Exhibit
99.1




Report
of Independent Auditors





To the
Board of Directors of SemGroup Energy Partners G.P., L.L.C.:





In our
opinion, the accompanying consolidated balance sheet presents fairly, in all
material respects, the financial position of SemGroup Energy Partners G.P.,
L.L.C. and subsidiaries (the “Company”) at December 31, 2008 in conformity with
accounting principles generally accepted in the United States of America. This
financial statement is the responsibility of the Company’s management. Our
responsibility is to express an opinion on this financial statement based on our
audit. We conducted our audit of this statement in accordance with auditing
standards generally accepted in the United States of America. Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the balance sheet is free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the balance sheet, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall balance sheet
presentation. We believe that our audit of the balance sheet provides a
reasonable basis for our opinion.





The
accompanying financial statement has been prepared assuming that the Company
will continue as a going concern. As discussed in Note 17 to the financial
statement, the Company has substantial long-term debt, a deficit in partners’
capital, significant litigation uncertainties, and other issues, which raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 17. The financial
statement does not include any adjustments that might result from the outcome of
this uncertainty





/s/
PricewaterhouseCoopers LLP


Tulsa,
Oklahoma


July 2,
2009








SEMGROUP
ENERGY PARTNERS G.P., L.L.C.


CONSOLIDATED
BALANCE SHEET


December
31, 2008


(in
thousands)





ASSETSCurrent
      assets:Cash and cash
      equivalents
                          
                          $
                          29,644Accounts receivable, net of
      allowance for doubtful accounts of $554
                          
                          
                          8,342Receivables from related
      parties, net of allowance for doubtful accounts of $0
                          
                          
                          18,912Prepaid
    insurance
                          
                          
                          2,256Other current
      assets
                          
                          
                          1,811Total current
      assets
                          
                          
                          60,965Property,
      plant and equipment, net of accumulated depreciation of
      $80,277
                          
                          
                          284,489Goodwill
                          
                          
                          6,340Debt
      issuance costs
                          
                          
                          1,956Other
      assets, net
                          
                          
                          1,750Total
      assets
                          
                          $
                          355,500LIABILITIES
      AND PARTNERS’ CAPITAL (DEFICIT)Current
      liabilitiesAccounts
payable
                          
                          $
                          2,610Payables to related
      parties
                          
                          
                          20,134Accrued interest
      payable
                          
                          
                          175Accrued property taxes
      payable
                          
                          
                          1,951Interest rate swap settlements
      payable
                          
                          
                          1,505Unearned
revenue
                          
                          
                          2,765Other accrued
      liabilities
                          
                          
                          2,923Current portion of capital
      lease obligations
                          
                          
                          866Total current
      liabilities
                          
                          
                          32,929Long-term
      debt
                          
                          
                          448,100Long-term
      capital lease obligations
                          
                          
                          255Minority
      interest
                          
                          
                          480,993Commitments
      and contingencies (Note 14)Partners’
      capital (deficit)
                          
                          
                          (606,777
                          )Total
      liabilities and partners’ capital (deficit)
                          
                          $
                          355,500




See
accompanying notes to consolidated balance sheet.


2




SEMGROUP ENERGY PARTNERS, G.P.,
L.L.C.


NOTES TO CONSOLIDATED BALANCE
SHEET




1. ORGANIZATION AND NATURE OF
BUSINESS




SemGroup
Energy Partners G.P., L.L.C. and subsidiaries (the “General Partner”) is a
single member Delaware limited liability company, formed on February 22,
2007 to become the general partner of SemGroup Energy Partners, L.P. (the
“Partnership”). The General Partner is an indirect wholly-owned subsidiary of
SemGroup, L.P. (“Private Company”). The General Partner owns a 2% general
partner interest in the Partnership. However, due to the substantive control
granted to the General Partner by the partnership agreement of the Partnership
the accounts of the Partnership are consolidated into the financial statements
of the General Partner.




On
July 20, 2007, the Partnership issued 12,500,000 common units, representing
limited partnership interests in the Partnership, and 12,570,504 subordinated
units, representing additional limited partnership interests in the Partnership,
to SemGroup Holdings, L.P. (“SemGroup Holdings”) and 549,908 general partner
units representing a 2% general partner interest in the General Partner.
SemGroup Holdings subsequently offered 12,500,000 common units pursuant to a
public offering at a price of $22 per unit. In addition, the Partnership issued
an additional 1,875,000 common units to the public pursuant to the underwriters’
exercise of their over-allotment option. The initial public offering closed on
July 23, 2007.




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




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


3




On May
30, 2008, the Partnership purchased eight recently constructed crude oil storage
tanks located at the Cushing Interchange from the Private Company and the
Private Company assigned a take-or-pay, fee-based agreement to the
Partnership that commits substantially all of the 2.0 million barrels of new
storage to a third-party customer through August 2010 (the “Acquired
Storage Assets”) for aggregate consideration of $90.3 million, including $0.3
million of acquisition-related costs.  For accounting purposes, the
acquisition has been reflected as a purchase of assets, with the Acquired
Storage Assets recorded at the historical cost of the Private Company, which was
approximately $17.2 million, inclusive of $0.6 million of completion costs
subsequent to the close of the acquisition, with the additional purchase price
of $73.1 million reflected in the statement of changes in partners’ capital as a
distribution to the Private Company.  The acquisition was funded with
borrowings under the Partnership’s existing revolving credit
facility.  The Board approved the acquisition of the Acquired Storage
Assets based on a recommendation from its conflicts committee, which consisted
entirely of independent directors. The conflicts committee retained independent
legal and financial advisors to assist it in evaluating the transaction and
considered a number of factors in approving the acquisition, including an
opinion from the committee’s independent financial advisor that the
consideration paid for the Acquired Storage Assets was fair, from a financial
point of view, to the Partnership.




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




On
July 22, 2008, the Private Company and certain of its subsidiaries filed
voluntary petitions (the “Bankruptcy Filings”) for reorganization under Chapter
11 of the Bankruptcy Code in the United States Bankruptcy Court for the District
of Delaware (the “Bankruptcy Court”), Case No. 08-11547-BLS.  The
Private Company and its subsidiaries continue to operate their businesses and
own and manage their properties as debtors-in-possession under the jurisdiction
of the Bankruptcy Court and in accordance with the applicable provisions of the
Bankruptcy Code. None of the Partnership, the General Partner, the
subsidiaries of the Partnership nor the subsidiaries of the General Partner were
party to the Bankruptcy Filings.  See Notes 8 and 17 for a discussion
of the impact of the Bankruptcy Filings and related events upon the
Partnership.




2.
BASIS OF PRESENTATION




The
accompanying consolidated balance sheet and related notes have been prepared
assuming that the Partnership will continue as a going concern.  Prior
to consummating the Settlement (as defined below in Note 17), events of default
existed under the Partnership’s credit facility, including during the year ended
December 31, 2008.  As discussed in Notes 8 and 17 to the financial
statements, the Partnership entered into the Credit Agreement Amendment (as
defined below) under which, among other things, the lenders under the
Partnership’s credit facility consented to the Settlement and waived all
existing defaults and events of default described in the Forbearance Agreement
(as defined below) and amendments thereto.  However, the Partnership
continues to face uncertainty relating to its to its ability to comply with
certain restrictive financial covenants specified in its credit facility, its
exposure and sensitivity to interest rate risks given the materiality of its
borrowings under its credit facility, and uncertainties related to securities
and other litigation as discussed in Note 17.  These factors raise
substantial doubt about the Partnership’s ability to continue as a going
concern.  Management’s plans in regard to these matters are also
discussed in Note 17.  The accompanying financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.




The
accompanying consolidated balance sheet and related notes include the accounts
of the General Partner and the Partnership, including the assets and liabilities
contributed to the Partnership by the Private Company in connection with the
Partnership’s initial public offering. The consolidated balance sheet has been
prepared in accordance with accounting principles and practices generally
accepted in the United States of America (“GAAP”). The General Partner
consolidates the Partnership in accordance with Emerging Issues Task Force
(“EITF”) Issue No. 04-5, “Determining Whether a General Partner, or the
General Partners as a Group, Controls a Limited Partnership or Similar Entity
When the Limited Partners Have Certain Rights” (“EITF 04-5”). EITF 04-5 presumes
that a general partner controls a limited partnership and therefore should
consolidate the partnership in the financial statements of the general
partner.


4




The
accompanying consolidated balance sheet includes the assets and liabilities of
crude oil terminalling and storage and gathering and transportation operations
that were contributed to the Partnership prior to the closing of the
Partnership’s initial public offering on a carve-out basis and are referred to
herein as the “Predecessor”. Both the Partnership and the Predecessor had common
ownership and, in accordance with Emerging Issues Task Force Issue
No. 87-21, “Change of Accounting Basis in Master Limited Partnership
Transactions,” the assets and liabilities transferred were carried forward to
the Partnership at their historical amounts. Specifically, the Predecessor’s
terminalling and storage and gathering and transportation operations were
contributed to the Partnership and include crude oil storage capacity located in
Oklahoma, Kansas and Texas, pipelines that gather and transport crude oil in
Oklahoma and Texas, and owned or leased crude oil transport trucks that gather
and transport crude oil primarily in Oklahoma, Kansas and Texas. All significant
intercompany accounts and transactions have been eliminated in the preparation
of the accompanying financial statements.




All
significant intercompany balances and transactions have been eliminated in
consolidation. Transactions between the General Partner, the Partnership and
other Private Company operations have been identified in the consolidated
balance sheet as transactions between affiliates (see Note 12).




3.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES




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 and disclosure of
contingencies. Management makes significant estimates including:
(1) allowance for doubtful accounts receivable; (2) estimated useful
lives of assets, which impacts depreciation; (3) estimated cash flows and
fair values inherent in impairment tests under SFAS No. 142, “Goodwill and
Other Intangible Assets” (“SFAS 142”) and SFAS No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets” (“SFAS 144”); (4) estimated
fair value of assets and liabilities acquired and identification of associated
intangible assets; (5) accruals related to revenues and expenses; and
(6) liability and contingency accruals. Although management believes these
estimates are reasonable, actual results could differ from these
estimates.




RECLASSIFICATIONS — Certain
amounts in the Partnership’s consolidated financial statements have been
reclassified to conform to the 2008 presentation.  These
reclassifications did not impact previously reported net income or partners’
capital.




CASH AND CASH EQUIVALENTS —
The Partnership includes as cash and cash equivalents, cash and all investments
with maturities at date of purchase of three months or less which are readily
convertible into known amounts of cash.




ACCOUNTS RECEIVABLE — The
majority of the Partnership’s accounts receivable relate to its gathering and
transportation activities. Accounts receivable included in the balance sheet are
reflected net of the allowance for doubtful accounts of $0.6 million at December
31, 2008.




The
Partnership reviews all outstanding accounts receivable balances on a monthly
basis and records a reserve for amounts that the Partnership expects will not be
fully recovered. Although the Partnership considers its allowance for doubtful
trade accounts receivable to be adequate, there is no assurance that actual
amounts will not vary significantly from estimated amounts.




PROPERTY, PLANT AND EQUIPMENT
— Property, plant and equipment are recorded at cost. Expenditures for
maintenance and repairs that do not add capacity or extend the useful life of an
asset are expensed as incurred. The carrying value of the assets is based on
estimates, assumptions and judgments relative to useful lives and salvage
values. As assets are disposed of, the cost and related accumulated depreciation
are removed from the accounts, and any resulting gain or loss is included in
other income in the statements of operations.




Depreciation
is calculated using the straight-line method, based on estimated useful lives of
the assets. These estimates are based on various factors including age (in the
case of acquired assets), manufacturing specifications, technological advances
and historical data concerning useful lives of similar assets. Uncertainties
that impact these estimates include changes in laws and regulations relating to
restoration and abandonment requirements, economic conditions, and supply and
demand in the area. When assets are put into service, management makes estimates
with respect to useful lives and salvage values that it believes are reasonable.
However, subsequent events could cause management to change its estimates, thus
impacting the future calculation of depreciation.


5




The
Partnership has contractual obligations to perform dismantlement and removal
activities in the event that some of its liquid asphalt cement and residual fuel
oil terminalling and storage assets are abandoned (see Note 14).  Such
obligations are recognized in the period incurred if reasonably estimable under
the provisions of SFAS No 143, “Accounting for Asset Retirement
Obligations.”




IMPAIRMENT OF LONG-LIVED
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 144 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. There were no asset impairments for the year ended
December 31, 2008.




DEBT ISSUANCE COSTS — Costs
incurred in connection with the issuance of long-term debt related to the
Partnership’s credit facilities are capitalized and 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.




GOODWILL AND OTHER INTANGIBLE
ASSETS — Goodwill represents the excess of the cost of acquisitions over
the amounts assigned to assets acquired and liabilities assumed. Goodwill is not
amortized but is tested annually for impairment and when events and
circumstances warrant an interim evaluation. Goodwill is tested for impairment
at a level of reporting referred to as a reporting unit. The Partnership has
three reporting segments comprised of (i) its crude oil terminalling and
storage operations, (ii) its crude oil gathering and transportation
operations and (iii) its asphalt operations. All of the Partnership’s goodwill
is attributed to its crude oil gathering and transportation reporting unit. If
the fair value of a reporting unit exceeds its carrying amount, goodwill of the
reporting unit is considered not impaired. Since adoption of SFAS 142, the
Partnership has not recognized any impairment of goodwill.




Acquired
customer relationships and non-compete agreements are capitalized and amortized
over useful lives ranging from 5 to 10 years using the straight-line method of
amortization. An impairment loss is recognized for amortizable intangibles if
the carrying amount of an intangible asset is not recoverable and its carrying
amount exceeds its fair value.  No impairment loss was recognized for
the year ended December 31, 2008.




ENVIRONMENTAL MATTERS —
Liabilities for loss contingencies, including environmental remediation costs,
arising from claims, assessments, litigation, fines, and penalties and other
sources are charged to expense when it is probable that a liability has been
incurred and the amount of the assessment and/or remediation can be reasonably
estimated. No material environmental liabilities exist as of December 31,
2008.




REVENUE RECOGNITION — The
Partnership’s revenues consist of (i) terminalling and storage revenues and
(ii) gathering and transportation revenues.




Terminalling
and storage revenues consist of (i) storage fees from actual storage used
on a month-to-month basis; (ii) storage fees resulting from short-term and
long-term contracts for committed space that may or may not be utilized by the
customer in a given month; and (iii) terminal throughput charges to pump
crude oil to connecting carriers or to deliver liquid asphalt cement out of the
Partnership’s terminals. Terminal throughput charges are recognized as the crude
oil exits the terminal and is delivered to the connecting crude oil carrier or
third-party terminal and as the liquid asphalt cement is delivered out of the
Partnership’s terminal. Storage revenues are recognized as the services are
provided and the amounts earned on a monthly basis. All terminalling and storage
revenues are based on actual volumes and rates.




Gathering
and transportation revenues consist of fees recognized for the gathering of
crude oil for the Partnership’s customers and the transportation of the crude
oil to refiners, to common carrier pipelines for ultimate delivery to refiners,
or to terminalling and storage facilities owned by the Partnership and others.
Revenue for the gathering and transportation of crude oil is recognized when the
service is performed and is based upon regulated and non-regulated tariff rates
and the related transport volumes.


6




INCOME AND OTHER TAXES — The
Partnership is not subject to federal income taxes. For federal and most state
income tax purposes, all income, gains, losses, expenses, deductions and tax
credits generated by the Partnership flow through to the unitholders of the
Partnership. Beginning in 2007, the state of Texas implemented a
partnership-level tax based on a percentage of the revenue earned for services
provided in the state of Texas. The Partnership has estimated its liability
related to this tax to be $0.3 million at December 31, 2008.




STOCK BASED COMPENSATION — In
July 2007 the General Partner adopted the SemGroup Energy Partners G.P. L.L.C.
Long Term Incentive Plan (the “Plan”). The compensation committee of the general
partner’s board of directors administers the Plan. The Plan authorizes the grant
of an aggregate of 1.25 million common units deliverable upon vesting.
Although other types of awards are contemplated under the Plan, currently
outstanding awards include “phantom” units, which convey the right to receive
common units upon vesting, and “restricted” units, which are grants of common
units restricted until the time of vesting. The phantom unit awards also include
distribution equivalent rights (“DERs”). Subject to applicable earnings
criteria, a DER entitles the grantee to a cash payment equal to the cash
distribution paid on an outstanding common unit prior to the vesting date of the
underlying award. Cash distributions paid on DERs are accounted for as
partnership distributions. Recipients of restricted units are entitled to
receive cash distributions paid on common units during the vesting period. The
unit-based awards granted during 2008 have been accounted for under the
provisions of SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS
123(R)”).




Under
SFAS 123(R), the Partnership classifies unit award grants as either equity
or liability awards. All award grants made under the Plan from its inception
through December 31, 2008 are classified as equity awards. Fair value for
award grants classified as equity is determined on the grant date of the award
and this value is recognized as compensation expense ratably over the requisite
service period of unit award grants, which generally is the vesting period. Fair
value for equity awards is calculated as the closing price of the Partnership’s
common units representing limited partner interests in the Partnership (“limited
partner units”) on the grant date. Compensation expense related to unit-based
payments is included in general and administrative expenses on the Partnership’s
consolidated statements of operations.




DERIVATIVE INSTRUMENTS — The
Partnership utilizes derivative instruments to manage its exposure to interest
rate risk. The Partnership records all derivative instruments on the balance
sheet as either assets or liabilities measured at their fair value under the
provisions of SFAS No. 133, “Accounting for Derivative Instruments and
Hedging Activities” (“SFAS 133”) . SFAS 133 requires that
changes in derivative instruments’ fair value be recognized currently in
earnings unless specific hedge accounting criteria are met, in which case,
changes in fair value are deferred to accumulated other comprehensive income and
reclassified into earnings when the underlying transaction affects earnings.
Changes in the fair value of the Partnership’s interest rate swaps are
recognized currently in earnings. See Note 8 for further
discussion.




4.
OTHER CURRENT ASSETS




Other
current assets consist of the following (in thousands):




December 31,2008Prepaid
      deposits
                    
                    $
                    1,560Other
      prepayments
                    
                    
                    251Total
      other current assets
                    
                    $
                    1,811





7


5.
PROPERTY, PLANT AND EQUIPMENT




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





EstimatedUseful
                                      
                                      
                                      December
      31,Lives
      (Years)
                                      
                                      
                                      2008Land
                                      
                                      
                                      
                                      $
                                      15,065Land
      improvements
                                      
                                      
                                      10-20
                                      
                                      
                                      5,366Pipelines
      and facilities
                                      
                                      
                                      5-31
                                      
                                      
                                      95,010Storage
      and terminal facilities
                                      
                                      
                                      10-35
                                      
                                      
                                      166,950Transportation
      equipment
                                      
                                      
                                      3-10
                                      
                                      
                                      24,744Office
      property and equipment and other
                                      
                                      
                                      3-31
                                      
                                      
                                      19,972Construction-in-progress
                                      
                                      
                                      
                                      
                                      
                                      37,659Property,
      plant and equipment, gross
                                      
                                      
                                      
                                      
                                      
                                      364,766Accumulated
      depreciation
                                      
                                      
                                      
                                      
                                      
                                      (80,277)Property,
      plant and equipment, net
                                      
                                      
                                      
                                      
                                      $
                                      284,489





Property,
plant and equipment includes assets under capital leases of $1.2 million, net of
accumulated depreciation of $5.3 million at December 31, 2008,
respectively. All capital leases relate to the transportation equipment asset
category.  At December 31, 2008, $37.1 million of
construction-in-progress consists of the Eagle North Pipeline System, a
130-mile, 8-inch pipeline that was acquired by the Partnership from the Private
Company on May 12, 2008.  The Partnership has suspended capital
expenditures on this pipeline due to the continuing impact of the Bankruptcy
Filings (see Note 17).  Management currently intends to put the asset into
service in early 2010 and is exploring various alternatives to complete the
project.




6.
INTANGIBLES AND OTHER ASSETS, NET




Other
assets, net of accumulated amortization, consist of the following (in
thousands):




December 31,2008Customer
      relationships
                                          
                                          $
                                          1,858Non-compete
      agreements
                                          
                                          
                                          557Deposits
                                          
                                          
                                          19Other
                                          
                                          
                                          59Other
      assets, gross
                                          
                                          
                                          2,493Accumulated
      amortization
                                          
                                          
                                          (743
                                          )Other
      assets, net
                                          
                                          $
                                          1,750




7.
ACQUISITIONS





The
Partnership has acquired various assets, including the Acquired Asphalt Assets,
the Acquired Pipeline Assets and the Acquired Storage Assets, from the Private
Company.  See Notes 1, 10 and 12 for a description of these
acquisitions.  In addition, the Partnership acquired certain liquid
asphalt cement assets and crude oil assets from the Private Company in
connection with the Settlement (see Note 17).





8.
LONG TERM DEBT




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




8


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




Due to
events related to the Bankruptcy Filings, events of default occurred under the
Partnership’s credit agreement (see Note 17).  Effective on September
18, 2008, the Partnership and the requisite lenders under its credit facility
entered into a Forbearance Agreement and Amendment to Credit Agreement (the
“Forbearance Agreement”) under which the lenders agreed, subject to specified
limitations and conditions, to forbear from exercising their rights and remedies
arising from the Partnership’s defaults and events of default described therein
for the period commencing on September 18, 2008 and ending on the earliest of
(i) December 11, 2008, (ii) the occurrence of any default or event of default
under the credit agreement other than certain defaults and events of default
indicated in the Forbearance Agreement, or (iii) the failure of the Partnership
to comply with any of the terms of the Forbearance Agreement (the “Forbearance
Period”).  On December 11, 2008, the lenders agreed to extend the
Forbearance Period until December 18, 2008 pursuant to a First Amendment to
Forbearance Agreement and Amendment to Credit Agreement (the “First Forbearance
Amendment”), on December 18, 2008, the lenders agreed to extend the Forbearance
Period until March 18, 2009 pursuant to a Second Amendment to Forbearance
Agreement and Amendment to Credit Agreement (the “Second Forbearance
Amendment”), and on March 18, 2009, the lenders agreed to further extend the
Forbearance Period until April 8, 2009 pursuant to a Third Amendment to
Forbearance Agreement and Amendment to Credit Agreement (the “Third Forbearance
Amendment”).





The
Partnership, its subsidiaries that are guarantors of the obligations under the
credit facility, Wachovia Bank, National Association, as Administrative Agent,
and the requisite lenders under the Partnership’s credit agreement entered into
the Consent, Waiver and Amendment to Credit Agreement (the “Credit Agreement
Amendment”), dated as of April 7, 2009, under which, among other
things, the lenders consented to the Settlement (see Note 17) and
waived all existing defaults and events of default described in the Forbearance
Agreement and amendments thereto.




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




The
Credit Agreement Amendment subsequently further permanently reduced the
Partnership’s revolving credit facility under the credit agreement from $220
million to $50 million, and increased the term loan facility from $250 million
to $400 million.  Upon the execution of the Credit Agreement
Amendment, $150 million of the Partnership’s outstanding revolving loans were
converted to term loans and the Partnership became able to borrow additional
funds under its revolving credit facility.  Substantially all of the
Partnership’s assets are pledged as collateral under the Credit
Agreement.  Pursuant to the Credit Agreement Amendment, the credit
facility and all obligations thereunder will mature on June 30, 2011. 
As of June 26, 2009, the Partnership had $421.9 million in outstanding
borrowings under its credit facility (including $21.9 million under its
revolving credit facility and $400.0 million under its term loan facility) with
an aggregate unused credit availability under its revolving credit facility of
approximately $28.1 million and cash on hand of approximately $3.0 million.
Pursuant to the Credit Agreement Amendment, the Partnership’s revolving credit
facility is limited to $ 50.0 million.  If any of the financial
institutions that support the Partnership’s revolving credit facility were to
fail, it may not be able to find a replacement lender, which could negatively
impact its ability to borrow under its revolving credit facility.  For
instance, Lehman Brothers Commercial Bank is one of the lenders under the
Partnership’s $50.0 million revolving credit facility, and Lehman Brothers
Commercial Bank has agreed to fund approximately $2.5 million (approximately 5%)
of the revolving credit facility.  On several occasions Lehman Brothers
Commercial Bank has failed to fund revolving loan requests under the
Partnership’s revolving credit facility, effectively limiting the aggregate
amount of the Partnership’s revolving credit facility to $47.5
million.




9


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




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




Among
other things, the Partnership’s credit facility, as amended by the Credit
Agreement Amendment, now requires the Partnership to make (i) minimum quarterly
amortization payments on March 31, 2010 in the amount of $2.0 million, June 30,
2010 in the amount of $2.0 million, September 30, 2010 in the amount of $2.5
million, December 31, 2010 in the amount of $2.5 million and March 31, 2011 in
the amount of $2.5 million, (ii) mandatory prepayments of amounts outstanding
under the revolving credit facility (with no commitment reduction) whenever cash
on hand exceeds $15.0 million, (iii) mandatory prepayments with 100% of asset
sale proceeds, (iv) mandatory prepayment with 50% of the proceeds raised through
equity sales and (v) annual prepayments with 50% of excess cash flow (as
defined in the Credit Agreement Amendment).  The Partnership’s credit
facility, as amended by the Credit Agreement Amendment, prohibits the
Partnership from making draws under the revolving credit facility if it would
have more than $15.0 million of cash on hand after making the draw and applying
the proceeds thereof.  Based on borrowings under the credit facility
as of December 31, 2008, the Partnership estimates an additional principal
repayment of $436.6 million in 2011 in connection with the June 30, 2011
maturity of all obligations under the credit facility.  Based on the
borrowing rates currently available to the Partnership for debt with similar
terms and maturities and consideration of the Partnership’s non-performance
risk, long-term debt at December 31, 2008 approximates its fair
value.




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




10


The
credit agreement, as amended by the Credit Agreement Amendment, also requires
the Partnership to maintain an interest coverage ratio (the ratio of its
consolidated EBITDA to its consolidated interest expense, in each case as
defined in the credit agreement) that ranges on a monthly basis from not less
than 2.50 to 1.00 to not less than 1.00 to 1.00.  As of December 31,
2008, the Partnership’s interest coverage ratio was 3.58 to 1.00.




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




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




The
Partnership capitalized debt issuance costs of approximately $2.1 million in
2008, which is being amortized straight-line through June
2011.  Amortization expense related to debt issuance costs for the
year ended December 31, 2008 was $0.6 million.  In connection with the
forbearance agreements entered into in 2008, $0.5 million in debt issuance costs
associated with the Partnership’s credit facility were written off and recorded
as additional interest expense in 2008.





The
Partnership is exposed to market risk for changes in interest rates related to
its credit facility. Interest rate swap agreements were used to manage a portion
of the exposure related to changing interest rates by converting floating-rate
debt to fixed-rate debt. In August 2007 the Partnership entered into interest
rate swap agreements with an aggregate notional value of $80.0 million that
mature on August 20, 2010. Under the terms of the interest rate swap
agreements, the Partnership was to pay fixed rates of 4.9% and receive
three-month LIBOR with quarterly settlement.  In March 2008 the
Partnership entered into interest rate swap agreements with an aggregate
notional value of $100.0 million that mature on March 31, 2011.  Under
the terms of the interest rate swap agreements, the Partnership was to pay fixed
rates of 2.6% to 2.7% and receive three-month LIBOR with quarterly
settlement.  The interest rate swaps do not receive hedge accounting
treatment under SFAS 133. Changes in the fair value of the interest rate swaps
are recorded in interest expense in the statements of operations.  In
addition, the interest rate swap agreements contain cross-default provisions to
events of default under the credit agreement.  Due to events related
to the Bankruptcy Filings, all of these interest rate swap positions were
terminated in the third quarter of 2008, and the Partnership has recorded a $1.5
million liability as of December 31, 2008 with respect to these
positions.





11


9.
FAIR VALUE MEASUREMENTS




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




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




As
required by SFAS No. 157, financial assets and liabilities are classified
based on the lowest level of input that is significant to the fair value
measurement. The Partnership’s assessment of the significance of a particular
input to the fair value measurement requires judgment, and may affect the
valuation of the fair value of assets and liabilities and their placement within
the fair value hierarchy levels.




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





Fair
      Value Measurements Using
                          Significant
      Unobservable Inputs
                          (Level
      3)
                          For
      the Year Ended
                          December
      31, 2008Beginning
      balance
                        
                        $
                        (2,233)Total
      gains or losses (realized/unrealized)Included
      in earnings (1)
                        
                        
                        2,785Included
      in other comprehensive income
                        
                        
                        -Purchases,
      issuances, and settlements
                        
                        
                        (552)Transfers
      in and/or out of Level 3
                        
                        
                        -Ending
      balance, December 31, 2008
                        
                        $
                        -The
      amount of total losses for the period includedin
      earnings attributable to the change in the unrealizedgains
      or losses relating to liabilities still held atthe
      reporting date
                        
                        $
                        -(1)
      Amounts reported as included in earnings are reported as interest expense
      on the statements of operations.







12




10.
PARTNERS’ CAPITAL AND DISTRIBUTIONS




In
accordance with the terms of its partnership agreement, each quarter the
Partnership distributes all of its available cash (as defined) to its
unitholders. Generally, distributions are allocated first, 98% to the common
unitholders and 2% to its general partner until the Partnership distributes for
each common unit an amount equal to the minimum quarterly distribution $0.3125
per unit. Subject to any arrearages in the minimum quarterly distribution to the
common unitholders, amounts then are distributed 98% to the subordinated
unitholders and 2% to the general partner up to the minimum quarterly
distribution for the quarter. Amounts distributable above the minimum quarterly
amount are generally distributed 98% to all unitholders and 2% to its general
partner, subject to the incentive distribution rights of the general partner.
The incentive distribution rights entitle the general partner to receive
increasing percentages, up to a maximum of 50%, of cash the Partnership
distributes in excess of $0.3594 per unit each quarter. Distributions are also
paid to the holders of restricted units and phantom units as disclosed in Note
13.




On
October 25, 2007, the Partnership declared a pro-rated cash distribution of
$0.24 per unit on its outstanding units. The distribution was paid on
November 14, 2007 to unitholders of record on November 1, 2007. The
distribution was pro-rated for the partial quarter following the closing of the
Partnership’s initial public offering and therefore corresponded to the period
July 23, 2007 through September 30, 2007. The total distribution paid
was approximately $6.7 million, with approximately $3.5 million, $3.0 million,
and $0.1 million paid to the Partnership’s common unitholders, subordinated
unitholders and general partner, respectively, and $0.1 million paid to phantom
and restricted unitholders pursuant to awards granted under the Partnership’s
long-term incentive plan.




On
January 24, 2008, the Partnership declared a cash distribution of $0.3375
per unit on its outstanding units. The distribution was paid on
February 14, 2008 to unitholders of record on February 1, 2008. The
distribution is for the period October 1, 2007 through December 31,
2007. The total distribution paid was approximately $9.5 million, with
approximately $4.9 million, $4.2 million, and $0.2 million paid to the
Partnership’s common unitholders, subordinated unitholders and general partner,
respectively, and $0.2 million paid to phantom and restricted unitholders
pursuant to awards granted under the Partnership’s long-term incentive
plan.





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





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





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





13


On May
30, 2008, the Partnership purchased the Acquired Storage Assets from the Private
Company for aggregate consideration of $90.3 million, including $0.3 million of
acquisition-related costs. For accounting purposes, the acquisition has been
reflected as a purchase of assets, with the Acquired Storage Assets recorded at
the historical cost of the Private Company, which was approximately $17.2
million, inclusive of $0.6 million of completion costs subsequent to the close
of the acquisition, and with the additional purchase price of $73.1 million
reflected in the statement of changes in partners’ capital as a distribution to
the Private Company.  The Board approved the acquisition of the
Acquired Storage Assets based on a recommendation from its conflicts committee,
which consisted entirely of independent directors. The conflicts committee
retained independent legal and financial advisors to assist it in evaluating the
transaction and considered a number of factors in approving the acquisition,
including an opinion from the committee’s independent financial advisor that the
consideration paid for the Acquired Storage Assets was fair, from a financial
point of view, to the Partnership.





As a
result of the Private Company’s control of the General Partner, consideration
paid in excess of the historical cost of the Acquired Asphalt Assets, Acquired
Pipeline Assets, and Acquired Storage Assets were treated as distributions to
the Private Company.  This resulted in an aggregate reduction in
Partners’ Capital of $317.1 million during the year ended December 31,
2008.  As a result of the Private Company’s control of the General
Partner, the Partnership was subject to the risk that the Private Company may
favor its own interest in proposing the terms of any acquisition (or drop downs)
the Partnership makes from the Private Company and such terms may not be as
favorable as those received from an unrelated third party.  The Board
approved the acquisition of the Acquired Asphalt Assets, the Acquired Pipeline
Assets, and Acquired Storage Assets, as well as the terms of the related
agreements based on a recommendation from its conflicts committee, which
consisted entirely of independent directors. The conflicts committee retained
independent legal and financial advisors to assist it in evaluating these
transactions and considered a number of factors in approving the acquisitions,
including opinions from the committee’s independent financial advisor that the
consideration paid for the Acquired Asphalt Assets, the Acquired Pipeline
Assets, and the Acquired Storage Assets was fair, from a financial point of
view, to the Partnership.




11.
MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK




For the
year ended December 31, 2008 the Private Company accounted for
approximately 73% of the Partnership’s revenues excluding fuel surcharge
revenues related to fuel and power consumed to operate its liquid asphalt cement
storage tanks. As a result of the Bankruptcy Filings, the Partnership has made
efforts to replace revenues generated by services provided to the Private
Company with revenues generated from services provided to other third party
customers (see Note 17).




No other
customers accounted for 10% or more of the Partnership’s revenues during the
year ended December 31, 2008.




Financial
instruments that potentially subject the Partnership to concentrations of credit
risk consist principally of trade receivables. The Partnership’s accounts
receivable are primarily from producers, purchasers and shippers of crude oil
and liquid asphalt cement and at times will include the Private Company. This
industry concentration has the potential to impact the Partnership’s overall
exposure to credit risk in that the customers may be similarly affected by
changes in economic, industry or other conditions. The Partnership reviews
credit exposure and financial information of its counterparties and generally
require letters of credit for receivables from customers that are not considered
creditworthy, unless the credit risk can otherwise be reduced.





12.
RELATED PARTY TRANSACTIONS





Prior to
the close of its initial public offering in July 2007, the Partnership entered
into the Throughput Agreement with the Private Company. For the year ended
December 31, 2008, the Partnership recognized revenue of $77.7 million under the
Throughput Agreement.




In
conjunction with the purchase of the Acquired Asphalt Assets in February 2008,
the Partnership entered into the Terminalling Agreement with the Private
Company. For the year ended December 31, 2008, the Partnership recognized
revenue of $65.8 million under the Terminalling Agreement, including fuel
surcharge revenues related to fuel and power consumed to operate its liquid
asphalt cement storage tanks.




14


Based on
the minimum requirements under the Throughput Agreement and the Terminalling
Agreement, the Private Company was obligated to pay the Partnership an aggregate
minimum monthly fee totaling $135.0 million annually for the Partnership’s
gathering and transportation services and the Partnership’s terminalling and
storage services.  Pursuant to an order of the Bankruptcy Court
entered on September 9, 2008, the Private Company began making payments under
the Throughput Agreement at a market rate based upon the Private Company’s
actual usage rather than the contractual minimums.  In connection with
the Settlement, the Private Company rejected the Throughput Agreement and the
Terminalling Agreement as part of its Bankruptcy Cases (see Note
17).




In
connection with the Settlement, the Partnership and the Private Company entered
into various agreements including the New Throughput Agreement pursuant to which
the Partnership provides certain crude oil gathering, transportation,
terminalling and storage services to the Private Company and the New
Terminalling Agreement pursuant to which the Partnership provides certain
liquid asphalt cement terminalling and storage services for the Private
Company’s remaining asphalt inventory.  For a further discussion of
these agreements, and the other agreements entered into in connection with the
Settlement, please see Note 17.




As of
December 31, 2008, the Partnership had $18.9 million in receivables from
the Private Company and its subsidiaries, including the pre-petition
receivables that will be netted and waived due to the Settlement of $0 and $10.5
million, respectively.  The $10.5 million relates to amounts that were
due from the Private Company as of December 31, 2008 and are considered
prepetition debt in the Bankruptcy Cases.  In connection with the
Settlement, these pre-petition related party receivables will be netted against
pre-petition related party payables and waived (see Note 17).




Prior to
the Bankruptcy Filings, the Partnership paid the Private Company a fixed
administrative fee for providing general and administrative services to the
Partnership.  This fixed administrative fee was initially fixed at
$5.0 million per year through July 2010.  Concurrently with the
closing of the purchase of the Acquired Asphalt Assets, the Partnership amended
and restated the Omnibus Agreement, increasing the fixed administrative fee the
Partnership paid the Private Company for providing general and administrative
services to the Partnership from $5.0 million per year to $7.0 million per
year.  For the year ended December 31, 2008, the Partnership paid the
Private Company $6.9 million for the services provided under the Omnibus
Agreement.  The obligation for the Private Company to provide services
under the Amended Omnibus Agreement and the corresponding administrative fee
payable by the Partnership were terminated in connection with the events related
to the change of control of the General Partner.  The Private Company
continued to provide such services to the Partnership until the effective date
of the Settlement at which time the Private Company rejected the Amended Omnibus
Agreement and the Private Company and the Partnership entered into the Shared
Services Agreement and the Transition Services Agreement relating to
the provision of such services (see Note 17).  In addition, in connection
with the Settlement, the Private Company waived the fixed
administrative fee payable by the Partnership under the Amended Omnibus
Agreement for the month of March 2009 (see Note 17).





The
Partnership also reimburses the Private Company for direct operating payroll and
payroll-related costs and other operating costs associated with services the
Private Company’s employees provide to the Partnership.  As of
December 31, 2008, the Partnership had $20.1 million in payables
to the Private Company and its subsidiaries, including the pre-petition payables
that will be netted and waived due to the Settlement of $10.6 million,
respectively.  Pursuant to the Settlement, these pre-petition related
party payables will be netted against pre-petition related party receivables and
waived (see Note 17).  After the effective date of the Settlement,
these costs will be reimbursed pursuant to the Shared Services Agreement and the
Transition Services Agreement (see Note 17).  In addition, in connection
with the Settlement, the Private Company waived the direct operational costs
attributable to the Partnership’s asphalt operations and payable by the
Partnership under the Amended Omnibus Agreement for the month of March 2009 (see
Note 17).




The
Partnership has acquired various assets, including the Acquired Asphalt Assets,
the Acquired Pipeline Assets and the Acquired Storage Assets, from the Private
Company.  See Notes 1 and 10 for a description of these
acquisitions.  In addition, the Partnership acquired certain liquid
asphalt cement assets and crude oil assets from the Private Company in
connection with the Settlement (see Note 17).





15


During
the year ended December 31, 2008 the Partnership provided crude oil gathering
and transportation services to an entity on whose board of directors a member of
the Board serves.  As of December 31, 2008, the Partnership has a $0.7
million receivable from this entity.





During
the year ended December 31, 2008, the Partnership made payments of
$2.2 million to a third party entity on whose board of directors a former
member of the Board served in connection with leased transport trucks and
trailers utilized in the Partnership’s crude oil gathering and transportation
services segment. At December 31, 2008 the Partnership had future
commitments to this entity totaling $7.7 million.




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





13.
LONG-TERM INCENTIVE PLAN




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




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




In July
2007, 475,000 phantom common units and 5,000 restricted common units were
granted which vest ratably over periods of four and three years, respectively.
In October 2007, 5,000 restricted common units were granted which vest ratably
over three years. In June 2008, 375,000 phantom common units were granted which
vest ratably over three years.  In July 2008, 5,000 restricted common
units were granted which vest ratably over three years.  These grants
are equity awards under SFAS 123(R), and, accordingly, the fair value of the
awards as of the grant date is expensed over the vesting period. The weighted
average grant date fair-value of the awards granted in 2007 and 2008 is $22.06
per unit and $25.86 per unit, respectively. The value of these award grants was
approximately $10.5 million, $0.1 million, $0.1 million, $9.8 million
and $0.1 million on their grant dates, respectively.  Due to the
change of control of the General Partner related to the Private Company’s
liquidity issues, all outstanding awards as of July 18, 2008 vested.  
On August 14, 2008, 282,309 common units were issued in connection with the
vesting of certain of the outstanding awards.  In addition, in
December 2008 the Plan was amended to provide for the delivery of subordinated
units in addition to common units upon vesting and 3,333 restricted common units
and 1,667 restricted subordinated units were awarded under the Plan, and as of
December 31, 2008, these were the only awards outstanding under the
Plan.  In April 2009, the 1,667 restricted subordinated units were
cancelled and were replaced by a grant of 1,667 restricted common
units.  In the year ended December 31, 2008, there were no forfeitures
of awards.




16


14.
COMMITMENTS AND CONTINGENCIES




The
Partnership leases certain real property, equipment and operating facilities
under various operating and capital leases. It also incurs costs associated with
leased land, rights-of-way, permits and regulatory fees, the contracts for which
generally extend beyond one year but can be cancelled at any time should they
not be required for operations. Future non-cancellable commitments related to
these items at December 31, 2008, are summarized below (in
thousands):




Capital
                  Leases
                
                
                Operating
                  LeasesFor
      twelve months ending:December 31,
      2009
                
                $
                933
                
                
                $
                3,752December 31,
      2010
                
                
                261
                
                
                
                3,282December 31,
      2011
                
                
                1
                
                
                
                2,890December 31,
      2012
                
                
                -
                
                
                
                1,672December 31,
      2013
                
                
                -
                
                
                
                417Thereafter
                
                
                -
                
                
                
                239Total
      future minimum lease payments
                
                
                1,195
                
                
                $
                12,252Less
      amount representing interest
                
                
                (74
                )Net
      future minimum lease payments
                
                
                1,121Less
      current portion
                
                
                (866
                )$
                255




The
Partnership is subject to various legal actions and claims, including a
securities class action and other lawsuits, an SEC investigation and a Grand
Jury investigation due to events related to the Bankruptcy Filings (see Note
17).  The Partnership intends to vigorously defend these
actions.  There can be no assurance regarding the outcome of the
litigation.  An estimate of possible loss, if any, or the range of
loss cannot be made and therefore the Partnership has not accrued a loss
contingency related to these actions.  However, the ultimate
resolution of these actions could have a material adverse effect on the
Partnership’s business, financial condition, results of operations, cash flows,
ability to make distributions to its unitholders, the trading price of the its
common units and the Partnership’s ability to conduct its business.





The
Partnership is from time to time subject to various legal actions and claims
incidental to its business, including those arising out of environmental-related
matters. Management believes that these routine legal proceedings will not have
a material adverse effect on the financial position, results of operations or
cash flows of the Partnership. Once management determines that information
pertaining to a legal proceeding indicates that it is probable that a liability
has been incurred and the amount of such liability can be reasonably estimated,
an accrual is established equal to its estimate of the likely exposure. The
Partnership did not have an accrual for legal settlements as of
December 31, 2008.




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




17


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




15.
ENVIRONMENTAL REMEDIATION




The
Partnership maintains insurance of various types with varying levels of coverage
that it considers adequate under the circumstances to cover its operations and
properties. The insurance policies are subject to deductibles and retention
levels that the Partnership considers reasonable and not excessive. Consistent
with insurance coverage generally available in the industry, in certain
circumstances the Partnership’s insurance policies provide limited coverage for
losses or liabilities relating to gradual pollution, with broader coverage for
sudden and accidental occurrences. Although the Partnership maintains a program
designed to prevent and, as applicable, to detect and address such releases
promptly, damages and liabilities incurred due to environmental releases from
its assets may substantially affect its business.




At
December 31, 2008, the Partnership was not aware of any existing conditions
that may cause it to incur significant expenditures in the future for the
remediation of existing contamination. As such, the Partnership has not
reflected in the accompanying financial statements any liabilities for
environmental obligations to be incurred in the future based on existing
contamination. Changes in the Partnership’s estimates and assumptions may occur
as a result of the passage of time and the occurrence of future
events.





16.
RECENTLY ISSUED ACCOUNTING STANDARDS




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




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




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




18


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




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




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




Issue
No. 07-4 is effective for fiscal years beginning after December 15,
2008 and interim periods within those fiscal years. The accounting treatment is
effective for all financial statements presented. The Partnership does not
expect the impact of the adoption of Issue 07-4 on its presentation of
earnings per unit to be significant.




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





17.
EVENTS RELATED TO THE BANKRUPTCY FILINGS AND SUBSEQUENT EVENTS




Due to
the events related to the Bankruptcy Filings described herein, including the
uncertainty relating to the Partnership’s ability to comply with certain
restrictive financial covenants specified in its credit facility, its exposure
and sensitivity to interest rate risks given the materiality of its borrowings
under its credit facility, and uncertainties related to securities and other
litigation, the Partnership faces substantial doubt as to its ability to
continue as a going concern.  While it is not feasible to predict the
ultimate outcome of the events surrounding the Bankruptcy Cases, the Partnership
has been and could continue to be materially and adversely affected by such
events and it may be forced to make a bankruptcy filing or take other action
that could have a material adverse effect on its business, the price of its
common units and its results of operations.




Bankruptcy
Filings




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




19


On July
22, 2008 and thereafter, the Private Company and certain of its subsidiaries
made the Bankruptcy Filings.  The Private Company and its subsidiaries
continue to operate their businesses and own and manage their properties as
debtors-in-possession under the jurisdiction of the Bankruptcy Court and in
accordance with the applicable provisions of the Bankruptcy Code (the
“Bankruptcy Cases”). None of the Partnership, its general partner, the
subsidiaries of the Partnership nor the subsidiaries of the general partner are
debtors in the Bankruptcy Cases.  However, because of the contractual
relationships with the Private Company and certain of its subsidiaries, the
Bankruptcy Filings have adversely impacted the Partnership and may in the future
impact the Partnership in various ways, including the items discussed
below.  The Partnership’s consolidated balance sheet as of December
31, 2008 also reflects a $0.6 million allowance for doubtful accounts related to
amounts due from third parties as of December 31, 2008.  The allowance
related primarily to amounts due from third parties was established as a result
of certain third party customers netting amounts due them from the Private
Company with amounts due to the Partnership.  Also, due to the change
of control of the General Partner related to the Private Company’s liquidity
issues, all outstanding awards under the Plan vested on July 18, 2008 (see Note
13).




Board
and Management Composition




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




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





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




On
October 1, 2008, Dave Miller (who is an affiliate of Manchester) and Duke R.
Ligon were appointed members of the Board. Mr. Ligon is an independent member of
the Board and is the chairman of the audit committee and also serves on the
compensation committee and the conflicts committee of the Board. Under the
provisions of the Plan, Mr. Ligon was granted an award of 3,333 restricted
common units and 1,667 restricted subordinated units on December 23, 2008 (see
Note 13). In April 2009, the 1,667 restricted subordinated units granted to Mr.
Ligon were cancelled and replaced with 1,667 restricted common units (see Note
13).  The restricted common units granted to Mr. Ligon vest in
one-third increments over a three-year period.




20


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




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





SemGroup
Holdings is party to the Bankruptcy Cases.  On May 15, 2009, the
Private Company filed the Reorganization Plan.  The Reorganization
Plan does not address the reorganization of SemGroup Holdings, including the
satisfaction of any obligations it has to Manchester under the Holdings Credit
Agreements or the disposition of the ownership interests in the General Partner
or the Partnership’s subordinated units and incentive distribution
rights.  The membership units in the General Partner, as well as the
Partnership’s subordinated units and its incentive distribution rights, may be
transferred, without the consent of the Partnership’s unitholders, to a third
party as part of the Bankruptcy Cases or subsequent to the resolution of the
Bankruptcy Cases.  Furthermore, Manchester may transfer all or a
portion of its interests in the Holdings Credit Agreements (including its rights
to vote the membership interest in the General Partner) to a third
party.  Any new owner of the General Partner or holder of such voting
rights would be in a position to replace the board of directors and officers of
the General Partner with its own choices and thereby influence the decisions
made by the board of directors and officers.  In addition, any such
change of control of the Partnership or the General Partner will result in an
event of default under the Partnership’s credit agreement, may result in
additional uncertainty in the Partnership’s operations and business and could
have a material adverse effect on the Partnership’s business, cash flows,
ability to make distributions to its unitholders, the price of its common units,
its results of operations and ability to conduct its business.





Bankruptcy
Court Order




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





21


Settlement
with the Private Company




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




The
Settlement provided for the following:




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




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




·
            the
      Private Company rejected the Throughput
  Agreement;




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




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




·
            the
      Partnership offered employment to certain crude oil
    employees;




·
            the
      Private Company transferred its asphalt assets that are connected to the
      Acquired Asphalt Assets to the
Partnership;




·
            the
      Private Company rejected the Terminalling
  Agreement;




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




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




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




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




·
            the
      Private Company rejected the Amended Omnibus
  Agreement;




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




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




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




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




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





Management
is obtaining independent valuations of the assets transferred.  Certain
terms of transaction documents relating to the Settlement are discussed in more
detail below.





22


Shared
Services Agreement





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





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





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





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





Transition
Services Agreement





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





Transfer
of Crude Oil Assets





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





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





23


Transfer
of Asphalt Assets





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





New
Throughput Agreement





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





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





New
Terminalling and Storage Agreement





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





New
Access and Use Agreement





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





Trademark
Agreement





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





24


Building
and Office Leases





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





Easements





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





Partnership
Revenues




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




The
Partnership has been pursuing opportunities to provide crude oil terminalling
and storage services, crude oil gathering and transportation services and
asphalt services to third parties.  As a result of new crude oil
third-party crude oil storage contracts, the Partnership increased its
third-party terminalling and storage revenue from approximately $1.0 million, or
approximately 10% of total terminalling and storage revenue during the
second quarter of 2008, to approximately $4.6 million and $8.4 million, or
approximately 41% and 83% of total terminalling and storage revenue for the
third and fourth quarter of 2008, respectively.




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





The
significant majority of the increase in third party revenues results from an
increase in third-party crude oil services provided and a corresponding decrease
in crude oil services provided to the Private Company due to the termination of
the monthly contract minimum revenues under the Throughput Agreement in
September 2008.  Average rates for the new third-party crude oil
terminalling and storage and gathering and transportation contracts are
comparable with those previously received from the Private
Company.  However, the volumes being terminalled, stored, gathered and
transported have decreased as compared to periods prior to the Bankruptcy
Filings, which has negatively impacted total revenues.  As an example,
fourth quarter 2008 total revenues are approximately $9.5 million (or
approximately 19%) less than second quarter 2008 total revenues, in each case
excluding fuel surcharge revenues related to fuel and power consumed to operate
its liquid asphalt cement storage tanks.




25


In
addition, the Partnership has recently entered into leases and storage
agreements with third parties relating to 45 of its 46 asphalt
facilities.




The
Partnership has entered into various crude oil transportation and storage
contracts with third parties and is continuing to pursue additional contracts
with third parties; however, these additional efforts may not be
successful.  In addition, certain third parties may be less likely to
enter into business transactions with the Partnership due to the Bankruptcy
Filings.  The Private Company may also choose to curtail its
operations or liquidate its assets as part of the Bankruptcy
Cases.  As a result, unless the Partnership is able to generate
additional third party revenues, the Partnership will continue to experience
lower volumes in its system which could have a material adverse effect on its
results of operations and cash flows.





Asphalt
Operations




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




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




The
Partnership has recently entered into leases and storage agreements with third
parties relating to 45 of its 46 asphalt
facilities.




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





26


Operation
and General Administration of the Partnership




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




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





Intellectual
Property Rights




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




Credit
Facility




As
described in Note 8, in connection with the events related to the Bankruptcy
Filings, events of default occurred under the Partnership’s credit
agreement.  On September 18, 2008, the Partnership and the requisite
lenders under its credit facility entered into the Forbearance Agreement
relating to such events of default.  On April 7, 2009, the Partnership
and the requisite lenders entered into the Credit Agreement Amendment, under
which the lenders consented to the Settlement and waived all existing defaults
and events of default described in the Forbearance Agreement and amendments
thereto.  See Note 8 for more information regarding the Partnership’s
credit facility, the Forbearance Agreement and the Credit Agreement
Amendment.





27


Distributions
to Unitholders





The
Partnership did not make a distribution to its common unitholders, subordinated
unitholders or general partner attributable to the results of operations for the
quarters ended June 30, 2008, September 30, 2008, December 31, 2008 or March 31,
2009 due to the events of default under its credit agreement and the uncertainty
of its future cash flows relating to the Bankruptcy Filings.  In
addition, the Partnership does not currently expect to make a distribution
relating to the second quarter of 2009. The Partnership’s unitholders will be
required to pay taxes on their share of the Partnership’s taxable income even
though they did not receive a cash distribution for such periods.  The
Partnership distributed approximately $14.3 million to its unitholders for the
three months ended March 31, 2008.  Pursuant to the Credit Agreement
Amendment, the Partnership is prohibited from making distributions to its
unitholders if its leverage ratio (as defined in the credit agreement) exceeds
3.50 to 1.00.  As of December 31, 2008, the Partnership’s leverage
ratio was 4.86 to 1.00. If the Partnership’s leverage ratio does not
improve, it may not make quarterly distributions to its unitholders in the
future.





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





Nasdaq
Delisting




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




The
Partnership continues to work to become compliant with its SEC reporting
obligations and intends to promptly seek the relisting of its common units on
Nasdaq as soon as practicable after it has become compliant with such reporting
obligations.  However, the Partnership may not be able to relist its
common units on Nasdaq or any other national securities exchange, and the
Partnership may face a lengthy process to relist its common units if it is able
to relist them at all.





Claims
Against and By the Private Company’s Bankruptcy Estate




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




28


Governmental
Investigations




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




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





Securities
and Other Litigation




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




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




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




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




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




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




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





Pursuant
to a motion filed with the United States Judicial Panel on Multidistrict
Litigation (“MDL Panel”), the Maurer case has been
transferred to the Northern District of Oklahoma and consolidated with the Carson case.  The Rubin, Jain, and Hickman cases have also been
transferred to the Northern District of Oklahoma.




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




29


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





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





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




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




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





Examiner




On August
12, 2008, a motion was filed by the United States Trustee asking the Bankruptcy
Court to appoint an examiner to investigate the Private Company’s trading
strategies as well as certain “insider transactions,” including the contribution
of the crude oil assets to the Partnership in connection with its initial public
offering, the sale of the Acquired Asphalt Assets to the Partnership, the sale
of the Acquired Pipeline Assets to the Partnership, the sale of the Acquired
Storage Assets to the Partnership, and the entering into the Holdings Credit
Agreements by SemGroup Holdings.  On September 10, 2008, the
Bankruptcy Court approved the appointment of an examiner, and on October 14,
2008, the United States Trustee appointed Louis J. Freeh, former director of the
Federal Bureau of Investigation, as the examiner (the “Examiner”).  On
April 15, 2009, the Examiner filed a report summarizing the findings of his
investigation with the Bankruptcy Court (the “Examiner’s Report”).




30


The
Examiner was directed by the Bankruptcy Court to (i) investigate the
circumstances surrounding the Private Company’s trading strategy, the transfer
of the New York Mercantile Exchange account, certain insider transactions, the
formation of the Partnership, the potential improper use of borrowed funds and
funds generated from the Private Company’s operations and the liquidation of its
assets to satisfy margin calls related to the trading strategy for the Private
Company and certain entities owned or controlled by the Private Company’s
officers and directors and (ii) determine whether any directors, officers or
employees of the Private Company participated in fraud, dishonesty,
incompetence, misconduct, mismanagement, or irregularity in the management of
the affairs of the Private Company and whether the Private Company’s estates
have causes of action against such persons arising from any such
participation.




The
Examiner’s Report identified potential claims or causes of action against
current officers of the General Partner who were former officers and/or
directors of the Private Company, including (i) against Kevin L. Foxx for his
failure to develop a suitable risk management policy or integrate a suitable
risk management policy into the Private Company’s business controls, and for his
failure to comply with the risk management policy that did exist, thereby
subjecting the Private Company to increased risk and (ii) against Alex G.
Stallings for his failure to stop Thomas L. Kivisto from engaging in trading
activity on his own behalf through Westback Purchasing Company, L.L.C.
(“Westback”), a limited liability trading partnership that Mr. Kivisto owned and
controlled, thereby subjecting the Private Company to increased risk and
losses.  In addition, the Examiner’s Report criticized Mr. Foxx for certain
conflicts of interest with entities that he or his family invested in and that
had a business relationship with the Private Company.  Additionally,
the Examiner’s Report identified a number of potential claims or causes of
action against Mr. Kivisto and Gregory C. Wallace, who are former directors of
the General Partner and former officers of the Private Company, including,
without limitation, for negligence and mismanagement, fraud and false
statements, conversion and corporate waste, unjust enrichment, breach of
fiduciary duties and breach of contract.





The
Examiner did not perform a detailed analysis applying the elements of any of the
causes of action identified in the Examiner’s Report to the facts of the Private
Company’s Bankruptcy Cases or otherwise evaluate the strength of any particular
claims the Private Company’s bankruptcy estate may have.  In addition,
the Examiner did not analyze potential defenses that may be available with
respect to these causes of action.





The
Examiner’s Report and related exhibits are publicly available at
www.kccllc.net/SemGroup.





Bankruptcy
Adversary Proceeding




The
Official Committee of Unsecured Creditors of SemCrude, L.P. (“Unsecured
Creditors Committee”) filed an adversary proceeding in connection with the
Bankruptcy Cases  against Thomas L. Kivisto, Gregory C. Wallace, and
Westback.  In that proceeding, filed February 18, 2009, the Unsecured
Creditors Committee asserted various claims against the defendants on behalf of
the Private Company’s bankruptcy estate, including claims based upon theories of
fraudulent transfer, breach of fiduciary duties, waste, breach of contract, and
unjust enrichment.  On June 8, 2009, the Unsecured Creditors Committee
filed a Second Amended Complaint asserting additional claims against Kevin L.
Foxx and Alex G. Stallings, among others, based upon certain findings and
recommendations in the Examiner’s Report described above (see “—Examiner”). The
claims against Mr. Foxx are based upon theories of fraudulent transfer, unjust
enrichment, and breach of fiduciary duty with respect to certain bonus payments
received from the Private Company, and other claims of breach of fiduciary duty
and breach of contract are also alleged against Messrs. Foxx and Stallings in
the amended complaint.  Messrs. Foxx and Stallings have informed the
Partnership that they intend to vigorously defend these claims.





Internal
Review




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




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




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




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





Equity
Awards and Employment Agreements




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




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




For
purposes of the employment agreements:




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




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





Taxation
as a Corporation




The
anticipated after-tax economic benefit of an investment in the Partnership’s
common units depends largely on the Partnership being treated as a partnership
for federal income tax purposes.  If less than 90% of the gross income
of a publicly traded partnership, such as the Partnership, for any taxable year
is “qualifying income” from sources such as the transportation, marketing (other
than to end users), or processing of crude oil, natural gas or products thereof,
interest, dividends or similar sources, that partnership will be taxable as a
corporation under Section 7704 of the Internal Revenue Code for federal income
tax purposes for that taxable year and all subsequent
years.




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





The
Partnership recently entered into new storage contracts and leases with third
party customers with respect to substantially all of its asphalt
facilities.  It is unclear under current tax law as to whether the
rental income from the leases, and whether  the fees attributable to
certain of the processing services the Partnership provides under certain of the
storage contracts, constitute “qualifying income.”  In the second
quarter of 2009, the Partnership submitted a request for a ruling from the IRS
that rental income from the leases constitutes “qualifying
income.”  The Partnership may not be successful in obtaining this
ruling.  If the Partnership is not successful in obtaining this
ruling, it will likely have to transfer the leases and the related asphalt
assets and rental income, and/or certain of the processing assets and related
fee income, to one or more subsidiaries taxed as corporations.  Even
if successful in obtaining this ruling, the Partnership will likely transfer
certain of the processing assets and related fee income, to one or more
subsidiaries taxed as corporations.  Any such subsidiary that is taxed
as a corporation would pay federal income tax on its income at the corporate tax
rate, which is currently a maximum of 35%, and would likely pay state (and
possibly local) income tax at varying rates.  Distributions would
generally be taxed again to unitholders as corporate distributions and none of
the income, gains, losses, deductions or credits of any such subsidiary would
flow through to the Partnership’s unitholders.  If a material amount
of entity-level taxes were incurred by any such subsidiaries, then the
Partnership’s cash available for distribution to its unitholders could be
substantially reduced.





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Other
Effects




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




The
Partnership is currently pursuing various strategic alternatives for its
business and assets including the possibility of entering into strategic
partnerships (potentially involving the issuance of additional interests in the
Partnership), additional storage contracts with third party customers, and/or
the sale of all or a portion of the Partnership’s assets.  The
uncertainty relating to the Bankruptcy Filings and the recent global market and
economic conditions may make it more difficult to pursue strategic opportunities
or enter into storage contracts with third party customers.




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