement of Limited Partnership, dated as of October 10,
2006 (“Partnership Agreement”), and other common law claims relating to certain
transactions and an amendment to the Partnership Agreement that occurred in June
2008.  Quicksilver seeks a temporary and permanent injunction, a
declaratory judgment relating primarily to the interpretation of the Partnership
Agreement and the voting rights in that agreement, indemnification, punitive or
exemplary damages, avoidance of BreitBurn GP's assignment to us of all of its
economic interest in us, attorneys’ fees and costs, pre- and post-judgment
interest, and monetary damages.  The parties to the lawsuit are engaged in
discovery pursuant to an agreed scheduling order.  On February 17,
2009, we filed a motion for summary judgment which is scheduled to be heard on
March 26, 2009.  A hearing on Quicksilver’s request for a temporary
injunction is scheduled for April 6, 2009.





We are
defending ourselves vigorously in connection with the allegations in the
lawsuit.  Because this lawsuit still is at an early stage, we cannot
predict the manner and timing of the resolution of the lawsuit or its outcome,
or estimate a range of possible losses, if any, that could result in the event
of an adverse verdict in the lawsuit.





Although
we may, from time to time, be involved in litigation and claims arising out of
our operations in the normal course of business, we are not currently a party to
any material legal proceedings other than as mentioned above.  In addition,
we are not aware of any material legal or governmental proceedings against us,
or contemplated to be brought against us, under the various environmental
protection statues to which we are subject.




F-41


17.  Supplemental
property tax billings





In May
2006, the predecessor received supplemental property tax billings from Los
Angeles County amounting to approximately $0.3 million (net of expected
recoveries from working interest and mineral interest owners) related to a
reassessment of mineral values associated with its oil and gas properties
located in Los Angeles County.  This reassessment was performed by Los
Angeles County as a result of Provident’s purchase of BEC on June 15,
2004.  The supplemental billings covered the period from July 1, 2005
to June 30, 2006.





In June
2006, the predecessor received supplemental property tax billings from Los
Angeles County amounting to approximately $1.3 million related to a reassessment
of mineral values associated with those properties as a result of Provident’s
purchase of BEC.  After projecting recoveries from outside working
interest and mineral interest owners, the predecessor’s net property tax
liability was approximately $1.1 million for the period July 1, 2004 to June 30,
2005.





At year
end 2004, a review of California counties’ recent practices of oil and gas
property value assessments indicated that a value reassessment of BEC’s
California oil and gas properties would likely not occur until the annual lien
date of January 1, 2005.  The predecessor employed third party
property tax experts to assist with this review.  As a result, the
predecessor concluded that its property tax liabilities accrued at year end 2004
were proper.





In 2005,
the predecessor received property tax billings from Los Angeles County that
reflected substantially increased assessed values over the 2004 Los Angeles
County oil and gas properties’ assessed values.  Due to this increase
in assessed values and earlier discussions with the predecessor’s third party
property tax experts, the predecessor concluded that the Los Angeles County
property tax billings it received in 2005 included amounts due for any
reassessment Los Angeles County would have performed.  As a result,
the predecessor concluded that its property tax liabilities accrued at year end
2005 were reasonable.





In
accordance with paragraph 8 of SFAS No. 5, Accounting for Contingencies,
the predecessor has accrued the full amount of the supplemental property tax
billings in its 2006 financial statements.  This accrual increased
property tax expense by $1.6 million (net of expected recoveries from working
interest and mineral interest owners).  In July 2006, the predecessor
filed an appeal with Los Angeles County challenging the reassessed values used
in the supplemental property tax billings.  In 2007, the appeal was
withdrawn as the reassessment calculations for the properties fair values were
determined to have been performed within acceptable limits and were in
accordance with the regulations.





18.  Retirement Plan





BreitBurn
Management operates our assets and performs other administrative services for us
such as accounting, corporate development, finance, land administration, legal
and engineering.  All of our employees, including our executives, are
employees of BreitBurn Management.  BreitBurn Management has a defined
contribution retirement plan, which covers substantially all of its employees
who have completed at least three months of service.  The plan
provides for BreitBurn Management to make regular contributions based on
employee contributions as provided for in the plan
agreement.  Employees fully vest in BreitBurn Management’s
contributions after five years of service.  BEC is charged for a
portion of the matching contributions made by BreitBurn
Management.  For the year ended December 31, 2008, the matching
contribution paid by us was $0.4 million. For the year ended December 31, 2007
and the period from October 10, 2006 to December 31, 2006, the matching
contributions paid by us were $0.1 million and a negligible amount,
respectively.  The Predecessor paid $0.1 million in matching
contributions for the period ended October 9, 2006.





19.  Significant
Customers





We sell
oil, natural gas and natural gas liquids primarily to large domestic
refiners.  For the year ended December 31, 2008, our purchasers which
accounted for 10 percent or more of net sales were ConocoPhillips which
accounted for 25 percent of net sales and Marathon Oil Company which accounted
for 13 percent of net sales.  For the years ended December 31, 2007
and 2006, ConocoPhillips purchased approximately 20 percent and 45 percent of
our production, respectively, and Marathon Oil Company purchased approximately
24 percent and 28 percent of our production, respectively.




F-42


20.  Minority
Interest





Through
our BEPI Acquisition (see Note 4 - Acquisitions), we acquired the limited
partner interest (99 percent) of BEPI.  As such, we are fully
consolidating the results of BEPI and thus are recognizing a minority interest
liability representing the book value of the general partner’s
interests.  At December 31, 2008, the amount of this minority interest
liability was $0.5 million.  The general partner of BEPI holds a 35
percent reversionary interest under the existing limited partnership agreement
applicable to the properties.  Based on year end price and cost
projections, the revisionary interest payout is not expected to
occur.





21.  Subsequent
Events





On
January 22, 2009, we terminated a portion of our 2011 and 2012 crude oil swaps
(1,939 Bbls/d at $90.00 per Bbl) and replaced them with new contracts with the
same counterparty for the same volumes at market prices ($63.30 per
Bbl).  We realized $32.3 million from this termination.  On
January 26, 2009, we terminated a portion of our 2011 and 2012 natural gas swaps
and replaced them with new contracts with the same counterparty for the same
volumes at market prices. We realized $13.3 million from this
termination.  Proceeds from these contracts were used to pay down
debt.





On
February 13, 2009, we paid a cash distribution of approximately $27.4
million to our common unitholders of record as of the close of business on
February 9, 2009.  The distribution that was paid to unitholders
was $0.52 per Common Unit.  In February 2009 we also made payments
equivalent to the distribution made to unitholders of $0.7 million on Restricted
Phantom Units and Convertible Phantom Units issued under our Long-Term Incentive
Plans.





On February 19, 2009, 134,377 Common
Units were issued to employees under our 2006 Long-Term Incentive Plan,
increasing our outstanding Common Units to 52,770,011.  See Note 15
for information regarding our unit based compensation plans.





22.  Oil
and Natural Gas Activities (Unaudited)





Costs
incurred





Our oil
and natural gas activities are conducted in the United States.  The
following table summarizes the costs incurred by us, as successor, and BEC, as
the Predecessor:





Successor
                      
                      
                      PredecessorYear
      Ended
                      
                      
                      Year
      Ended
                      
                      
                      October
      10 to
                      
                      
                      January
      1 toDecember
      31,
                      
                      
                      December
      31,
                      
                      
                      December
      31,
                      
                      
                      October
      9,Thousands
      of dollars
                      
                      2008
                      
                      
                      2007
                      
                      
                      2006
                      
                      
                      2006Property
      acquisition costs (1)Proved
                      
                      $
                      -
                      
                      
                      $
                      1,437,129
                      
                      
                      $
                      -
                      
                      
                      $
                      -Unproved
                      
                      
                      -
                      
                      
                      
                      213,344
                      
                      
                      
                      -
                      
                      
                      
                      -Development
      costs
                      
                      
                      129,503
                      
                      
                      
                      26,959
                      
                      
                      
                      1,248
                      
                      
                      
                      36,941Asset
      retirement costs
                      
                      
                      1,363
                      
                      
                      
                      3,583
                      
                      
                      
                      2,633
                      
                      
                      
                      -Pipelines
      and processing facilities (1)
                      
                      
                      -
                      
                      
                      
                      48,810
                      
                      
                      
                      -
                      
                      
                      
                      -Total
                      
                      $
                      130,866
                      
                      
                      $
                      1,729,825
                      
                      
                      $
                      3,881
                      
                      
                      $
                      36,941





(1) See
Note 4 - Acquisitions for additional information


F-43


Capitalized
costs





The
following table presents the aggregate capitalized costs subject to
depreciation, depletion and amortization relating to oil and gas activities, and
the aggregate related accumulated allowance.





At
      December 31,
                      
                      
                      At
      December 31,Thousands
      of dollars
                      
                      2008
                      
                      
                      2007Proved
      properties and related producing assets
                      
                      $
                      1,734,932
                      
                      
                      $
                      1,648,787Pipelines
      and processing facilities
                      
                      
                      112,726
                      
                      
                      
                      48,810Unproved
      properties
                      
                      
                      209,873
                      
                      
                      
                      213,344Accumulated
      depreciation, depletion and amortization
                      
                      
                      (223,575
                      )
                      
                      
                      (46,877
                      )$
                      1,833,956
                      
                      
                      $
                      1,864,064





The
average DD&A rate per equivalent unit of production for our year ended
December 31, 2008 was $26.42 per Boe. The average DD&A rate per equivalent
unit of production for us over the year ended December 31, 2007 was $9.75 per
Boe.  The increase in the DD&A rate was primarily due to our 2007
acquisitions, price related depletion and depreciation adjustments of $34.5
million and field impairments totaling $51.9 million.





Results
of operations for oil and gas producing activities





The
results of operations from oil and gas producing activities below exclude
non-oil and gas revenues and expenses, general and administrative expenses,
interest expenses and interest income.





Successor
                        
                        
                        PredecessorYear
      Ended
                        
                        
                        October
      10 to
                        
                        
                        January
      1 toDecember
      31,
                        
                        
                        December
      31,
                        
                        
                        October
      9,Thousands
      of dollars
                        
                        2008
                        
                        
                        2007
                        
                        
                        2006
                        
                        
                        2006Oil,
      natural gas and NGL sales
                        
                        $
                        467,381
                        
                        
                        $
                        184,372
                        
                        
                        $
                        18,452
                        
                        
                        $
                        110,329Realized
      gain (loss) on derivative instruments
                        
                        
                        (55,946
                        )
                        
                        
                        (6,556
                        )
                        
                        
                        2,181
                        
                        
                        
                        (3,692
                        )Unrealized
      gain (loss) on derivative instruments
                        
                        
                        388,048
                        
                        
                        
                        (103,862
                        )
                        
                        
                        (1,299
                        )
                        
                        
                        5,983Operating
      costs
                        
                        
                        (149,681
                        )
                        
                        
                        (70,329
                        )
                        
                        
                        (7,159
                        )
                        
                        
                        (33,583
                        )Depreciation,
      depletion, and amortization
                        
                        
                        (178,657
                        )
                        
                        
                        (29,277
                        )
                        
                        
                        (2,488
                        )
                        
                        
                        (10,554
                        )Pre-tax
      Income
                        
                        
                        471,145
                        
                        
                        
                        (25,652
                        )
                        
                        
                        9,687
                        
                        
                        
                        68,483Income
      tax expense (benefit)
                        
                        
                        1,939
                        
                        
                        
                        (1,229
                        )
                        
                        
                        (40
                        )
                        
                        
                        90Results
      of  producing operations
                        
                        $
                        469,206
                        
                        
                        $
                        (24,423
                        )
                        
                        $
                        9,727
                        
                        
                        $
                        68,393





Supplemental
reserve information





The
following information summarizes our estimated proved reserves of oil (including
condensate and natural gas liquids) and natural gas and the present values
thereof for the years ended December 31, 2008 and 2007 and the period from
October 10, 2006 to December 31, 2006.   The information for BEC,
the Predecessor, is presented for the period from January 1, 2006 to October 9,
2006.  The following reserve information is based upon reports by
Netherland, Sewell & Associates, Inc. and Schlumberger Data &
ConsultingServices,
independent petroleum engineering firms.  The estimates are prepared
in accordance with SEC regulations.





Management
believes the reserve estimates presented herein, in accordance with generally
accepted engineering and evaluation principles consistently applied, are
reasonable.  However, there are numerous uncertainties inherent in
estimating quantities and values of the estimated proved reserves and in
projecting future rates of production and timing of development expenditures,
including many factors beyond our control.  Reserve engineering is a
subjective process of estimating the recovery from underground accumulations of
oil and gas that cannot be measured in an exact manner and the accuracy of any
reserve estimate is a function of the quality of available data and of
engineering and geological interpretation and judgment.  Because all
reserve estimates are to some degree speculative, the quantities of oil and gas
that are ultimately recovered, production and operating costs, the amount and
timing of future development expenditures and future oil and gas sales prices
may all differ from those assumed in these estimates.  In addition,
different reserve engineers may make different estimates of reserve quantities
and cash flows based upon the same available data.  Therefore, the
standardized measure of discounted net future cash flows shown below represents
estimates only and should not be construed as the current market value of the
estimated oil and gas reserves attributable to our properties.  In
this regard, the information set forth in the following tables includes
revisions of reserve estimates attributable to proved properties included in the
preceding year’s estimates.  Such revisions reflect additional
information from subsequent exploitation and development activities, production
history of the properties involved and any adjustments in the projected economic
life of such properties resulting from changes in product prices.  The
beginning balance of the successor in 2006, which is reflected on the table as
contributions from predecessor, represents the estimated reserves in place at
the time the initial public offering was completed on October 10,
2006.  Decreases in the prices of oil and natural gas and increases in
operating expenses have had, and could have in the future, an adverse effect on
the carrying value of our proved reserves and revenues, profitability and cash
flow.


F-44





The
following table sets forth certain data pertaining to our estimated proved and
proved developed reserves for the years ended December 31, 2008 and 2007,
data for the period from October 10, 2006 to December 31, 2006 representing us
as successor and the predecessor’s data for the year 2006.





Successor
                        
                        
                        PredecessorYear
      Ended December 31,
                        
                        
                        October
      10-2008
                        
                        
                        2007
                        
                        
                        December
      31, 2006 (b)
                        
                        
                        2006
      (a)Oil
                        
                        
                        Gas
                        
                        
                        Oil
                        
                        
                        Gas
                        
                        
                        Oil
                        
                        
                        Gas
                        
                        
                        Oil
                        
                        
                        GasIn
      Thousands
                        
                        (MBbl)
                        
                        
                        (MMcf)
                        
                        
                        (MBbl)
                        
                        
                        (MMcf)
                        
                        
                        (MBbl)
                        
                        
                        (MMcf)
                        
                        
                        (MBbl)
                        
                        
                        (MMcf)Proved
      ReservesBeginning
      balance
                        
                        
                        58,095
                        
                        
                        
                        505,069
                        
                        
                        
                        30,042
                        
                        
                        
                        4,190
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        58,185
                        
                        
                        
                        17,022Contribution from
      Predecessor(c)
      (d)
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        30,408
                        
                        
                        
                        4,270
                        
                        
                        
                        (30,408
                        )
                        
                        
                        (4,270
                        )Revision of previous
      estimates (d)
                        
                        
                        (29,106
                        )
                        
                        
                        (16,251
                        )
                        
                        
                        3,260
                        
                        
                        
                        (534
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        521
                        
                        
                        
                        1,498Extensions,
      discoveries and other additions(d)
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        118
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        1,898
                        
                        
                        
                        -Purchase
      of reserves in-place
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        27,005
                        
                        
                        
                        505,547
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Production (a)
      (b)
                        
                        
                        (3,079
                        )
                        
                        
                        (22,384
                        )
                        
                        
                        (2,330
                        )
                        
                        
                        (4,134
                        )
                        
                        
                        (366
                        )
                        
                        
                        (80
                        )
                        
                        
                        (2,036
                        )
                        
                        
                        (657
                        )Ending
      balance
                        
                        
                        25,910
                        
                        
                        
                        466,434
                        
                        
                        
                        58,095
                        
                        
                        
                        505,069
                        
                        
                        
                        30,042
                        
                        
                        
                        4,190
                        
                        
                        
                        28,160
                        
                        
                        
                        13,593Proved
      Developed ReservesBeginning
      balance
                        
                        
                        52,103
                        
                        
                        
                        457,444
                        
                        
                        
                        27,786
                        
                        
                        
                        4,190
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        45,195
                        
                        
                        
                        8,359Ending
      balance
                        
                        
                        23,346
                        
                        
                        
                        433,780
                        
                        
                        
                        52,103
                        
                        
                        
                        457,444
                        
                        
                        
                        27,786
                        
                        
                        
                        4,190
                        
                        
                        
                        17,292
                        
                        
                        
                        4,588





(a)
            2006
      production for predecessor is from January 1 - October 9 for Contributed
      Properties and January 1 - December 31 for Retained
      Properties.


(b)
            2006
      production for Successor is from October 10 - December 31, 2006 for
      Contributed Properties.


(c)
            Contribution
      from predecessor to the Successor as of October 10, 2006.  The
      contributed amount was determined by subtracting Successor production for
      the period from October 10 to December 31, 2006 from the year-end reserve
      balance of the Successor.


(d)
            Additions
      due to infill drilling are classified in Revisions and were approximately
      741 MBbl for oil and 35,834 MMcf for natural gas in 2008 and 1,422 MBbl
      for oil and 19 MMcf for natural gas in 2007.  For 2006,
      revisions attributable to extensions, discoveries, additions and revisions
      of previous estimates were determined at year-end.  Because
      these adjustments were not determinable at October 10, 2006, all
      adjustments appear in the predecessor's reserve amounts.  For
      2006, additions due to infill drilling were not reclassified from
      extensions, discoveries and other
additions.




F-45


Standardized
measure of discounted future net cash flows





The
Standardized Measure of discounted future net cash flows relating to our
estimated proved crude oil and natural gas reserves as of December 31, 2008
and 2007, and the predecessor’s data as of the year ended December 31, 2006
is presented below:





December
      31,Thousands
      of dollars
                    
                    2008
                    
                    
                    2007
                    
                    
                    2006Future
      cash inflows
                    
                    
                    3,523,524
                    
                    
                    
                    8,154,921
                    
                    
                    $
                    1,572,245Future
      development costs
                    
                    
                    (212,951
                    )
                    
                    
                    (370,594
                    )
                    
                    
                    (126,171
                    )Future
      production expense
                    
                    
                    (1,843,986
                    )
                    
                    
                    (3,360,451
                    )
                    
                    
                    (788,287
                    )Future
      net cash flows
                    
                    
                    1,466,587
                    
                    
                    
                    4,423,876
                    
                    
                    
                    657,787Discounted
      at 10% per year
                    
                    
                    (874,327
                    )
                    
                    
                    (2,511,409
                    )
                    
                    
                    (345,288
                    )Standardized
      measure of discounted future net cash flows
                    
                    $
                    592,260
                    
                    
                    $
                    1,912,467
                    
                    
                    $
                    312,499





The
standardized measure of discounted future net cash flows discounted at ten
percent from production of proved reserves was developed as
follows:





1.
            An
      estimate was made of the quantity of proved reserves and the future
      periods in which they are expected to be produced based on year-end
      economic conditions.





2.
            In
      accordance with SEC guidelines, the reserve engineers’ estimates of future
      net revenues from our estimated proved properties and the present value
      thereof are made using oil and gas sales prices in effect as of the dates
      of such estimates and are held constant throughout the life of the
      properties, except where such guidelines permit alternate treatment,
      including the use of fixed and determinable contractual price
      escalations.  We have entered into various arrangements to fix
      or limit the prices relating to a portion of our oil and gas
      production.  Arrangements in effect at December 31, 2008
      are discussed in Note 14.  Such risk management
      arrangements are not reflected in the reserve
      reports.  Representative market prices at the as-of date for the
      reserve reports as of December 31, 2008, 2007 and 2006 were $44.60
      ($20.12 for Wyoming), $95.95 ($54.52 for Wyoming) and $60.85 per barrel of
      oil, respectively, and $5.71, $6.80 and $5.64 per MMBTU of gas,
      respectively.





3.
            The
      future gross revenue streams were reduced by estimated future operating
      costs (including production and ad valorem taxes) and future development
      and abandonment costs, all of which were based on current
      costs.  Future net cash flows assume no future income tax
      expense as we are essentially a non-taxable entity except for two tax
      paying corporations whose future income tax liabilities on a discounted
      basis are insignificant.





The
principal sources of changes in the Standardized Measure of the future net cash
flows for the year ended December 31, 2008, December 31, 2007 and the period
ended from October 10 to December 31, 2006 is presented below:





SuccessorDecember
      31,
                    
                    
                    December
      31,
                    
                    
                    Oct
      10-Dec 31,Thousands
      of dollars
                    
                    2008
                    
                    
                    2007
                    
                    
                    2006Beginning
      balance
                    
                    $
                    1,912,467
                    
                    
                    $
                    312,499
                    
                    
                    
                    -Contribution
      from Predecessor
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    323,792Sales,
      net of production expense
                    
                    
                    (317,700
                    )
                    
                    
                    (114,041
                    )
                    
                    
                    (11,293
                    )Net
      change in sales and transfer prices, net of production
    expense
                    
                    
                    (1,306,752
                    )
                    
                    
                    243,374
                    
                    
                    
                    -Previously
      estimated development costs incurred during year
                    
                    
                    57,694
                    
                    
                    
                    15,451
                    
                    
                    
                    -Changes
      in estimated future development costs
                    
                    
                    (98,064
                    )
                    
                    
                    (22,683
                    )
                    
                    
                    -Extensions,
      discoveries and improved recovery, net of costs
                    
                    
                    -
                    
                    
                    
                    2,602
                    
                    
                    
                    -Purchase
      of reserves in place
                    
                    
                    -
                    
                    
                    
                    1,386,133
                    
                    
                    
                    -Revision
      of quantity estimates and timing of estimated production
                    
                    
                    153,368
                    
                    
                    
                    57,882
                    
                    
                    
                    -Accretion
      of discount
                    
                    
                    191,247
                    
                    
                    
                    31,250
                    
                    
                    
                    -Net
      change in income taxes
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Ending
      balance
                    
                    $
                    592,260
                    
                    
                    $
                    1,912,467
                    
                    
                    $
                    312,499




F-46


23.  Quarterly
Financial Data (Unaudited)





Year
      Ended December 31, 2008First
                    
                    
                    Second
                    
                    
                    Third
                    
                    
                    FourthThousands
      of dollars
                    
                    Quarter
                    
                    
                    Quarter
                    
                    
                    Quarter
                    
                    
                    QuarterOil,
      natural gas and natural gas liquid sales
                    
                    $
                    115,849
                    
                    
                    $
                    139,962
                    
                    
                    $
                    130,249
                    
                    
                    $
                    81,321Gains
      (losses) on derivative instruments
                    
                    
                    (83,387
                    )
                    
                    
                    (353,282
                    )
                    
                    
                    407,441
                    
                    
                    
                    361,330Other
      revenue, net
                    
                    
                    875
                    
                    
                    
                    643
                    
                    
                    
                    806
                    
                    
                    
                    596Total
      revenue
                    
                    $
                    33,337
                    
                    
                    $
                    (212,677
                    )
                    
                    $
                    538,496
                    
                    
                    $
                    443,247Operating
      income (loss) (1)
                    
                    
                    (34,455
                    )
                    
                    
                    (282,267
                    )
                    
                    
                    468,625
                    
                    
                    
                    277,451Net
      income (loss) (1)
                    
                    
                    (41,140
                    )
                    
                    
                    (286,240
                    )
                    
                    
                    454,454
                    
                    
                    
                    251,162Limited
      Partners' interest in loss (1)
                    
                    
                    (40,867
                    )
                    
                    
                    (284,494
                    )
                    
                    
                    454,454
                    
                    
                    
                    251,162Basic
      net loss per limited partner unit (2)
                    
                    
                    (0.61
                    )
                    
                    
                    (4.39
                    )
                    
                    
                    8.63
                    
                    
                    
                    4.77Diluted
      net loss per limited partner unit (2)
                    
                    
                    (0.61
                    )
                    
                    
                    (4.39
                    )
                    
                    
                    8.41
                    
                    
                    
                    4.65Basic
      units outstanding
                    
                    
                    67,020,641
                    
                    
                    
                    64,807,563
                    
                    
                    
                    52,635,634
                    
                    
                    
                    52,635,634Diluted
      units outstanding
                    
                    
                    67,020,641
                    
                    
                    
                    64,807,563
                    
                    
                    
                    54,062,291
                    
                    
                    
                    54,019,830Year
      Ended December 31, 2007First
                    
                    
                    Second
                    
                    
                    Third
                    
                    
                    FourthThousands
      of dollars
                    
                    Quarter
                    
                    
                    Quarter
                    
                    
                    Quarter
                    
                    
                    QuarterOil,
      natural gas and natural gas liquid sales
                    
                    $
                    21,389
                    
                    
                    $
                    32,413
                    
                    
                    $
                    49,528
                    
                    
                    $
                    81,042Gains
      (losses) on derivative instruments
                    
                    
                    (6,668
                    )
                    
                    
                    (7,551
                    )
                    
                    
                    (24,767
                    )
                    
                    
                    (71,432
                    )Other
      revenue, net
                    
                    
                    241
                    
                    
                    
                    237
                    
                    
                    
                    130
                    
                    
                    
                    429Total
      revenue
                    
                    $
                    14,962
                    
                    
                    $
                    25,099
                    
                    
                    $
                    24,891
                    
                    
                    $
                    10,039Operating
      loss
                    
                    
                    (4,361
                    )
                    
                    
                    (670
                    )
                    
                    
                    (7,195
                    )
                    
                    
                    (43,122
                    )Net
      loss
                    
                    
                    (4,756
                    )
                    
                    
                    (1,068
                    )
                    
                    
                    (7,467
                    )
                    
                    
                    (47,066
                    )Limited
      Partners' interest in loss
                    
                    
                    (4,661
                    )
                    
                    
                    (1,052
                    )
                    
                    
                    (7,353
                    )
                    
                    
                    (46,619
                    )Basic
      net loss per limited partner unit (2)
                    
                    
                    (0.21
                    )
                    
                    
                    (0.04
                    )
                    
                    
                    (0.25
                    )
                    
                    
                    (0.86
                    )Diluted
      net loss per limited partner unit (2)
                    
                    
                    (0.21
                    )
                    
                    
                    (0.04
                    )
                    
                    
                    (0.25
                    )
                    
                    
                    (0.86
                    )Basic
      units outstanding
                    
                    
                    21,975,758
                    
                    
                    
                    24,816,419
                    
                    
                    
                    29,006,002
                    
                    
                    
                    54,349,093Diluted
      units outstanding
                    
                    
                    21,975,758
                    
                    
                    
                    24,816,419
                    
                    
                    
                    29,006,002
                    
                    
                    
                    54,349,093





(1)
Fourth quarter 2008 includes $86.4 million for total impairments and price
related adjustments and depreciation expense.


(2) Due
to changes in the number of weighted average common units outstanding that may
occur each quarter, the earnings per unit amounts for certain quarters may not
be additive.




F-47