-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Lmx4yewXPhrDp3T1uCoQRwS5FSShcf/A2UuOdxvBEaNGB74ry3F5XtiJGKITuXRr t6q/dgXd2bsVb4EVirfluQ== 0001047469-08-010075.txt : 20080915 0001047469-08-010075.hdr.sgml : 20080915 20080915162416 ACCESSION NUMBER: 0001047469-08-010075 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20080630 FILED AS OF DATE: 20080915 DATE AS OF CHANGE: 20080915 FILER: COMPANY DATA: COMPANY CONFORMED NAME: K-SEA TRANSPORTATION PARTNERS LP CENTRAL INDEX KEY: 0001178575 STANDARD INDUSTRIAL CLASSIFICATION: WATER TRANSPORTATION [4400] IRS NUMBER: 200194477 FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-31920 FILM NUMBER: 081071825 BUSINESS ADDRESS: STREET 1: ONE TOWER CENTER BOULEVARD, 17TH FLOOR CITY: EAST BRUNSWICK STATE: NJ ZIP: 08816 BUSINESS PHONE: (732) 565-3818 MAIL ADDRESS: STREET 1: ONE TOWER CENTER BOULEVARD, 17TH FLOOR CITY: EAST BRUNSWICK STATE: NJ ZIP: 08816 10-K 1 a2187896z10-k.htm FORM 10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K


ý		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2008
OR
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 001-31920

K-SEA TRANSPORTATION PARTNERS L.P.
(Exact name of registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)		20-0194477 (I.R.S. Employer Identification No.)
One Tower Center Boulevard, 17^th Floor East Brunswick, New Jersey 08816 (Address of principal executive offices and zip code)
(732) 565-3818 (Registrant's telephone number, including area code)

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

Title of each class		Name of each exchange on which registered

Common Units		New York Stock Exchange

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

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

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

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

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

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


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

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

The aggregate market value of the registrant's Common Units held by non-affiliates of the registrant was approximately $338.6 million as of December 31, 2007 based on $35.89 per Common Unit, the closing price of the Common Units on the New York Stock Exchange on such date.

At September 15, 2008, 13,633,200 Common Units and 2,082,500 Subordinated Units were outstanding.

Documents Incorporated by Reference: None

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K-SEA TRANSPORTATION PARTNERS L.P.

2008 ANNUAL REPORT ON FORM 10-K

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			PAGE

PART I
	ITEMS 1 and 2.	BUSINESS and PROPERTIES	1
	ITEM 1A	RISK FACTORS	21
	ITEM 1B	UNRESOLVED STAFF COMMENTS	39
	ITEM 3.	LEGAL PROCEEDINGS	39
	ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS	39
PART II
	ITEM 5.	MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SECURITYHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	40
	ITEM 6.	SELECTED FINANCIAL DATA	42
	ITEM 7.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	45
	ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	66
	ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	67
	ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	67
	ITEM 9A.	CONTROLS AND PROCEDURES	67
	ITEM 9B.	OTHER INFORMATION	68
PART III
	ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE	69
	ITEM 11.	EXECUTIVE COMPENSATION	73
	ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SECURITYHOLDER MATTERS	85
	ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE	90
	ITEM 14.	PRINCIPAL ACCOUNTANT FEES AND SERVICES	93
PART IV
	ITEM 15.	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES	94

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FORWARD-LOOKING STATEMENTS

Statements included in this report that are not historical facts (including statements concerning plans and objectives of management for future operations or economic performance, or assumptions related thereto) are forward-looking statements. In addition, we may from time to time make other oral or written statements that are also forward-looking statements. Forward-looking statements may include words such as "anticipate," "estimate," "expect," "project," "intend," "plan," "believe," "should" and other words and terms of similar meaning.

Forward-looking statements appear in a number of places in this report and include statements with respect to, among other things:

•: our ability to pay distributions;
•: planned capital expenditures and availability of capital resources to fund capital expenditures;
•: our expected cost of complying with the Oil Pollution Act of 1990;
•: estimated future expenditures for drydocking and maintenance of our tank vessels' operating capacity;
•: our plans for the retirement or retrofitting of tank vessels and the expected delivery and cost of newbuild vessels;
•: the integration of acquisitions of tank barges and tugboats, including the timing, effects and benefits thereof;
•: expected decreases in the supply of domestic tank vessels;
•: expected demand in the domestic tank vessel market in general and the demand for our tank vessels in particular;
•: the adequacy and availability of our insurance and the amount of any capital calls;
•: expectations regarding litigaton;
•: the likelihood that pipelines will be built that compete with us;
•: the effect of new or existing regulations or requirements on our financial position;
•: our future financial condition or results of operations and our future revenues and expenses;
•: our business strategies and other plans and objectives for future operations;
•: our future financial exposure to lawsuits currently pending against EW Transportation LLC and its predecessors; and
•: any other statements that are not historical facts.

These forward-looking statements are made based upon management's current plans, expectations, estimates, assumptions and beliefs concerning future events and, therefore, involve a number of risks and uncertainties. We caution that forward-looking statements are not guarantees and that actual results could differ materially from those expressed or implied in the forward-looking statements. Please read "Item 1A. Risk Factors" for a list of important factors that could cause our actual results of operations or financial condition to differ from our expectations.

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PART I

ITEMS 1 and 2. BUSINESS and PROPERTIES.

Our Partnership

We are a leading provider of marine transportation, distribution and logistics services for refined petroleum products in the United States. As of September 1, 2008, we operated a fleet of 74 tank barges and 66 tugboats that serves a wide range of customers, including major oil companies, oil traders and refiners. With approximately 4.4 million barrels of capacity, we believe we operate the largest coastwise tank barge fleet in the United States.

For the fiscal year ended June 30, 2008, our fleet transported approximately 160 million barrels of refined petroleum products for our customers, including BP, Chevron, Conoco Philips, ExxonMobil and Tesoro. Our five largest customers in fiscal 2008 have been doing business with us for approximately 18 years on average. We do not assume ownership of any of the products we transport. During fiscal 2008, we derived approximately 81% of our revenue from longer-term contracts that are generally for periods of one year or more.

We believe we have a high-quality, well-maintained fleet. As of September 1, 2008, approximately 76% of our barrel-carrying capacity was double-hulled. Furthermore, we will be permitted to continue to operate our single-hull tank vessels until January 1, 2015 in compliance with the Oil Pollution Act of 1990, or OPA 90, which mandates the phase-out of all single-hull tank vessels transporting petroleum and petroleum products in U.S. waters. All of our tank vessels except two operate under the U.S. flag, and all but four are qualified to transport cargo between U.S. ports under the Jones Act, the federal statutes that restrict foreign owners from operating in the U.S. maritime transportation industry.

Our strategy to expand our business and increase our distributable cash flow includes the expansion of our fleet through the building of new equipment and strategic acquisitions. On August 14, 2007, we acquired all of the equity interests in Smith Maritime, Ltd., Go Big Chartering, LLC, and Sirius Maritime, LLC, which we refer to collectively as the "Smith Maritime Group". The Smith Maritime Group provides marine transportation and logistics services to major oil companies, oil traders and refiners in Hawaii and along the West Coast of the United States. On a combined basis, the petroleum transportation operations of these companies added 11 petroleum tank barges and 14 tugboats to our fleet, aggregating 777,000 barrels of capacity, of which 669,000 barrels, or 86%, are double-hulled. The aggregate purchase price for the Smith Maritime Group was $203.7 million, comprising $168.9 million in cash, $23.5 million in assumed debt, and common units representing limited partner interests valued at $11.3 million.

On October 18, 2005, we acquired all of the membership interests in Sea Coast Transportation LLC, or Sea Coast, from Marine Resources Group, Inc., or MRG. Also on October 18, 2005, Sea Coast acquired four tugboats from MRG. Sea Coast is a provider of marine transportation and logistics services to major oil companies, oil traders and refiners along the West Coast of the United States and Alaska. The aggregate purchase price for Sea Coast and the four tugboats was $82.4 million, comprising $78.0 million in cash and common units representing limited partner interests valued at $4.4 million.

We also have grown our fleet through acquisitions of individual vessels and through a robust vessel newbuilding program. Since our initial public offering in January 2004, we have purchased or retrofitted six existing double-hulled tank barges, with aggregate capacity of 634,000 barrels. Also since our initial public offering, under our vessel newbuilding program, we have taken delivery of twelve newly built double-hulled tank barges with aggregate capacity of 610,000 barrels, and we have entered into agreements with shipyards to construct eight more new double-hulled tank barges with an aggregate capacity of 645,000 barrels, including a 185,000 barrel articulated tug-barge unit, all scheduled to be delivered by the end of calendar 2010. These vessels are expected to cost, in the aggregate and after

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the addition of certain special equipment, approximately $165.0 million. We expect to finance construction of these new vessels with borrowings and cash from operations.

In June 2008, we purchased eight tugboats from Roehrig Maritime for $41.5 million in cash. These tugboats will initially reduce our outside towing costs or be chartered out under existing contracts; however, they will also provide sufficient power for our newbuild barges to be delivered by the end of 2010. To enhance productivity and reduce reliance on chartered-in towing, we also purchased three additional tugboats during fiscal 2008 at a total cost of approximately $9.8 million.

Our primary business objective is to increase distributable cash flow to unitholders by executing the following strategies:

•: Expanding our fleet through newbuildings and accretive and strategic acquisitions. We have grown successfully in the past through vessel newbuildings and strategic acquisitions. We expect to continue this strategy by regularly surveying the marketplace to identify and pursue newbuilding opportunities and acquisitions that expand the services and products we offer or that expand our geographic presence. Since our initial public offering in January 2004, we have grown our fleet barrel-carrying capacity from 2.3 million barrels to 4.4 million barrels currently, and we have an additional 645,000 barrels capacity under construction.
•: Maximizing fleet utilization and improving productivity. The interchangeability of our tank vessels and the critical mass of our fleet give us the flexibility to allocate the right vessel for the right cargo assignment on a timely basis. We intend to continue improving our operational efficiency through the use of new technology and comprehensive training programs for new and existing employees. We also intend to minimize down time by emphasizing efficient scheduling and timely completion of planned and preventative maintenance.
•: Maintaining safe, low-cost and efficient operations. We believe we are a cost-efficient and reliable tank vessel operator. We intend to continue to reduce operating costs through constant evaluation of each vessel's performance and concurrent adjustment of operating and chartering procedures to maximize each vessel's safety and profitability. We also intend to continue to minimize costs through an active preventative maintenance program both on-shore and at sea, employing qualified officers and crew and continually training our personnel to ensure safe and reliable vessel operations.
•: Balancing our fleet deployment between longer-term contracts and shorter-term business in an effort to provide stable cash flows through business cycles, while preserving flexibility to respond to changing market conditions. During fiscal 2008, we derived approximately 81% of our revenue from time charters, consecutive voyage charters, contracts of affreightment, and bareboat charters, all of which are generally for periods of one year or more. We derived the remaining 19% of our revenue for fiscal 2008 from single voyage charters, which are generally priced at prevailing market rates. Vessels operating under voyage charters may generate increased profit margins during periods of improved charter rates, while vessels operating on time charters generally provide more predictable cash flow. We intend to pursue a strategy of emphasizing longer-term contracts, while preserving operational flexibility to take advantage of changing market conditions.
•: Attracting and maintaining customers by adhering to high standards of performance, reliability and safety. Customers place particular emphasis on efficient operations and strong environmental and safety records. We intend to continue building on our reputation for maintaining high standards of performance, reliability and safety, which we believe will enable us to attract increasingly selective customers.

We are a publicly traded Delaware limited partnership. Our business activities are conducted through our subsidiary, K-Sea Operating Partnership L.P., a Delaware limited partnership which we

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refer to as the operating partnership, and the subsidiaries of the operating partnership. Our general partner, K-Sea General Partner L.P., is a Delaware limited partnership whose general partner is K-Sea General Partner GP LLC, a Delaware limited liability company. K-Sea General Partner GP LLC has ultimate responsibility for managing our business.

Our principal executive office is located at One Tower Center Boulevard, 17^th Floor, East Brunswick, New Jersey 08816, and our telephone number at that address is (732) 585-3818.

Our Industry

Introduction

Tank vessels, which include tank barges and tankers, are a critical link in the refined petroleum product distribution chain. Tank vessels transport gasoline, diesel fuel, heating oil, asphalt and other products from refineries and storage facilities to a variety of destinations, including other refineries, distribution terminals, power plants and ships. According to a June 2006 study by the Association of Oil Pipe Lines, 29.9% of all domestic refined petroleum product transportation was by water in 2004, making waterborne transportation the most used mode of transportation for refined petroleum products after pipelines.

Among the laws governing the domestic tank vessel industry is the one commonly referred to as the Jones Act, the federal statute that restricts foreign competition in the U.S. marine transportation industry. Under the Jones Act, marine transportation of cargo between points in the United States, generally known as U.S. coastwise trade, is limited to U.S.-flag vessels that were built in the United States and are owned, manned and operated by U.S. citizens. All of our tank vessels except two operate under the U.S. flag, and all but four are qualified to transport cargo between U.S. ports under the Jones Act.

OPA 90 mandates, among other things, the phase-out of all single-hull tank vessels transporting petroleum and petroleum products in U.S. waters at varying times by January 1, 2015. The effect of this legislation has been, and is expected to continue to be, the replacement of domestic single-hull tank vessel capacity with double hulled newbuildings and retrofitting of existing single-hull tank vessels.

The demand for domestic tank vessels is driven primarily by U.S. demand for refined petroleum products, which can be categorized as either clean oil products or black oil products. Clean oil products include motor gasoline, diesel fuel, heating oil, jet fuel and kerosene. Black oil products, which are what remain after clean oil products have been separated from crude oil, include residual fuel oil in the refining process, asphalt, petrochemical feedstocks and bunker fuel. The demand for clean oil products is impacted by vehicle usage, air travel and prevailing weather conditions, while demand for black oil products varies depending on the type of product transported and other factors, such as oil refinery requirements and turnarounds, asphalt use, the use of residual fuel oil by electric utilities and bunker fuel consumption.

Transportation of Refined Petroleum Products

Refined petroleum products are transported by pipelines, water carriers, motor carriers and railroads. Tank vessels are used frequently to continue the transportation of refined petroleum products along the distribution chain after these products have first been transported by another method of transportation, such as a pipeline. For example, many areas have access to refined petroleum products only by using marine transportation as the last link in their distribution chain. In addition, tank vessel transportation is generally a more cost-effective and energy-efficient means of transporting bulk commodities such as refined petroleum products than transportation by rail car or truck. The carrying capacity of a 100,000-barrel tank barge is the equivalent of approximately 162 average-size rail tank cars and approximately 439 average-size tractor trailer tank trucks.

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Types of Tank Vessels

The domestic tank vessel fleet consists of tankers, which have internal propulsion systems, and tank barges, which do not have internal propulsion systems and are instead pushed or towed by a tugboat. Tank barges generally move at slower speeds than comparably sized tankers, but are less expensive to build and operate. Although tank barge configuration varies, the bow and stern of most tank barges are square or sloped, with the stern of many tank barges having a notch of varying depth to permit pushing by a tugboat. While a larger tank vessel may be able to carry more cargo, some voyages require a tank vessel to go through a lock, bridge opening or narrow waterway, which limit the size of vessels that may be used. In addition, some loading and discharge facilities have physical limitations that prevent larger tank vessels from loading or discharging their cargo. Tank barges are often able to navigate the shallower waters of the inland waterway system and the waters along the coast. Tankers, however, are often confined to the deeper waters offshore due to their size.

Tank vessels can be categorized by:

•: Barrel-carrying Capacity—the number of barrels of refined product that it takes to fill a vessel;
•: Gross Tonnage—the total volume capacity of the interior space of a vessel, including non-cargo space, using a convention of 100 cubic feet per gross ton;
•: Net Tonnage—the volume capacity of a vessel determined by subtracting the engine room, crew quarters, stores and navigation space from the gross tonnage using a convention of 100 cubic feet per net ton;
•: Deadweight Tonnage—the number of long-tons (2,240 pounds) of cargo that a vessel can transport. A deadweight ton is equivalent to approximately 6.5 to 7.5 barrels of capacity, depending on the specific gravity of the cargo. In this report, we have assumed that a deadweight ton is equivalent to 7.0 barrels of capacity;
•: Hull Type—the body or framework of a vessel. Vessels can have more than one hull, which means they have additional compartments between the cargo and the outside of the vessel. Typical vessels are single- or double-hulled; and
•: Cargo—the type of commodity transported.

Tank vessels can also be categorized into the following fleets based on the primary waterway system typically navigated by the vessel:

•

Coastwise Fleet. The term coastwise fleet generally refers to commercial vessels that transport goods in the following areas:

•: along the Atlantic, Gulf and Pacific coasts;
•: between the U.S. mainland and Puerto Rico, Alaska, Hawaii and other U.S. Pacific Islands; and
•: between the Atlantic or Gulf and Pacific coasts by way of the Panama Canal.

•

Inland Waterways Fleet. The term inland waterways fleet generally refers to commercial vessels that transport goods on the navigable internal waterways of the Atlantic, Gulf and Pacific Coasts, and the Mississippi River System. The main arteries of the inland waterways network for the mid-continent are the Mississippi and the Ohio Rivers. The inland waterways fleet consists primarily of tugboats and tank barges which typically have a shallower depth. These tank barges are generally less costly than many tank barges, operating in the coastwise fleet. The vessels comprising the inland waterways fleet are generally not built to standards required for operation in coastal waters.

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•: Great Lakes Fleet. The term Great Lakes fleet generally refers to commercial vessels normally navigating the waters among the U.S. Great Lakes ports and connecting waterways.

Tugboats

Tugboats are equipped to push, pull or tow tank barges alongside. The amount of horsepower required to handle a barge depends on a number of factors, including the size of the barge, the amount of product loaded, weather conditions and the waterways navigated. A typical tugboat is manned by six people: a captain, a mate, an engineer, an assistant engineer and two deckhands. These individuals perform the duties and tasks required to operate the tugboat, such as standing navigational watches, maintaining and repairing machinery, rigging and line-handling, and painting and other routine maintenance. A standard work schedule for a tugboat crew is 14 days on, 14 days off. While on duty, the crew members generally work two six-hour shifts each day.

Integrated Tug-Barge Units

Tugboats can also be integrated into a barge utilizing a notching system that connects the two vessels. An integrated tug-barge unit, or ITB, has certain advantages over other tug-barge combinations, including higher speed and better maneuverability. In addition, an ITB can operate in certain sea and weather conditions in which conventional tug-barge combinations cannot.

Our Customers

We provide marine transportation services primarily to major oil companies, oil traders and refiners in the East, West and Gulf Coast regions of the United States, including Alaska and Hawaii. We monitor the supply and distribution patterns of our actual and prospective customers and focus our efforts on providing services that are responsive to the current and future needs of these customers.

The following chart sets forth our major customers and the number of years each of them has been a customer:

K-Sea Transportation Partners L.P.
Major Customers

Major Customers		Years as Customer

BP			35
Chevron			19
ConocoPhillips			12
ExxonMobil			12
Tesoro			10

Our three largest customers in fiscal 2008, based on gross revenue, were ConocoPhillips, ExxonMobil, and Tesoro, each of which accounted for more than 10% of our fiscal 2008 consolidated revenue. Please read note 10 to our audited consolidated financial statements included elsewhere in this report.

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Our Vessels

Tank Vessel Fleet

At September 1, 2008, our fleet consisted of the following tank vessels:

K-Sea Transportation Partners L.P. Tank Vessel Fleet

Vessel(1)

*Double-Hull Barges*
	DBL 155(2)	2004	165,882	12,152	N.A.
	DBL 151	1981	150,000	8,710	N.A.
	DBL 140	2000	140,000	10,303	N.A.
	DBL 134(3)	1994	134,000	9,514	N.A.
	DBL 105(4)	2004	105,000	11,438	N.A.
	DBL 101	2002	102,000	6,774	N.A.
	DBL 102	2004	102,000	6,774	N.A.
	DBL 103	2006	102,000	6,774	N.A.
	DBL 104	2007	102,000	6,774	N.A.
	Casablanca(5)	1987	89,293	5,736	N.A.
	Lemon Creek(5)	1987	89,293	5,736	N.A.
	Spring Creek(5)	1987	89,293	5,736	N.A.
	Nale	2007	86,000	6,508	N.A.
	McCleary's Spirit(6)	2001	85,000	6,554	N.A.
	Antares	2004	84,000	5,855	N.A.
	Deneb	2006	84,000	5,855	N.A.
	DBL 81	2003	82,000	5,667	N.A.
	DBL 82	2003	82,000	5,667	N.A.
	Capella(7)	2002	81,751	5,159	N.A.
	Leo	2003	81,540	5,954	N.A.
	Pacific	1993	81,000	5,669	N.A.
	Rigel	1993	80,861	5,669	N.A.
	Sasanoa	2001	81,000	5,790	N.A.
	DBL 78	2000	80,000	5,559	N.A.
	DBL 77	2008	80,000	5,235	N.A.
	DBL 70	1972	73,024	5,248	N.A.
	Kays Point(7)	1999	67,000	4,720	N.A.
	Noa	2002	67,000	4,826	N.A.
	Cascades	1993	67,000	4,721	N.A.
	Columbia	1993	58,000	4,286	N.A.
	Na-Kao	2005	52,000	4,076	N.A.
	Ne'ena	2004	52,000	4,076	N.A.
	DBL 53	1965	53,000	4,543	N.A.
	DBL 31	1999	30,000	2,146	N.A.
	DBL 32	1999	30,000	2,146	N.A.
	DBL 28	2006	28,000	2,146	N.A.
	DBL 29	2006	28,000	2,146	N.A.
	DBL 26	2006	28,000	2,146	N.A.
	DBL 27	2007	28,000	2,146	N.A.
	DBL 22	2007	28,000	2,146	N.A.
	DBL 23	2007	28,000	2,146	N.A.

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DBL 24		2007	28,000	2,146	N.A.
DBL 25		2007	28,000	2,146	N.A.
Puget Sounder		1992	25,000	1,870	N.A.
DBL 2202		1962	22,000	1,830	N.A.
DBL 16		1954	20,000	1,420	N.A.
DBL 17		1998	18,000	1,499	N.A.
DBL 18		1998	18,000	1,499	N.A.
DBL 19		1998	18,000	1,499	N.A.

	Subtotal		3,333,937	239,135

Vessel(1)

*Single-Hull Barges*
	KTC 80		1981	82,878	4,576	2015
	KTC 71		1975	81,759	4,719	2015
	BB 110(7)		1976	78,000	4,754	2015
	SCT 340		1983	75,000	4,395	2015
	344(7)		1984	75,000	5,214	2015
	Noho Hele		1982	67,880	4,185	2015
	KTC 60		1980	61,638	3,824	2015
	KTC 55		1972	53,012	3,113	2015
	KTC 50		1974	54,716	3,367	2015
	SCT 280		1977	48,000	3,081	2015
	SCT 282		1978	48,000	3,081	2015
	Hui Mana(7)		1988	40,000	2,299	2015
	Essex		1967	35,160	2,307	2015
	DBL 3201		1968	31,000	2,033	2015
	KTC 30		1960	30,000	1,807	2015
	Wallabout Bay		1986	28,330	1,687	2015
	Newark Bay		1969	27,390	1,595	2015
	PM 230(7)		1983	25,000	1,610	2015
	KTC 21		1961	20,000	1,214	2015
	KTC 20		1980	20,000	1,065	2015
	Oyster Bay		1951	19,370	1,278	2015
	SCT 180		1980	16,250	1,053	2015
	Josiah Bartlett		1955	14,000	1,287	2015
	SEA 76		1969	13,313	830	2015
	KTC 14		1941	13,000	820	2015

		Subtotal		1,058,696	65,194

		Total Fleet		4,392,633	304,329

(1): Excludes one potable water barge and one deck barge which we also operate.
(2): Built in 1974; double-hulling was completed and the vessel redelivered in September 2004.
(3): Built in 1986 and rebuilt in 1994.
(4): Built in 1982 and rebuilt for petroleum transportation in 2004.
(5): Vessel not qualified for Jones Act trade due to foreign construction.

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(6): Built in 1969 and rebuilt in 2001.
(7): Chartered-in vessel.

Newbuildings

The following sets forth the size and expected delivery date for vessels in our newbuilding program:

Vessels		Expected Delivery

Two 80,000-barrel tank barges		1^st – 2nd Quarter fiscal 2009
One 185,000-barrel articulated tug-barge unit		2^nd Quarter fiscal 2010
One 100,000-barrel tank barge		2^nd Quarter fiscal 2010
Four 50,000-barrel tank barges		3^rd Quarter fiscal 2010 – 2^nd Quarter fiscal 2011

The total cost of the barges described above, in the aggregate and after the addition of certain special equipment, is approximately $165.0 million, of which approximately $40.4 million has been spent as of June 30, 2008. Please read "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Ongoing Capital Expenditures" in Item 7 of this report.

Tugboat Fleet

We use tugboats as the primary means of propelling our tank barge fleet. Therefore, we seek to maintain the proper balance between the number of tugboats and the number of tank barges in our fleet. This balance is influenced by a variety of factors, including the condition of the vessels in our fleet, the mix of our coastwise business and our local business and the level of longer-term contracts versus shorter-term business. We are also able to maintain a proper balance between tugboats and tank barges by analyzing the historical trading patterns of our customers and the nature of their cargoes. While a tank barge is unloading, we often dispatch its tugboat to perform other work.

At September 1, 2008, we operated the following tugboats:

K-Sea Transportation Partners L.P. Tugboat Fleet

Name(1)

Lincoln Sea	2000	8000	119' × 40' × 22'
Rebel	1975	7200	150' × 46' × 22'
Yankee	1976	7200	150' × 46' × 22'
Jimmy Smith	1976	7200	150' × 40' × 22'
Barents Sea	1976	6200	136' × 40' × 16'
McKinley Sea	1981	6000	136' × 37' × 20'
Aegean Sea	1978	6000	136' × 37' × 20'
Irish Sea	1969	5750	135' × 35' × 18'
Sirius	1974	5750	135' × 38' × 19'
Nakolo	1974	5750	125' × 38' × 14'
El Lobo Grande	1978	5750	128' × 36' × 19'

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Name(1)

Nakoa	1976	5500	118' × 34' × 17'
Volunteer	1982	4860	120' × 37' × 18'
Adriatic Sea(2)	2004	4800	126' × 34' × 15'
Java Sea(3)	2005	4800	119' × 34' × 15'
Namahoe	1997	4400	105' × 34' × 16'
Pacific Freedom(4)	1998	4500	120' × 31' × 15'
Viking	1972	4300	133' × 34' × 18'
Beaufort Sea	1971	4300	113' × 32' × 16'
North Sea	1982	4200	126' × 34' × 16'
Greenland Sea	1990	4200	117' × 34' × 17'
Pacific Wolf	1975	4100	111' × 24' × 13'
William J. Moore	1970	4000	135' × 35' × 20'
Niolo	1982	4000	117' × 34' × 17'
Nokea	1975	4000	105' × 30' × 14'
Nunui	1978	4000	185' × 40' × 12'
Tasman Sea	1976	3900	124' × 34' × 16'
Norwegian Sea(5)	2006	3900	133' × 34' × 17'
Sea Hawk(6)	2006	3900	112' × 32' × 15'
John Brix(7)	1999	3900	141' × 35' × 8'
Pacific Avenger	1977	3900	140' × 34' × 17'
Altair	1981	3800	106' × 33' × 17'
Kara Sea	1974	3520	111' × 32' × 14'
Ross Sea	2003	3400	95' × 32' × 14'
Bismarck Sea	1978	3300	95' × 28' × 13'
Solomon Sea	1965	3300	105' × 32' × 14'
Coral Sea	1973	3280	111' × 32' × 14'
Nathan E. Stewart	2001	3200	95' × 32' × 14'
Maryland	1962	3010	110' × 28' × 14'
Baltic Sea	1973	3000	101' × 30' × 13'
Pacific Challenger	1976	3000	118' × 34' × 16'
Paragon	1978	3000	99' × 32' × 15'
Pacific Raven	1970	3000	112' × 31' × 14'
Na Hoku	1981	3000	105' × 34' × 17'
Nalani	1981	3000	105' × 34' × 17'
Nohea	1983	3000	98' × 30' × 14'
Pacific Pride(8)	1989	2500	84' × 28' × 13'
Sargasso Sea	1972	2460	105' × 30' × 15'
Labrador Sea	2002	2400	82' × 26' × 12'
Siberian Sea	1980	2400	85' × 24' × 10'
Caribbean Sea	1961	2400	85' × 24' × 10'
Bering Sea	1975	2250	105' × 29' × 13'
Caspian Sea	1981	2000	65' × 24' × 9'
Inland Sea	2000	2000	76' × 26' × 10'
Pacific Patriot	1981	2000	77' × 27' × 12'
Davis Sea	1982	2000	77.4' × 26' × 9'
Pacific Eagle(9)	2001	2000	98' × 27' × 13'
Tiger	1966	2000	88' × 27' × 12'

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Name(1)

Chukchi Sea	1979	2000	92' × 26' × 9'
Houma	1970	1950	90' × 29' × 11'
Timor Sea	1960	1920	80' × 24' × 10'
Odin	1982	1860	72' × 28' × 12'
Taurus	1979	1860	79' × 25' × 12'
Falcon	1978	1800	80' × 25' × 12'
Naupaka	1983	1800	75' × 26' × 10'
Fidalgo	1973	1400	98' × 25' × 8'

(1): Excluding certain workboats and other small vessels most of which are less than 1,000 HP.
(2): Built in 1978 and rebuilt in 2004.
(3): Built in 1981 and rebuilt in 2005.
(4): Built in 1969 and rebuilt in 1998.
(5): Built in 1976 and rebuilt in 2006.
(6): Built in 1978 and rebuilt in 2006.
(7): Built in 1963 and rebuilt in 1999.
(8): Built in 1976 and rebuilt in 1989.
(9): Built in 1966 and rebuilt in 1985 and 2001.

Integrated Tug-Barge Units

As of September 1, 2008, we operated 22 ITBs, which represented approximately 40% of the barrel-carrying capacity of our tank barge fleet.

Bunkering

For over 30 years, we have specialized in the shipside delivery of fuel, known as bunkering, for the major and independent bunker suppliers in New York Harbor. We also provide bunkering services in the port of Norfolk. Demand for bunkering services is driven primarily by the number of ship arrivals. A ship's time in port generally is limited, and the cost of delaying sailing due to bunkering or other activities can be significant. Therefore, we continually strive to improve the level of service and on-time deliveries to our customers.

The majority of our bunker delivery tank vessels are equipped with advanced, whole-load sampling devices to provide the supplier and receiver a representative sample. Our bunker delivery tank barges are also equipped with extended booms for hose handling ease alongside ships, remote pump engine shut-offs, spill rails, spill containment equipment and supplies, VHF and UHF radio communication and fendering.

Preventative Maintenance

We have a computerized preventative maintenance program that tracks U.S. Coast Guard and American Bureau of Shipping inspection schedules and establishes a system for the reporting and handling of routine maintenance and repair.

Vessel captains submit monthly inspection reports, which are used to note conditions that may require maintenance or repair. Vessel superintendents are responsible for reviewing these reports, inspecting identified discrepancies, assigning a priority classification and generating work orders. Work orders establish job type, assign personnel responsible for the task and record target start and completion dates. Vessel superintendents inspect repairs completed by the crew, supervise outside contractors as needed and conduct quarterly inspections following the same criteria as the captains.

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Drills and training exercises are conducted in conjunction with these inspections, which are typically more comprehensive in scope. In addition, an operations duty officer is available on a 24-hour basis to handle any operational issues. The operations duty officer is prepared to respond on scene whenever required and is trained in technical repair issues, spill control and emergency response.

The American Bureau of Shipping and the U.S. Coast Guard establish drydocking schedules. Typically, we drydock our vessels twice every five years. Prior to sending a vessel to a shipyard, we develop comprehensive work lists to ensure all required maintenance is completed. Repair facilities bid on these work lists, and jobs are awarded based on quality, price and time to complete. Vessels then report to a cleaning facility to prepare for shipyard. Once the vessel is gas-free, a certified marine chemist issues paperwork certifying that no dangerous vapors are present. The vessel proceeds to the shipyard where the vessel superintendent and certain crewmembers assist in performing the maintenance and repair work. The planned maintenance period is considered complete when all work has been tested to the satisfaction of American Bureau of Shipping or U.S. Coast Guard inspectors or both.

Safety

General

We are committed to operating our vessels in a manner that protects the safety and health of our employees, the general public and the environment. Our primary goal is to minimize the number of safety- and health-related accidents on our vessels and our property. Our primary concerns are to avoid personal injuries and to reduce occupational health hazards. We want to prevent accidents that may cause damage to our personnel, equipment or the environment, such as fire, collisions, petroleum spills and groundings of our vessels. In addition, we are committed to reducing overall emissions and waste generation from each of our facilities and vessels and to the safe management of associated cargo residues and cleaning wastes.

Our policy is to follow all laws and regulations as required, and we are actively participating with government, trade organizations and the public in creating responsible laws, regulations and standards to safeguard the workplace, the community and the environment. Our Operations Department is responsible for coordinating all facets of our health and safety program and identifies areas that may require special emphasis, including new initiatives that evolve within the industry. Our Human Resources Department is responsible for all training, whether conducted in-house or at a training facility. Supervisors are responsible for carrying out and monitoring compliance for all of the safety and health policies on their vessels.

Tank Barge Characteristics

To protect the environment, today's tank barge hulls are required not only to be leak-proof into the body of water in which they float but also to be vapor-tight to prevent the release of any fumes or vapors into the atmosphere. Our tank barges that carry light products such as gasoline or naphtha have alarms that indicate when the tank is full (95% of capacity) and when it is overfull (98% of capacity). Each tank barge also has a vapor recovery system that connects the cargo tanks to the shore terminal via pipe and hose to return to the plant the vapors generated while loading.

The majority of our bunker delivery tank barges are equipped with advanced, whole-load sampling devices to provide the supplier and receiver a representative sample. Our bunker delivery tank barges are also equipped with extended booms for hose handling ease alongside ships, remote pump engine shut-offs, spill rails, spill containment equipment and supplies, VHF and UHF radio, satellite and internet communication.

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Safety Management Systems

We belong and adhere to the recommendations of the American Waterways Operators ("AWO") Responsible Carrier Program. The program is designed as a framework for continuously improving the industry's and member companies' safety performance. The program complements and builds upon existing government regulations, requiring company safety and training standards that in many instances exceed those required by federal law or regulation.

Developed by the AWO, the Responsible Carrier Program incorporates best industry practices in three primary areas:

•: management and administration;
•: equipment and inspection; and
•: human factors.

The Responsible Carriers Program has been recognized by many groups, including the U.S. Coast Guard and shipper organizations. We are periodically audited by an AWO-certified auditor to verify compliance. We were last audited in early 2007, and our Responsible Carrier Program certificate remains in effect until March 2010.

We are also certified to the standards of the International Safety Management, or ISM, system. The ISM standards were promulgated by the International Maritime Organization, or IMO, and have been adopted through treaty by many IMO member countries, including the United States. Although ISM is not required for coastal tug and barge operations, we have determined that an integrated safety management system including the ISM and Responsible Carriers Program standards promotes safer operations and provides us with necessary operational flexibility as we continue to grow.

Ship Management, Crewing and Employees

We maintain an experienced and highly qualified work force of shore-based and seagoing personnel. As of August 15, 2008, we employed 1,044 persons, comprising 176 shore staff and 868 fleet personnel. Our tug and tanker captains are non-union management supervisors. Effective July 1, 2008, we agreed on a new two-year collective bargaining agreement with our maritime union covering certain of our seagoing personnel comprising 47% of our workforce. The collective bargaining agreement provides for wage increases, and requires us to make contributions to certain pension and other welfare programs. No unfunded pension liability exists under any of these programs. Our vessel employees are paid on a daily or hourly basis and typically work 14 days on and 14 days off. Our shore-based personnel are generally salaried and most are located at our headquarters in East Brunswick, New Jersey or our facilities in Staten Island, New York, Seattle, Washington, Honolulu, Hawaii, Norfolk, Virginia and Philadelphia, Pennsylvania. We believe that our relations with our employees are satisfactory.

Our shore staff provides worldwide support for all aspects of our fleet and business operations, including sales and scheduling, crewing and human resources functions, engineering, compliance and technical management, financial and insurance services, and information technology. A staff of dispatchers and schedulers maintain a 24-hour duty rotation to monitor communications and to coordinate fleet operations with our customers and terminals. Communication with our vessels is accomplished by various methods, including wireless data links, cellular telephone, VHF, UHF and HF radio.

Our crews regularly inspect each vessel, both at sea and in port, and perform most of the ordinary course maintenance. Our procedures call for a member of our shore-based staff to inspect each vessel at least once each fiscal quarter, making specific notations and recommendations regarding the overall condition of the vessel, maintenance, safety and crew welfare. In addition, selected vessels are inspected each year by independent consultants. All of the vessels that are on bareboat charters to third parties are managed and operated by the customer.

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Classification, Inspection and Certification

Most of our coastwise vessels have been certified as being "in class" by the American Bureau of Shipping and, in the case of one vessel, by Lloyds of London. Other vessels, primarily in our West Coast operations, have the required "loadline" certification. The American Bureau of Shipping is one of several internationally recognized classification societies that inspect vessels at regularly scheduled intervals to ensure compliance with American Bureau of Shipping classification rules and some applicable federal safety regulations. Most insurance underwriters require at least a "loadline" certification by a classification society before they will extend coverage to a coastwise vessel. The classification society certifies that the pertinent vessel has been built and maintained in accordance with the rules of the society and complies with applicable rules and regulations of the vessel's country of registry and the international conventions of which that country is a member. Inspections are conducted on the pertinent vessel by a surveyor of the classification society in three surveys of varying frequency and thoroughness: annual surveys each year, an intermediate survey every two to three years and a special survey every four to five years. As part of the intermediate survey, a vessel may be required to be drydocked every 24 to 30 months for inspection of its underwater parts and for any necessary repair work related to such inspection.

Our vessels are also inspected at periodic intervals by the U.S. Coast Guard to ensure compliance with Federal safety regulations. All of our tank vessels carry Certificates of Inspection issued by the U.S. Coast Guard.

Our vessels and shoreside operations are also inspected and audited periodically by our customers, in some cases as a precondition to chartering our vessels. We maintain all necessary approvals required for our vessels to operate in their normal trades. We believe that the high quality of our vessels, our crews and our shoreside staff are advantages when competing against other vessel operators for long-term business.

Insurance Program

We maintain insurance coverage consistent with industry practice that we believe is adequate to protect against the accident-related risks involved in the conduct of our business and risks of liability for environmental damage and pollution. Nevertheless, we cannot provide assurance that all risks are adequately insured against, that any particular claims will be paid or that we will be able to procure adequate insurance coverage at commercially reasonable rates in the future.

Our hull and machinery insurance covers risks of actual or constructive loss from collision, towers liabilities, fire, grounding and engine breakdown up to an agreed value per vessel. Our war-risks insurance covers risks of confiscation, seizure, capture, vandalism, sabotage and other war-related risks. While some tanker owners and operators obtain loss-of-hire insurance covering the loss of revenue during extended tanker off-hire periods, we do not have this type of coverage. We believe that, given our diversified marine transportation operations and high utilization rate, this type of coverage is not economical and is of limited value to us. However, we evaluate the need for such coverage on an ongoing basis taking into account insurance market conditions and the employment of our vessels.

Our protection and indemnity insurance covers third-party liabilities and other related expenses from, among other things, injury or death of crew, passengers and other third parties, claims arising from collisions, damage to cargo, damage to third-party property, asbestos exposure and pollution arising from oil or other substances. Our current protection and indemnity insurance coverage for pollution is $1 billion per incident and is provided by West of England Ship Owners Insurance Services Ltd. ("West of England"), a mutual insurance association. West of England is a member of the International Group of protection and indemnity mutual assurance associations. The protection and indemnity associations that comprise the International Group insure approximately 90% of the world's commercial tonnage and have entered into a pooling agreement to reinsure each association's liabilities. Each protection and indemnity association has capped its exposure to this pooling agreement at

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approximately $4.3 billion per non-pollution incident. As a member of West of England, we are subject to calls payable to the association based on our claim records, as well as the claim records of all other members of the individual associations and members of West of England.

We are not currently the subject of any claims alleging exposure to asbestos or second-hand smoke, although such claims have been brought against our predecessors in the past and may be brought against us in the future. Our predecessor company, EW Transportation LLC, has contractually agreed to retain any such liabilities that occurred prior to our initial public offering in January 2004, will indemnify us for up to $10 million of such liabilities until January 2014, and will make available to us the benefit of certain indemnities it received in connection with the purchase of certain vessels. If, notwithstanding the foregoing, we are ultimately obligated to pay any asbestos-related or similar claims for any reason, we believe that we or EW Transportation LLC would have adequate insurance coverage for periods after March 1986 to pay such claims. However, EW Transportation LLC and its predecessors may not have insurance coverage prior to March 1986. If we were subject to claims related to that period, including claims from current or former employees, EW Transportation LLC may not have insurance to pay the liabilities, if any, that could be imposed on us. If we had to pay claims solely out of our own funds, it could have a material adverse effect on our financial condition. Furthermore, any claims covered by insurance would be subject to deductibles, and because it is possible that a large number of claims could be brought, the aggregate amount of these deductibles could be material. Please read "Legal Proceedings" in Item 3 of this report.

We may not be able to obtain insurance coverage in the future to cover all risks inherent in our business, and insurance, if available, may be at rates that we do not consider commercially reasonable. In addition, as more single-hull vessels are retired from active service, insurers may be less willing to insure, and customers less willing to hire, single-hull vessels.

Competition

The domestic tank vessel industry is highly competitive. The Jones Act restricts U.S. point-to-point maritime shipping to vessels built in the United States, owned and operated by U.S. citizens and manned by U.S. crews. In our market areas, our primary direct competitors are the operators of U.S.-flag ocean-going tank barges and U.S.-flag refined petroleum product tankers, including the captive fleets of major oil companies.

In the voyage and short-term charter market, our vessels compete with all other vessels of a size and type required by a charterer that can be available at the date specified. In the voyage market, competition is based primarily on price and availability, although charterers have become more selective with respect to the quality of vessels they hire, with particular emphasis on factors such as age, double hulls and the reliability and quality of operations. Increasingly, major charterers are demonstrating a preference for modern vessels based on concerns about the environmental risks associated with older vessels. Consequently, we believe that owners of large modern fleets have been able to gain a competitive advantage over owners of older fleets.

U.S.-flag tank vessels also compete with petroleum product pipelines and are affected by the level of imports on foreign flag products carriers. The Colonial Pipeline system, which originates in Texas and terminates at New York Harbor, the Plantation Pipe Line system, which originates in Louisiana and terminates in Washington D.C., and smaller regional pipelines between Philadelphia and New York, carry refined petroleum products to the major storage and distribution facilities that we currently serve. We believe that high capital costs, tariff regulation and environmental considerations make it unlikely that a new refined product pipeline system will be built in our market areas in the near future. It is possible, however, that new pipeline segments, including pipeline segments that connect with existing pipeline systems, could be built or that existing pipelines could be converted to carry refined petroleum products. Either of these occurrences could have an adverse effect on our ability to compete in particular locations.

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Regulation

Our operations are subject to significant federal, state and local regulation, including those described below.

Environmental

General. Government regulation significantly affects the ownership and operation of our tank vessels. Our tank vessels are subject to international conventions, federal, state and local laws and regulations relating to safety and health and environmental protection, including the generation, storage, handling, emission, transportation, and discharge of hazardous and non-hazardous materials. Although we believe that we are in substantial compliance with applicable environmental laws and regulations, we cannot predict the ultimate cost of complying with these requirements, or the impact of these requirements on the resale value or useful lives of our tank vessels. The recent trend in environmental legislation is toward stricter requirements, and this trend will likely continue. In addition, a future serious marine incident occurring in U.S. waters, or internationally, that results in significant oil pollution or causes significant environmental impact could result in additional legislation or regulation that could affect our profitability.

Various governmental and quasi-governmental agencies require us to obtain permits, licenses and certificates for the operation of our tank vessels. While we believe that we are in substantial compliance with applicable environmental laws and regulations and have all permits, licenses and certificates necessary for the conduct of our operations, frequently changing and increasingly stricter requirements, future non-compliance or failure to maintain necessary permits or approvals could require us to incur substantial costs or temporarily suspend operation of one or more of our tank vessels.

We maintain operating standards for all our tank vessels that emphasize operational safety, quality maintenance, continuous training of our crews and officers, care for the environment and compliance with U.S. regulations. Our tank vessels are subject to both scheduled and unscheduled inspections by a variety of governmental and private entities, each of which may have unique requirements. These entities include the local port authorities (U.S. Coast Guard, harbor master or equivalent), classification societies, flag state administration and charterers, particularly terminal operators and oil companies.

Finally, we manage our exposure to losses from potential discharges of pollutants through the use of well maintained and well managed facilities, well maintained and well equipped vessels and safety and environmental programs, including a maritime compliance program and our insurance program. Moreover, we believe we will be able to accommodate reasonably foreseeable environmental regulatory changes. However, the risks of substantial costs, liabilities, and penalties are inherent in marine operations. As a result, there can be no assurance that any new regulations or requirements or any discharge of pollutants by us will not have a material adverse effect on us.

The Oil Pollution Act of 1990. The Oil Pollution Act of 1990, or OPA 90, affects all vessels trading in U.S. waters, including the exclusive economic zone extending 200 miles seaward. OPA 90 sets forth various technical and operating requirements for tank vessels operating in U.S. waters. Existing single-hull, double-sided and double-bottomed tank vessels are to be phased out of service at varying times based on their tonnage and age, with all such vessels being phased out by January 2015. As of September 1, 2008, 25 of our tank vessels, which are single-hulled, will be precluded from transporting petroleum products as of January 1, 2015.

Under OPA 90, owners or operators of tank vessels and certain non-tank vessels operating in U.S. waters must file vessel spill response plans with the U.S. Coast Guard and operate in compliance with the plans. These vessel response plans must, among other things:

•: address a "worst case" scenario and identify and ensure, through contract or other approved means, the availability of necessary private response resources;
•: describe crew training and drills; and
•: identify a qualified individual with specific authority and responsibility to implement removal actions in the event of an oil spill.

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Our vessel response plans have been approved by the U.S. Coast Guard, and all of our tankermen have been trained to comply with OPA 90 requirements. In addition, we conduct regular oil-spill response drills in accordance with the guidelines set out in OPA 90. We believe that all of our vessels are in substantial compliance with OPA 90.

Environmental Spill and Release Liability. OPA 90 and various state laws substantially increased over historic levels the statutory liability of owners and operators of vessels for the discharge or substantial threat of a discharge of oil and the resulting damages, both regarding the limits of liability and the scope of damages. OPA 90 imposes joint and several strict liability on responsible parties, including owners, operators and bareboat charterers, for all oil spill and containment and clean-up costs and other damages arising from spills attributable to their vessels. A complete defense is available only when the responsible party establishes that it exercised due care and took precautions against foreseeable acts or omissions of third parties and when the spill is caused solely by an act of God, act of war (including civil war and insurrection) or a third party other than an employee or agent or party in a contractual relationship with the responsible party. These limited defenses may be lost if the responsible party fails to report the incident or reasonably cooperate with the appropriate authorities or refuses to comply with an order concerning clean-up activities. Even if the spill is caused solely by a third party, the owner or operator must pay removal costs and damage claims and then seek reimbursement from the third party or the trust fund established under OPA 90. Finally, in certain circumstances involving oil spills, OPA 90 and other environmental laws may impose criminal liability on personnel and/or the corporate entity.

OPA 90 limits the liability of each responsible party for oil pollution from vessels, and these limits were increased substantially in 2006. The limits for a tank vessel without a qualifying double hull are the greater of (1) $3,000 per gross ton or (2) $22 million for a tank vessel of greater than 3,000 tons or $6 million for a tank vessel of 3,000 gross tons or less. The limits for a tank vessel with a qualifying double hull are the greater of (1) $1,900 per gross ton or (2) $16 million for a tank vessel of greater than 3,000 gross tons or $4 million for a tank vessel of 3,000 gross tons or less. The limits for any vessel other than a tank vessel are the greater of $950 per gross ton or $0.8 million. The limits of liability are subject to periodic increases to account for inflation. These limits do not apply where, among other things, the spill is caused by gross negligence or willful misconduct of, or a violation of an applicable federal safety, construction or operating regulation by, a responsible party or its agent or employee or any person acting in a contractual relationship with a responsible party. In addition to removal costs, OPA 90 provides for recovery of damages, including:

•: natural resource damages and related assessment costs;
•: real and personal property damages;
•: net loss of taxes, royalties, rents, fees and other lost revenues;
•: net costs of public services necessitated by a spill response, such as protection from fire, safety or health hazards;
•: loss of profits or impairment of earning capacity due to the injury, destruction or loss of real property, personal property or natural resources; and
•: loss of subsistence use of natural resources.

OPA 90 requires owners and operators of vessels operating in U.S. waters to establish and maintain with the U.S. Coast Guard evidence of their financial responsibility sufficient to meet their potential liabilities imposed by OPA 90. Under the regulations, we may provide evidence of insurance, a surety bond, a guarantee, letter of credit, qualification as a self-insurer or other evidence of financial responsibility. We have qualified as a self-insurer under the regulations and have received Certificates of Financial Responsibility from the U.S. Coast Guard for all of our vessels subject to this requirement.

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OPA 90 expressly provides that individual states are entitled to enforce their own oil pollution liability laws, even if such laws are inconsistent with or imposing greater liability than OPA 90. There is no uniform liability scheme among the states. Some states have schemes similar to OPA 90 that limit liability to various amounts, some rely on common law fault-based remedies and others impose strict and/or unlimited liability on an owner or operator. Virtually all coastal states have enacted their own pollution prevention, liability and response laws, whether statutory or through court decisions, with many providing for some form of unlimited liability. We believe that the liability provisions of OPA 90 and similar state laws have greatly expanded potential liability in the event of an oil spill, even in instances where we did not cause the spill. Some states have also established their own requirements for financial responsibility. However, at least two states have repealed regulations concerning the operation, manning, construction or design of tank vessels as a result of the U. S. Supreme Court's 2000 ruling in United States v. Locke. In Locke, the Court held that the regulation of maritime commerce is generally a federal responsibility because of the need for national and international uniformity.

Parties affected by oil pollution that do not fully recover from a responsible party may pursue relief from the Oil Spill Liability Trust Fund. Responsible parties may seek reimbursement from the fund for costs incurred that exceed the liability limits of OPA 90. In order to obtain reimbursement of excess costs, the responsible party must establish that it is entitled to a statutory limitation of liability as discussed above. If we are deemed a responsible party for an oil pollution incident and are ineligible for reimbursement of excess costs, the costs of responding to an oil pollution incident could have a material adverse effect on our results of operations, financial condition and cash flows. We presently maintain oil pollution liability insurance in an amount in excess of that required by OPA 90. Through West of England, our current coverage for oil pollution is $1 billion per incident. It is possible, however, that our liability for an oil pollution incident may be in excess of the insurance coverage we maintain.

We are also subject to potential liability arising under the U.S. Comprehensive Environmental Response, Compensation, and Liability Act, or CERCLA, which applies to the discharge of hazardous substances, whether on land or at sea. Specifically, CERCLA provides for liability of owners and operators of vessels for cleanup and removal of hazardous substances. Liability under CERCLA for releases of hazardous substances from vessels is limited to the greater of $300 per gross ton or $5 million per incident unless attributable to willful misconduct or neglect, a violation of applicable standards or rules, or upon failure to provide reasonable cooperation and assistance. CERCLA liability for releases from facilities other than vessels is generally unlimited.

We are required to show proof of insurance, surety bond, self insurance or other evidence of financial responsibility to pay damages under OPA 90 and CERCLA in the amount of $1,500 per gross ton for vessels, consisting of the sum of the OPA 90 liability limit of $1,200 per gross ton or $10 million per discharge and the CERCLA liability limit of $300 per gross ton or $5 million per discharge. We have satisfied these requirements and obtained a U.S. Coast Guard Certificate of Financial Responsibility for each of our tank vessels. OPA 90 and CERCLA each preserve the right to recover damages under other existing laws, including maritime tort law.

Water. The federal Clean Water Act (CWA) imposes restrictions and strict controls on the discharge of pollutants into navigable waters, and such discharges generally require permits. The CWA provides for civil, criminal and administrative penalties for any unauthorized discharges and imposes substantial liability for the costs of removal, remediation and damages. State laws for the control of water pollution also provide varying civil, criminal and administrative penalties and liabilities in the case of a discharge of petroleum, its derivatives, hazardous substances, wastes and pollutants into state waters. In addition, the Coastal Zone Management Act authorizes state implementation and development of programs of management measures for non-point source pollution to restore and protect coastal waters.

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On July 23, 2008, the U.S. Ninth Circuit Court of Appeals affirmed the district court decision in Northwest Environmental Advocates v. EPA that vacated an Environmental Protection Agency's (EPA) regulation that exempted certain discharges of effluent from vessels, including discharges of ballast water, from permitting requirements under the National Pollutant Discharge Elimination System (NPDES) program. The district court ruling requires that the regulation be vacated on September 30, 2008. In connection with the district court decision, EPA published for comment the Draft NPDES General Permits for Discharges Incidental to the Normal Operation of a Vessel on June 17, 2008. The proposed general permits would impose effluent limitations on discharges from vessels and would require the implementation of best management practices to control such discharges. Because the general permit is only in draft form at this time, we cannot estimate its potential financial impact. However, we believe that any financial impacts resulting from the repeal of the permitting exemption for ballast water discharge and the resulting general permit for such discharges will not be material.

Solid Waste. Our operations occasionally generate and require the transportation, treatment and disposal of both hazardous and non-hazardous solid wastes that are subject to the requirements of the federal Resource Conservation and Recovery Act, or RCRA, and comparable state and local requirements. In addition, in the course of our tank vessel operations, we engage contractors to remove and dispose of waste material, including tank residue. In the event that such waste is found to be "hazardous" under either RCRA or the CWA, and is disposed of in violation of applicable law, we could be found jointly and severally liable for the cleanup costs and any resulting damages. Finally, the EPA does not currently classify "used oil" as "hazardous waste," provided certain recycling standards are met. However, some states in which we operate have classified "used oil" as "hazardous" under state laws patterned after RCRA. The cost of managing wastes generated by tank vessel operations has increased in recent years under stricter state and federal standards. Additionally, from time to time we arrange for the disposal of hazardous waste or hazardous substances at offsite disposal facilities. If such materials are improperly disposed of by third parties, we could be liable for clean up costs under CERCLA or the equivalent state laws. We use only certified haulers for this work.

Air Emissions. The federal Clean Air Act (CAA) requires the EPA to promulgate standards applicable to emissions of volatile organic compounds and other air contaminants. Our vessels are subject to vapor control and recovery requirements for certain cargoes when loading, unloading, ballasting, cleaning and conducting other operations in regulated port areas. Our tank barges are equipped with vapor control systems that satisfy these requirements. In addition, the EPA issued final rules regarding emissions standards for various classes of marine diesel engines. While these rules are currently limited to new engines beginning with the 2004 model year, the EPA has noted that it may revisit the application of emissions standards to rebuilt or remanufactured engines if the industry does not take steps to introduce new pollution control technologies. Adoption of such standards could require modifications to some existing marine diesel engines and may require substantial expenditures.

The CAA also requires states to draft State Implementation Plans (SIPs) designed to attain national health-based air quality standards in primarily major metropolitan and/or industrial areas. Where states fail to present approvable SIPs or SIP revisions by certain statutory deadlines, the federal government is required to draft a Federal Implementation Plan. Several SIPs regulate emissions resulting from barge loading and degassing operations by requiring the installation of vapor control equipment. As stated above, our tank barges are already equipped with vapor control systems that satisfy these requirements. Although a risk exists that new regulations could require significant capital expenditures and otherwise increase our costs, we believe, based upon the regulations that have been proposed to date, that no material capital expenditures beyond those currently contemplated and no material increase in costs are likely to be required.

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Coastwise Laws

A substantial portion of our operations are conducted in the U.S. domestic trade, which is governed by the coastwise laws of the United States. The U.S. coastwise laws reserve marine transportation between points in the United States, including harbor tug services, to vessels built in and documented under the laws of the United States (U.S.-flag) and owned and manned by U.S. citizens. Generally, an entity is deemed a U.S. citizen for these purposes so long as:

•: it is organized under the laws of the United States or a state;
•: each of its chief executive officer (by whatever title) and the chairman of its board of directors is a U.S. citizen;
•: no more than a minority of the number of its directors necessary to constitute a quorum for the transaction of business are non-U.S. citizens;
•: at least 75% of the interest and voting power in the corporation is held by U.S. citizens free of any trust, fiduciary arrangement or other agreement, arrangement or understanding whereby voting power may be exercised directly or indirectly by non-U.S. citizens; and
•: in the case of a limited partnership, the general partner meets U.S. citizenship requirements for U.S. coastwise trade.

Because we could lose the privilege of operating our vessels in the U.S. coastwise trade if non-U.S. citizens were to own or control in excess of 25% of our outstanding interests, our limited partnership agreement restricts foreign ownership and control of our common and subordinated units to not more than 15% of our outstanding interests.

There have been repeated efforts aimed at repeal or significant change of the Jones Act. Although we believe it is unlikely that the Jones Act will be substantially modified or repealed, there can be no assurance that Congress will not substantially modify or repeal such laws. Such changes could have a material adverse effect on our operations and financial condition.

Other

Our vessels are subject to the jurisdiction of the U.S. Coast Guard, the National Transportation Safety Board, the U.S. Customs and Border Protection (CBP) and the U.S. Maritime Administration, as well as subject to rules of private industry organizations such as the American Bureau of Shipping. These agencies and organizations establish safety standards and are authorized to investigate vessels and accidents and to recommend improved maritime safety standards. Moreover, to ensure compliance with applicable safety regulations, the U.S. Coast Guard is authorized to inspect vessels at will.

Occupational Health Regulations

Our shoreside facilities are subject to occupational safety and health regulations issued by the U.S. Occupational Safety and Health Administration, or OSHA, and comparable state programs. These regulations currently require us to maintain a workplace free of recognized hazards, observe safety and health regulations, maintain records, and keep employees informed of safety and health practices and duties. Our vessel operations are also subject to occupational safety and health regulations issued by the U.S. Coast Guard and, to an extent, OSHA. These regulations currently require us to perform monitoring, medical testing and recordkeeping with respect to mariners engaged in the handling of the various cargoes that are transported by our chemical and petroleum product carriers.

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Vessel Condition

Our vessels are subject to periodic inspection and survey by, and drydocking and maintenance requirements of, the U.S. Coast Guard and/or the American Bureau of Shipping. We believe we are currently in compliance in all material respects with the environmental and other laws and regulations, including health and safety requirements, to which our operations are subject. We are unaware of any pending or threatened litigation or other judicial, administrative or arbitration proceedings against us occasioned by any alleged non-compliance with such laws or regulations. The risks of substantial costs, liabilities and penalties are, however, inherent in marine operations, and there can be no assurance that significant costs, liabilities or penalties will not be incurred by or imposed on us in the future.

Seasonality

We operate our tank vessels in markets that exhibit seasonal variations in demand and, as a result, in charter rates. For example, movements of clean oil products, such as motor fuels, generally increase during the summer driving season. In certain regions, movements of black oil products and distillates, such as heating oil, generally increase during the winter months, while movements of asphalt products generally increase in the spring through fall months. Unseasonably cold winters result in significantly higher demand for heating oil in the northeastern United States. Meanwhile, our operations along the West Coast and in Alaska historically have been subject to seasonal variations in demand that vary from those exhibited in the East Coast and Gulf Coast regions. The summer driving season can increase demand for automobile fuel in all of our markets and, accordingly, the demand for our services. A decline in demand for, and level of consumption of, refined petroleum products could cause demand for tank vessel capacity and charter rates to decline, which would decrease our revenues and cash flows. Our West Coast operations provide seasonal diversification primarily as a result of services to our Alaskan markets, which experience the greatest demand for petroleum products in the summer months, due to weather conditions. Considering the above, we believe seasonal demand for our services is lowest during our third fiscal quarter. We do not see any significant seasonality in the Hawaiian market.

Properties

We lease pier facilities and approximately 7,000 square feet of office space in Staten Island, New York. The lease expires in April 2009; however, we have the option to renew it for two additional ten-year periods.

We lease pier facilities, a water treatment facility and approximately 10,500 square feet of office space in Norfolk, Virginia. This lease expires in January 2010 and we have an option to purchase the facility.

We lease approximately 15,542 square feet of office space for our principal executive office in East Brunswick, New Jersey, for which the lease expires in December 2013.

We lease pier facilities and approximately 16,000 square feet of office space in Seattle, Washington. This lease expires in October 2008 with a renewal option for one additional five-year term.

We lease wharf facilities of approximately 1,025 linear feet and approximately 12,000 square feet of office and warehouse space in Philadelphia, Pennsylvania, which terminates in July 2018.

We also lease a parcel of land, pier facilities and approximately 2,800 square feet of office and warehouse space, on a month to month basis, in Honolulu, Hawaii.

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SEC Reporting

We file annual, quarterly and current reports, along with any related amendments and supplements thereto, with the SEC. From time to time, we may also file registration statements pertaining to equity or debt offerings. You may read and copy any materials we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. You may obtain information regarding the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

We also provide electronic access to our periodic and current reports on our website, www.k-sea.com, free of charge. These reports are available on our website as soon as reasonably practicable after we electronically file such materials with, or furnish them to, the SEC. Information on our website or any other website is not incorporated by reference into this report and does not constitute a part of this report.

ITEM 1A. RISK FACTORS.

Risks Inherent in Our Business

Marine transportation is an inherently risky business.

Our vessels and their cargoes are at risk of being damaged or lost because of events such as:

•: marine disasters;
•: bad weather;
•: mechanical failures;
•: grounding, fire, explosions and collisions;
•: human error; and
•: war and terrorism.

All of these hazards can result in death or injury to persons, loss of property, environmental damages, delays or rerouting. If one of our vessels were involved in an accident, with the potential risk of environmental contamination, the resulting media coverage could have a material adverse effect on our business, financial condition and results of operations.

On November 11, 2005, one of our double-hulled tank barges, the DBL 152, struck submerged debris in the U.S. Gulf of Mexico, causing significant damage. The submerged debris was determined to be a service platform which collapsed during Hurricane Rita in September 2005. At the time of the incident, the barge was carrying approximately 120,000 barrels of No. 6 fuel oil, a heavy oil product. We believe much of the oil escaped into the ocean. Our insurers responded to the pollution-related costs and environmental damages resulting from the incident, paying approximately $65 million less $60,000 in total deductibles.

Our affiliate, EW Transportation LLC, and its predecessors have been named, together with a large number of other companies, as co-defendants in 39 civil actions by various parties alleging unspecified damages from past exposure to asbestos and second-hand smoke aboard some of the vessels that it contributed to us in connection with the initial public offering of our common units. EW Transportation LLC and its predecessors have been dismissed from 38 of these lawsuits for an aggregate sum of approximately $47,000 and are pursuing settlement of the other case. We may be subject to litigation in the future involving these plaintiffs and others alleging exposure to asbestos due to alleged failure to properly encapsulate friable asbestos or remove friable asbestos on our vessels, as well as for exposure to second-hand smoke and other matters.

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A decline in demand for, and level of consumption of, refined petroleum products could cause demand for tank vessel capacity and charter rates to decline, which would decrease our revenues and profitability.

The demand for tank vessel capacity is influenced by the demand for refined petroleum products and other factors including:

•: global and regional economic and political conditions;
•: developments in international trade;
•: changes in seaborne and other transportation patterns, including changes in the distances that cargoes are transported;
•: environmental concerns; and
•: competition from alternative sources of energy, such as natural gas, and alternate transportation methods.

Any of these factors could adversely affect the demand for tank vessel capacity and charter rates. Any decrease in demand for tank vessel capacity or decrease in charter rates could adversely affect our business, financial condition and results of operations.

In addition, we operate our tank vessels in markets that have historically exhibited seasonal variations in demand and, as a result, in charter rates. For example, movements of certain clean oil products, such as motor fuels, generally increase during the summer driving season. In those same regions, movements of black oil products and certain clean oil products, such as heating oil, generally increase during the winter months, while movements of asphalt products generally increase in the spring through fall months. Unseasonably mild winters can result in significantly lower demand for heating oil in the northeastern United States. Meanwhile, our operations along the West Coast and in Alaska historically have been subject to seasonal variations in demand that vary from those exhibited in the East Coast and Gulf Coast regions. In addition, unpredictable weather patterns and variations in oil reserves disrupt vessel scheduling. Seasonality could materially affect our business, financial condition and results of operations in the future.

Our business would be adversely affected if we failed to comply with the Jones Act provisions on coastwise trade, or if those provisions were modified, repealed or waived.

We are subject to the Jones Act and other federal laws that restrict maritime transportation between points in the United States to vessels built and registered in the United States and owned and manned by U.S. citizens. We are responsible for monitoring the ownership of our common units and other partnership interests. If we do not comply with these restrictions, we would be prohibited from operating our vessels in U.S. coastwise trade, and under certain circumstances we would be deemed to have undertaken an unapproved foreign transfer, resulting in severe penalties, including permanent loss of U.S. coastwise trading rights for our vessels, fines or forfeiture of the vessels. For information about the Jones Act and other maritime laws, please read "Regulation—Coastwise Laws" in Item 1 of this report.

In the past, interest groups have lobbied Congress to repeal the Jones Act to facilitate foreign flag competition for trades and cargoes currently reserved for U.S.-flag vessels under the Jones Act and cargo preference laws. We believe that interest groups may continue efforts to modify or repeal the Jones Act and cargo preference laws currently benefiting U.S.-flag vessels. If these efforts are successful, it could result in increased competition, which could reduce our revenues and cash available for distribution.

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The Secretary of the Department of Homeland Security is vested with the authority and discretion to waive the coastwise laws to such extent and upon such terms as he may prescribe whenever he deems that such action is necessary in the interest of national defense. In response to the effects of Hurricanes Katrina and Rita, the Secretary of the Department of Homeland Security waived the coastwise laws generally for the transportation of petroleum products from September 1 to September 19, 2005 and from September 26, 2005 to October 24, 2005. In the past, the Secretary of the Department of Homeland Security has waived the coastwise laws generally for the transportation of petroleum released from the Strategic Petroleum Reserve undertaken in response to circumstances arising from major natural disasters. Any waiver of the coastwise laws, whether in response to natural disasters or otherwise, could result in increased competition from foreign tank vessel operators, which could reduce our revenues and cash available for distribution.

We may not be able to grow or effectively manage our growth.

A principal focus of our strategy is to continue to grow by expanding our business in all coastal markets in the U.S. and also into other geographic markets. Our future growth will depend upon a number of factors, some of which we can control and some of which we cannot. These factors include our ability to:

•: identify businesses engaged in managing, operating or owning vessels for acquisitions or joint ventures;
•: identify vessels for acquisition;
•: consummate acquisitions or joint ventures;
•: integrate any acquired businesses or vessels successfully with our existing operations;
•: hire, train and retain qualified personnel to manage and operate our growing business and fleet;
•: identify new geographic markets;
•: improve our operating and financial systems and controls; and
•: obtain required financing for our existing and new operations.

A deficiency in any of these factors would adversely affect our ability to achieve anticipated levels of cash flows or realize other anticipated benefits. In addition, competition from other buyers could reduce our acquisition opportunities or cause us to pay a higher price than we might otherwise pay.

We may be unable to make or realize expected benefits from acquisitions, and implementing our growth strategy through acquisitions may harm our business, financial condition and operating results.

Our growth strategy is based upon the expansion of our fleet through newbuildings and strategic acquisitions. Our ability to grow our fleet depends upon a number of factors, many of which we cannot control. These factors include our ability to:

•: identify vessels or businesses for acquisition from third parties;
•: consummate any such acquisitions;
•: obtain required financing for acquisitions; and
•: integrate any acquired vessels or businesses successfully with its existing operations.

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Any acquisition of a vessel or business may not be profitable and may not generate returns sufficient to justify our investment. In addition, our acquisition growth strategy exposes us to risks that may harm our business, financial condition and operating results, including the risks that we may:

•: fail to realize anticipated benefits (such as new customer relationships) or increase cash flow;
•: decrease our liquidity by using a significant portion of available cash or borrowing capacity to finance acquisitions;
•: significantly increase our interest expense and indebtedness if we incur additional debt to finance acquisitions;
•: incur or assume unanticipated liabilities, losses or costs associated with the business or vessels acquired;
•: incur other significant charges, such as impairment of goodwill or other intangible assets, asset devaluation or restructuring charges; or
•: distract management from its duties and responsibilities as it devotes substantial time and attention to the integration of the acquired businesses or vessels.

Increased competition in the domestic tank vessel industry could result in reduced profitability and loss of market share for us.

Contracts for our vessels are generally awarded on a competitive basis, and competition in the markets we serve is intense. The process for obtaining such contracts generally requires a lengthy and time consuming screening and bidding process that may extend for months. The most important factors determining whether a contract will be awarded include:

•: quality, availability and capability of the vessels;
•: ability to meet the customer's schedule;
•: price;
•: environmental, health and safety record;
•: reputation; and
•: experience.

Some of our competitors may have greater financial resources and larger operating staffs than we do. As a result, they may be able to make vessels available more quickly and efficiently, transition to double-hull barges from single-hull barges more rapidly, and withstand the effects of declines in charter rates for a longer period of time. They may also be better able to weather a downturn in the oil and gas industry. As a result, we could lose customers and market share to these competitors.

Increased competition from pipelines could result in reduced profitability.

We also face competition from refined petroleum product pipelines. Long-haul transportation of refined petroleum products is generally less costly by pipeline than by tank vessel. The construction of new pipeline segments to carry petroleum products into our markets, including pipeline segments that connect with existing pipeline systems, and the conversion of existing non-refined petroleum product pipelines, could adversely affect our ability to compete in particular locations.

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We rely on a limited number of customers for a significant portion of our revenues. The loss of any of these customers could adversely affect our business and operating results.

Our customers consist primarily of major oil companies, oil traders and refineries. The portion of our revenues attributable to any single customer changes over time, depending on the level of relevant activity by the customer, our ability to meet the customer's needs and other factors, many of which are beyond our control. Three customers accounted for 16%, 12% and 11%, respectively, of our consolidated total revenues for fiscal 2008. If we were to lose any of these customers or if any of them significantly reduced its use of our services, our business and operating results could be adversely affected.

Voyage charters may not be available at rates that will allow us to operate our vessels profitably.

During fiscal 2008, we derived approximately 19% of our revenue from single voyage charters. Voyage charter rates fluctuate significantly based on tank vessel availability, the demand for refined petroleum products and other factors. Increased dependence on the voyage charter market by us could result in a lower utilization of our vessels and decreased profitability. Future voyage charters may not be available at rates that will allow us to operate our vessels profitably.

We may not be able to renew time charters, consecutive voyage charters, contracts of affreightment and bareboat charters when they expire.

We received approximately 81% of our revenue from time charters, consecutive voyage charters, contracts of affreightment and bareboat charters during fiscal 2008. These arrangements, which are generally for periods of one year or more, may not be renewed, or if renewed, may not be renewed at similar rates. If we are unable to obtain new charters at rates equivalent to those received under the old charters, our profitability may be adversely affected.

We must make substantial expenditures to maintain the operating capacity of our fleet, which will reduce our cash available for distribution.

Tank vessels are subject to the requirements of the Oil Pollution Act of 1990, or OPA 90. OPA 90 mandates that all single-hull tank vessels operating in U.S. waters be removed from petroleum and petroleum product transportation services at various times through January 1, 2015, and provides a schedule for the phase-out of the single-hull vessels based on their age and size. As of September 1, 2008, approximately 76% of the barrel-carrying capacity of our tank vessel fleet was double-hulled in compliance with OPA 90. The remaining 24% will be in compliance with OPA 90 until January 2015. The capacity of certain of our single-hull vessels has already been effectively replaced by double-hull vessels placed into service in the past several years. We estimate that the current cost to replace our remaining single hull capacity with newbuildings or by retrofitting certain of our existing vessels totals $50.0 million. This capacity can also be replaced by acquiring existing double-hull tank vessels as opportunities arise. At the time we make these expenditures, the actual cost could be higher due to inflation and other factors.

Marine transportation of refined petroleum products is a capital intensive business, requiring significant investment to maintain an efficient fleet and to stay in regulatory compliance. We estimate that, over the next five years, we will spend an average of approximately $23.0 million per year to drydock and maintain our fleet. In addition, we will deduct an additional $1.25 million per year from the cash that we would otherwise distribute to our unitholders to contribute to the cost of replacing the operating capacity of our single hull vessels when they phase-out under OPA 90 in January 2015. Periodically, we will also make expenditures to acquire or construct additional tank vessel capacity and to upgrade our overall fleet efficiency.

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Please read "—Risks Related to Our Common Units—In calculating our available cash from operating surplus each quarter, we are required to deduct estimated maintenance capital expenditures, which may result in less cash available for distribution to unitholders than if actual maintenance capital expenditures were deducted" for information about our requirement to deduct estimated maintenance capital expenditures in calculating our available cash from operating surplus.

Capital expenditures and other costs necessary to operate and maintain a vessel vary depending on the age of the vessel and changes in governmental regulations, safety or other equipment standards.

Capital expenditures and other costs necessary to operate and maintain a vessel increase with the age of the vessel. In addition, changes in governmental regulations, safety or other equipment standards, as well as compliance with standards imposed by maritime self-regulatory organizations and customer requirements or competition, may require us to make additional expenditures. For example, we may be required to make significant expenditures for alterations or the addition of new equipment to satisfy requirements of the U.S. Coast Guard and the American Bureau of Shipping. In addition, we may be required to take our vessels out of service for extended periods of time, with corresponding losses of revenues, in order to make such alterations or to add such equipment. In the future, market conditions may not justify these expenditures or enable us to operate our older vessels profitably during the remainder of their economic lives.

In order to fund these capital expenditures, we will either incur borrowings or raise capital through the sale of debt or equity securities. Our ability to access the capital markets for future offerings may be limited by our financial condition at the time as well as by adverse market conditions resulting from, among other things, general economic conditions and contingencies and uncertainties that are beyond our control. Our failure to obtain the funds for necessary future capital expenditures would limit our ability to continue to operate some of our vessels and could have a material adverse effect on our business and on our ability to make distributions to unitholders.

Our purchase of existing vessels carries risks associated with the quality of those vessels.

Our fleet renewal and expansion strategy includes the acquisition of existing vessels as well as the ordering of newbuildings. Unlike newbuildings, existing vessels typically do not carry warranties with respect to their condition. While we generally inspect any existing vessel prior to purchase, such an inspection would normally not provide us with as much knowledge of its condition as we would possess if the vessel had been built for us and operated by us during its life. Repairs and maintenance costs for existing vessels are difficult to predict and may be more substantial than for vessels we have operated since they were built. These costs could decrease our profits and reduce our liquidity.

Decreased utilization of our vessels due to bad weather could have a material adverse effect on our operating results and financial condition.

Unpredictable weather patterns tend to disrupt vessel scheduling and supplies of refined petroleum products and our vessels and cargoes are at risk of being damaged or lost because of bad weather. In addition, adverse weather conditions can cause delays in the delivery of newbuilds and in transporting cargoes. As a result, bad weather conditions could have a material adverse effect on our operating results and financial condition.

We are subject to complex laws and regulations, including environmental regulations, that can adversely affect the cost, manner or feasibility of doing business.

Increasingly stringent federal, state and local laws and regulations governing worker health and safety and the manning, construction and operation of vessels significantly affect our operations. Many aspects of the marine industry are subject to extensive governmental regulation by the U.S. Coast

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Guard, the Department of Transportation, the Department of Homeland Security, the National Transportation Safety Board and the U.S. Customs and Border Protection (CBP), and to regulation by private industry organizations such as the American Bureau of Shipping. The U.S. Coast Guard and the National Transportation Safety Board set safety standards and are authorized to investigate vessel accidents and recommend improved safety standards. The U.S. Coast Guard is authorized to inspect vessels at will.

Our operations are also subject to federal, state, local and international laws and regulations that control the discharge of pollutants into the environment or otherwise relate to environmental protection. Compliance with such laws, regulations and standards may require installation of costly equipment or operational changes. Failure to comply with applicable laws and regulations may result in administrative and civil penalties, criminal sanctions or the suspension or termination of our operations. Some environmental laws often impose strict liability for remediation of spills and releases of oil and hazardous substances, which could subject us to liability without regard to whether we were negligent or at fault. Under OPA 90, owners, operators and bareboat charterers are jointly and severally strictly liable for the discharge of oil within the internal and territorial waters of, and the 200-mile exclusive economic zone around, the United States. Additionally, an oil spill could result in significant liability, including fines, penalties, criminal liability and costs for natural resource damages. The potential for these releases could increase as we increase our fleet capacity. Most states bordering on a navigable waterway have enacted legislation providing for potentially unlimited liability for the discharge of pollutants within their waters.

Our insurance may not be adequate to cover our losses.

We may not be adequately insured to cover losses from our operational risks, which could have a material adverse effect on our operations. For example, a catastrophic oil spill or other disaster could exceed our insurance coverage. In addition, our affiliate, EW Transportation LLC, and its predecessors may not have insurance coverage prior to March 1986. If we were subject to claims related to that period, including claims from current or former employees, EW Transportation LLC may not have insurance to pay the liabilities, if any, that could be imposed on us. If we had to pay claims solely out of our own funds, it could have a material adverse effect on our financial condition. Furthermore, any claims covered by insurance would be subject to deductibles, and since it is possible that a large number of claims could be brought, the aggregate amount of these deductibles could be material.

We may not be able to procure adequate insurance coverage at commercially reasonable rates in the future, and some claims may not be paid. In the past, stricter environmental regulations have led to higher costs for insurance covering environmental damage or pollution, and new regulations could lead to similar increases or even make this type of insurance unavailable. In addition, our insurance may be voidable by the insurers as a result of certain actions of ours.

Because we obtain some of our insurance through protection and indemnity associations, we also may be subject to calls, or premiums, in amounts based not only on our own claim records, but also the claim records of all other members of the protection and indemnity associations through which we receive insurance coverage for tort liability, including pollution-related liability. Our payment of these calls could result in significant expenses to us, which could reduce our profits or cause losses. Moreover, the protection and indemnity clubs and other insurance providers reserve the right to make changes in insurance coverage with little or no advance notice.

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

After the terrorist attacks of September 11, 2001, New York Harbor was shut down temporarily, resulting in the suspension of our local operations in the New York City area for four days and the loss

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of revenue related to these operations. The long-term impact that terrorist attacks and the threat of terrorist attacks may have on the petroleum industry in general, and on us in particular, is not known at this time. Uncertainty surrounding continued hostilities in the Middle East or other sustained military campaigns may affect our operations in unpredictable ways, including disruptions of petroleum supplies and markets, and the possibility that infrastructure facilities could be direct targets of, or indirect casualties of, an act of terror.

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

We depend upon unionized labor for the provision of our services in certain geographic areas. Any work stoppages or labor disturbances could disrupt our business in those areas.

Approximately 47% of our seagoing personnel are employed under a contract with a division of the International Longshoreman's Association that expires on June 30, 2010. Any work stoppages or other labor disturbances could have a material adverse effect on our business, financial condition and results of operations.

Our employees are covered by federal laws that may subject us to job-related claims in addition to those provided by state laws.

Some of our employees are covered by provisions of federal statutory and general maritime law. These laws typically operate to make liability limits established by state workers' compensation laws inapplicable to these employees and to permit these employees and their representatives to pursue actions against employers for job-related injuries in federal courts. Because we are not generally protected by the limits imposed by state workers' compensation statutes, we may have greater exposure for claims made by these employees.

We depend on key personnel for the success of our business.

We depend on the services of our senior management team and other key personnel. In particular, our success depends on the continued efforts of Mr. Timothy J. Casey, the President and Chief Executive Officer of K-Sea General Partner GP LLC, and other key employees. The loss of the services of any key employee could have a material adverse effect on our business, financial condition and results of operations. We may not be able to locate or employ on acceptable terms qualified replacements for senior management or key employees if their services were no longer available.

Due to our lack of asset diversification, adverse developments in our marine transportation business would reduce our ability to make distributions to our unitholders.

We rely exclusively on the revenues generated from our marine transportation business. Due to our lack of asset diversification, an adverse development in this business would have a significantly greater impact on our business, financial condition and results of operations than if we maintained more diverse assets.

Changes in international trade agreements could affect our ability to provide marine transportation services at competitive rates.

Currently, vessel trade or marine transportation between two points within the same country, generally known as cabotage or coastwise trade, is not included in the General Agreement on Trade in Services or the North American Free Trade Agreement. In addition, the Jones Act restricts maritime cargo transportation between U.S. ports to U.S.-flag vessels qualified to engage in U.S. coastwise trade.

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If maritime services were deemed to include cabotage and included in the General Agreement on Trade in Services, the North American Free Trade Agreement or other multi-national trade agreements, transportation of maritime cargo between U.S. ports could be opened to foreign-flag vessels. Foreign vessels would have lower construction costs and would generally operate at significantly lower costs than we do in U.S. markets, which would likely have a material adverse effect on our ability to compete.

Delays or cost overruns in the construction of new vessels or the modification of existing vessels could adversely affect our business. Cash flows from new or retrofitted vessels may not be immediate or as high as expected.

We are currently building eight new vessels and completing other smaller projects at an estimated total cost of $165.0 million. These projects are subject to the risk of delay or cost overruns caused by the following:

•: unforeseen quality or engineering problems;
•: work stoppages;
•: weather interference;
•: unanticipated cost increases;
•: delays in receipt of necessary equipment; and
•: inability to obtain the requisite permits or approvals.

Significant delays could also have a material adverse effect on expected contract commitments for these vessels and our future revenues and cash flows. We will not receive any material increase in revenue or cash flow from new or modified vessels until they are placed in service and customers enter into binding arrangements for the use of the vessels. Furthermore, customer demand for new or modified vessels may not be as high as we currently anticipate, and, as a result, our future cash flows may be adversely affected.

Risks Related to Our Common Units

We may not have sufficient cash from operations to enable us to pay the minimum quarterly distribution following establishment of cash reserves and payment of fees and expenses, including payments to our general partner.

We may not have sufficient available cash each quarter to pay the minimum quarterly distribution. The amount of cash we can distribute on our common units principally depends upon the amount of cash we generate from our operations, which will fluctuate from quarter to quarter based on, among other things:

•: the level of consumption of refined petroleum products in the markets in which we operate;
•: the prices we obtain for our services;
•: the level of our operating costs, including payments to our general partner; and
•: prevailing economic conditions.

Additionally, the actual amount of cash we have available for distribution depends on other factors such as:

•: the level of capital expenditures we make, including for acquisitions, retrofitting of vessels and compliance with new regulations;

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•: the restrictions contained in our debt instruments and our debt service requirements;
•: fluctuations in our working capital needs;
•: our ability to make working capital borrowings; and
•: the amount, if any, of reserves, including reserves for future capital expenditures and other matters, established by our general partner in its discretion.

The amount of cash we have available for distribution depends primarily on our cash flow, including cash flow from operations and working capital borrowings, and not solely on profitability, which will be affected by non-cash items. As a result, we may make cash distributions during periods when we record losses and may not make cash distributions during periods when we record net income.

K-Sea General Partner L.P. and its affiliates have conflicts of interest and limited fiduciary duties, which may permit them to favor their own interests to the detriment of our unitholders.

Affiliates of our general partner indirectly own a 1.27% general partner interest and a 26.17% limited partner interest in us and own and control K-Sea General Partner GP LLC. Conflicts of interest may arise between K-Sea General Partner L.P. and its affiliates, on the one hand, and us and our unitholders, on the other hand. As a result of these conflicts, our general partner may favor its own interests and the interests of its affiliates over the interests of our unitholders. These conflicts include, among others, the following situations:

•: our general partner is allowed to take into account the interests of parties other than us, such as our affiliates, in resolving conflicts of interest, which has the effect of limiting its fiduciary duty to our unitholders;
•: our general partner may limit its liability and reduce its fiduciary duties, while also restricting the remedies available to our unitholders for actions that, without the limitations, might constitute breaches of fiduciary duty. As a result of purchasing common units, our unitholders consent to some actions and conflicts of interest that might otherwise constitute a breach of fiduciary or other duties under applicable state law;
•: our general partner determines the amount and timing of asset purchases and sales, capital expenditures, borrowings, issuance of additional partnership securities and reserves, each of which can affect the amount of cash that is distributed to our unitholders;
•: in some instances, our general partner may cause us to borrow funds in order to permit the payment of cash distributions, even if the purpose or effect of the borrowing is to make a distribution on the subordinated units, to make incentive distributions or to hasten the expiration of the subordination period;
•: our general partner determines which costs incurred by it and its affiliates, including K-Sea General Partner GP LLC, are reimbursable by us;
•: our partnership agreement does not restrict our general partner from causing us to pay it or its affiliates for any services rendered on terms that are fair and reasonable to us or entering into additional contractual arrangements with any of these entities on our behalf;
•: our general partner controls the enforcement of obligations owed to us by it and its affiliates; and
•: our general partner decides whether to retain separate counsel, accountants or others to perform services for us.

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Even if unitholders are dissatisfied, they cannot remove our general partner without its consent.

Unlike the holders of common stock in a corporation, unitholders have only limited voting rights on matters affecting our business and, therefore, limited ability to influence management's decisions regarding our business. Unitholders did not elect our general partner or the board of directors of its general partner and will have no right to elect our general partner or the board of directors of its general partner on an annual or other continuing basis. The board of directors of the general partner of our general partner is chosen by its members.

Furthermore, if the unitholders are dissatisfied with the performance of our general partner, they will have little ability to remove our general partner. Unitholders are currently unable to remove our general partner without its consent because our affiliates currently own sufficient units to be able to prevent the general partner's removal. The vote of the holders of at least 66²/3% of all outstanding common and subordinated units voting together as a single class is required to remove our general partner. Also, if our general partner is removed without cause during the subordination period and units held by our general partner and its affiliates are not voted in favor of that removal, all remaining subordinated units will automatically be converted into common units and any existing arrearages on the common units will be extinguished. A removal of our general partner under these circumstances would adversely affect the common units by prematurely eliminating their distribution and liquidation preference over the subordinated units, which would otherwise have continued until we had met certain distribution and performance tests.

Cause is narrowly defined in our partnership agreement to mean that a court of competent jurisdiction has entered a final, non-appealable judgment finding our general partner liable for actual fraud, gross negligence or willful or wanton misconduct in its capacity as our general partner. Cause does not include most cases of charges of poor management of the business, so the removal of our general partner during the subordination period because of the unitholders' dissatisfaction with our general partner's performance in managing our partnership will most likely result in the termination of the subordination period.

Our general partner's discretion in establishing cash reserves may reduce the amount of cash available for distribution to unitholders.

Our partnership agreement gives our general partner broad discretion in establishing financial reserves for the proper conduct of our business. These reserves also will affect the amount of cash available for distribution. Our general partner may establish reserves for distributions on the subordinated units, but only if those reserves will not prevent us from distributing the full minimum quarterly distribution, plus any arrearages, on the common units for the following four quarters. As described above under "—Risks Inherent in Our Business—We must make substantial expenditures to maintain the operating capacity of our fleet, which will reduce our cash available for distribution," the partnership agreement requires our general partner to deduct from operating surplus each quarter estimated maintenance capital expenditures as opposed to actual expenditures, which could reduce the amount of available cash for distribution.

In calculating our available cash from operating surplus each quarter, we are required to deduct estimated maintenance capital expenditures, which may result in less cash available for distribution to unitholders than if actual maintenance capital expenditures were deducted.

Our partnership agreement requires us to deduct estimated maintenance capital expenditures from operating surplus each quarter, as opposed to actual maintenance capital expenditures, in order to reduce disparities in operating surplus caused by the fluctuating level of maintenance capital expenditures, such as drydocking. Because of the capital expenditures we intend to make by January 1, 2015 to replace the operating capacity of our single-hull vessels, our annual estimated maintenance capital expenditures for purposes of calculating operating surplus also includes an additional $1.25 million to contribute to the cost of replacing this operating capacity.

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The amount of estimated maintenance capital expenditures we deduct from operating surplus is subject to review and change by the board of directors of K-Sea General Partner GP LLC, with the concurrence of the conflicts committee of such board. In years when estimated maintenance capital expenditures are higher than actual maintenance capital expenditures, the amount of cash available for distribution to unitholders will be lower than if actual maintenance capital expenditures were deducted from operating surplus.

Please read "—Risks Inherent in Our Business—We must make substantial expenditures to maintain the operating capacity of our fleet, which will reduce our cash available for distribution" for information regarding substantial expenditures that we must make to maintain the operating capacity of our fleet.

We may issue additional common units without the approval of unitholders, which would dilute unitholders' ownership interests.

During the subordination period, without the approval of our unitholders, our general partner may cause us to issue up to 2,082,500 additional common units. Our general partner may also cause us to issue an unlimited number of additional common units or other equity securities of equal rank with the common units, without unitholder approval, in a number of circumstances such as:

•: the issuance of common units in connection with acquisitions or capital improvements that increase cash flow from operations per unit on a pro forma or estimated pro forma basis;
•: issuances of common units to repay indebtedness, the cost of which to service is greater than the distribution obligations associated with the units issued in connection with the repayment of the indebtedness;
•: the redemption of common units from the net proceeds of an issuance of common units;
•: the conversion of subordinated units into common units;
•: the conversion of units of equal rank with the common units into common units under some circumstances; issuances of common units under our employee benefit plans;
•: the conversion of the general partner interest and the incentive distribution rights into common units as a result of the withdrawal or removal of our general partner; or
•: the combination or subdivision of common units.

The issuance by us of additional common units or other equity securities of equal or senior rank will have the following effects:

•: our unitholders' proportionate ownership interest in us will decrease;
•: the amount of cash available for distribution on each unit may decrease;
•: because a lower percentage of total outstanding units will be subordinated units, the risk that a shortfall in the payment of the minimum quarterly distribution will be borne by our common unitholders will increase;
•: the relative voting strength of each previously outstanding unit may be diminished; and
•: the market price of the common units may decline.

After the end of the subordination period, we may issue an unlimited number of limited partner interests of any type without the approval of our unitholders. Our partnership agreement does not give our unitholders the right to approve our issuance of equity securities ranking junior to the common units at any time.

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Our partnership agreement currently limits the ownership of our partnership interests by individuals or entities that are not U.S. citizens. This restriction could limit the liquidity of our common units.

In order to ensure compliance with Jones Act citizenship requirements, the board of directors of K-Sea General Partner GP LLC has adopted a requirement that at least 85% of our partnership interests must be held by U.S. citizens. This requirement may have an adverse impact on the liquidity or market value of our common units, because unitholders will be unable to sell units to non-U.S. citizens. Any purported transfer of common units in violation of these provisions will be ineffective to transfer the common units or any voting, dividend or other rights in respect of the common units.

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

If at any time our general partner and its affiliates own more than 80% of the common units, our general partner will have the right, but not the obligation, which it may assign to any of its affiliates or to us, to acquire all, but not less than all, of the common units held by unaffiliated persons at a price not less than their then-current market price. As a result, unitholders may be required to sell their common units at an undesirable time or price and may not receive any return on their investment. Unitholders may also incur a tax liability upon a sale of their units. Our general partner is not obligated to obtain a fairness opinion regarding the value of the common units to be repurchased by it upon exercise of the limited call right. There is no restriction in our partnership agreement that prevents our general partner from issuing additional common units and exercising its call right. If our general partner exercised its limited call right, the effect would be to take us private and, if the units were subsequently deregistered, we would no longer be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended.

Our partnership agreement restricts the voting rights of unitholders owning 20% or more of our common units.

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

Cost reimbursements due our general partner and its affiliates will reduce cash available for distribution to unitholders.

Prior to making any distribution on the common units, we will reimburse our general partner and its affiliates for all expenses they incur on our behalf, which will be determined by our general partner in its sole discretion. These expenses will include all costs incurred by the general partner and its affiliates in managing and operating us, including costs for rendering corporate staff and support services to us. In addition, our general partner and its affiliates may provide us with other services for which the general partner or its affiliates may charge us fees. The reimbursement of expenses and payment of fees, if any, to our general partner and its affiliates could adversely affect our ability to pay cash distributions to unitholders.

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Unitholders may not have limited liability if a court finds that unitholder action constitutes control of our business.

As a limited partner in a partnership organized under Delaware law, a unitholder could be held liable for our obligations to the same extent as a general partner if such unitholder participates in the "control" of our business. Our general partner generally has unlimited liability for the obligations of the partnership, such as its debts and environmental liabilities, except for those contractual obligations of the partnership that are expressly made without recourse to our general partner. In addition, Section 17-607 of the Delaware Revised Uniform Limited Partnership Act provides that, under some circumstances, a unitholder may be liable to us for the amount of a distribution for a period of three years from the date of the distribution. The limitations on the liability of holders of limited partner interests for the obligations of a limited partnership have not been clearly established in some of the other states in which we do business.

Restrictions in our debt agreements may prevent us from engaging in some beneficial transactions or paying distributions.

Our payment of principal and interest on our debt will reduce cash available for distribution on our units. Our credit agreement prohibits the payment of distributions after the occurrence of the following events, among others, and receipt of notice from our lenders:

•: failure to pay any principal, interest, fees, expenses or other amounts when due;
•: default under any vessel mortgage;
•: failure to notify the lenders of any oil spill or discharge of hazardous material, or of any action or claim related thereto;
•: breach or lapse of any insurance with respect to the vessels;
•: breach of certain financial covenants;
•: breach by our general partner or any of our subsidiaries of the guarantees issued under our new credit agreement;
•: failure to observe any other agreement, security instrument, obligation or covenant beyond specified cure periods in certain cases;
•: default under other material indebtedness of our operating partnership, our general partner or any of our subsidiaries;
•: bankruptcy or insolvency events involving us, our general partner or any of our subsidiaries;
•: failure of any representation or warranty to be materially correct;
•: a change of control, as defined in the applicable agreement;
•: a material adverse effect, as defined in the applicable agreement, occurs relating to us or our business; and
•: a judgment against us, our general partner or any of our subsidiaries in excess of certain allowances and not covered by insurance.

Any subsequent refinancing of our current debt or any new debt could have similar restrictions.

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

Our general partner may transfer its general partner interest to a third party in a merger or in a sale of all or substantially all of its assets without the consent of the unitholders so long as the third

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party satisfies the citizenship requirements of the Jones Act. Furthermore, there is no restriction in the partnership agreement on the ability of the partners of our general partner from transferring their respective partnership interests in our general partner to a third party that satisfies the citizenship requirements of the Jones Act. The new partners of our general partner would then be in a position to replace the board of directors and officers of the general partner of our general partner with their own choices and to control the decisions taken by the board of directors and officers.

Our affiliates may engage in activities that compete directly with us.

Pursuant to the omnibus agreement entered into in connection with the initial public offering of our common units, certain of our affiliates have agreed not to engage, either directly or indirectly, in the business of providing marine transportation, distribution and logistics services for refined petroleum products in the United States to the extent such business generates qualifying income for federal income tax purposes. The omnibus agreement does not prohibit the equity owners of our affiliates from owning assets or engaging in businesses that compete directly or indirectly with us.

Tax Risks

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

The anticipated after-tax economic benefit of an investment in us depends largely on our being treated as a partnership for federal income tax purposes. If less than 90% of our gross income for any taxable year is "qualifying income" from transportation or processing of crude oil, natural gas or products thereof, interest, dividends or similar sources, we 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. The IRS has not provided any ruling on this matter.

If we were treated as a corporation for federal income tax purposes, we would pay federal income tax on our income at the corporate tax rate, which is currently a maximum of 35%, and would likely pay state income tax at varying rates. Distributions would generally be taxed again to unitholders as corporate distributions and no income, gains, losses, or deductions would flow through to unitholders. Because a tax would be imposed upon us as an entity, cash available for distribution to unitholders would be substantially reduced. Treatment of us as a corporation would result in a material reduction in the anticipated cash flow and after-tax return to unitholders and thus would likely result in a substantial reduction in the value of the common units.

Current law may change so as to cause us to be treated as a corporation for federal income tax purposes or otherwise subject us to entity-level taxation. For example, because of widespread state budget deficits and other reasons, several states are evaluating ways to subject partnerships to entity-level taxation through the imposition of state income, franchise and other forms of taxation. The partnership agreement provides that, if a law is enacted or an existing law is modified or interpreted in a manner that subjects us to taxation as a corporation or otherwise subjects us to entity-level taxation for federal, state, or local income tax purposes, the minimum quarterly distribution amount and the target distribution amounts will be adjusted to reflect the impact of that law on us.

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

The present United States federal income tax treatment of publicly traded partnerships, including us, or an investment in our common units may be modified by administrative, legislative or judicial

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interpretation at any time. Any modification to the United States federal income tax laws and interpretations thereof may or may not be applied retroactively and could make it more difficult or impossible to meet the exception for us to be treated as a partnership for United States federal income tax purposes that is not taxable as a corporation, affect or cause us to change our business activities, affect the tax considerations of an investment in us, change the character or treatment of portions of our income and adversely affect an investment in our common units. For example, in response to certain recent developments, members of Congress are considering substantial changes to the definition of qualifying income under the Internal Revenue Code Section 7704(d) and the treatment of certain types of income earned from profits interests in partnerships. It is possible that these efforts could result in changes to the existing United States tax laws that affect publicly traded partnerships, including us. We are unable to predict whether any of these changes, or other proposals will ultimately be enacted. Any such changes could negatively impact the value of an investment in our common units.

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

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

Unitholders may be required to pay taxes on their share of our income even if they do not receive any cash distributions from us.

Because our unitholders will be treated as partners to whom we will allocate taxable income, which could be different in amount than the cash we distribute, our unitholders will be required to pay federal income taxes and, in some cases, state, local, and foreign income taxes on their share of our taxable income, even if they receive no cash distributions from us. Unitholders may not receive cash distributions equal to their share of our taxable income or even the tax liability that results from that income.

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

If a unitholder sells his common units, that unitholder will recognize gain or loss equal to the difference between the amount realized and the unitholder's tax basis in those common units. Prior distributions in excess of the total net taxable income the unitholder was allocated for a common unit, which decreased the unitholder's tax basis in that common unit, will, in effect, become taxable income to the unitholder if the common unit is sold at a price greater than the unitholder's tax basis in that common unit, even if the price the unitholder receives is less than the unitholder's original cost. A substantial portion of the amount realized, whether or not representing gain, may be ordinary income to unitholders. Should the IRS successfully contest some positions we take, unitholders could recognize more gain on the sale of common units than would be the case under those positions, without the benefit of decreased income in prior years. In addition, if unitholders sell their common units, they may incur a tax liability in excess of the amount of cash they receive from the sale.

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

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

We registered as a tax shelter under prior law. This may increase the risk of an IRS audit of us or a unitholder.

Prior to the enactment of the American Jobs Creation Act of 2004, certain types of entities were required to register with the IRS as "tax shelters," based on a perception that those entities might claim tax benefits that were unwarranted. We registered as a tax shelter under such prior law. The American Jobs Creation Act of 2004 repealed the tax shelter registration requirement and replaced it with a regime that requires reporting of certain "reportable transactions." We do not expect to engage in any reportable transactions. Nevertheless, our registration as a tax shelter under prior law, or our future participation in a reportable transaction, might increase the likelihood that we will be audited, and any such audit might lead to tax adjustments.

Should our tax returns be audited, any adjustments to our tax returns may lead to adjustments to our unitholders' tax returns and may lead to audits of unitholders' tax returns. Our unitholders' would be responsible for the consequences of any audits to their tax returns.

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

Because we cannot match transferors and transferees of common units and because of other reasons, we will take depreciation and amortization positions that may not conform to all aspects of the Treasury Regulations. A successful IRS challenge to those positions could adversely affect the amount of tax benefits available to unitholders. It also could affect the timing of these tax benefits or the amount of gain from the sale of common units and could have a negative impact on the value of our common units or result in audit adjustments to unitholders' tax returns.

Unitholders may be subject to state, local and foreign taxes and return filing requirements as a result of investing in our common units.

In addition to federal income taxes, unitholders will likely be subject to other taxes, such as state and local income taxes, unincorporated business taxes and estate, inheritance, or intangible taxes that are imposed by the various jurisdictions in which we do business or own property. Unitholders will likely be required to file state and local income tax returns and pay state and local income taxes in some or all of the various jurisdictions in which we do business or own property and may be subject to penalties for failure to comply with those requirements. We own property or conduct business in Alaska, New York, New Jersey, Pennsylvania, Hawaii, Washington and Virginia, all of which impose a state income tax. We currently conduct certain operations in Puerto Rico, Canada and Venezuela in a manner that we believe does not subject unitholders to direct liability to pay tax or file returns in those countries, but there can be no assurance that we will conduct our foreign operations in this manner in the future. Taxes we pay with respect to our foreign operations reduce the cash flow available for distribution to our unitholders. We may do business or own property in other states or foreign

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countries in the future. It is the responsibility of unitholders to file all federal, state, local, and foreign tax returns.

We have subsidiaries that are treated as corporations for federal income tax purposes and subject to corporate-level income taxes.

We conduct a portion of our operations through subsidiaries that are, or are treated as, corporations for federal income tax purposes. Currently, those operations consist primarily of our bunkering activities and our operation of a Canadian flagged vessel. We may elect to conduct additional operations in corporate form in the future. These corporate subsidiaries will be subject to corporate-level tax, which will reduce the cash available for distribution to us and, in turn, to our unitholders. If the IRS were to successfully assert that these corporate subsidiaries have more tax liability than we anticipate or legislation was enacted that increased the corporate tax rate, our cash available for distribution to our unitholders would be further reduced.

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

We will be considered to have terminated for federal income tax purposes if there is a sale or exchange of 50% or more of the total interests in our capital and profits within a twelve-month period. Our termination would, among other things, result in the closing of our taxable year for all unitholders and could result in a deferral of depreciation deductions allowable in computing our taxable income. If this occurs, you will be allocated an increased amount of federal taxable income for the year in which we are considered to be terminated as a percentage of the cash distributed to you with respect to that period.

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

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

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

Because a unitholder whose units are loaned to a "short seller" to cover a short sale of units may be considered as having disposed of the loaned units, he may no longer be treated for tax purposes as a partner with respect to those units during the period of the loan to the short seller and the unitholder may recognize gain or loss from such disposition. Moreover, during the period of the loan to the short seller, any of our income, gain, loss or deduction with respect to those units may not be reportable by the unitholder and any cash distributions received by the unitholder as to those units could be fully taxable as ordinary income. Unitholders desiring to assure their status as partners and avoid the risk of gain recognition from a loan to a short seller are urged to modify any applicable brokerage account agreements to prohibit their brokers from loaning their units.

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

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

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

ITEM 1B. UNRESOLVED STAFF COMMENTS.

None.

ITEM 3. LEGAL PROCEEDINGS.

We are a party to various suits in the ordinary course of business for monetary relief arising principally from personal injuries, collision or other casualty and to claims arising under vessel charters. All of these personal injury, collision and casualty claims against us are fully covered by insurance, subject to deductibles ranging from $25,000 to $100,000 in amount. We reserve on a current basis for amounts we expect to pay. Although the outcome of any individual claim or action cannot be predicted with certainty, we believe that any adverse outcome, individually or in the aggregate, would be substantially mitigated by applicable insurance or indemnification from previous owners of our assets, and would not have a material adverse effect on our financial position, results of operations or cash flows.

EW Transportation LLC and its predecessors have been named, together with a large number of other companies, as co-defendants in 39 civil actions by various parties, including former employees, alleging unspecified damages from past exposure to asbestos and second-hand smoke aboard some of the vessels that it contributed to us in connection with our initial public offering. EW Transportation LLC and its predecessors have been dismissed from 38 of these lawsuits for an aggregate sum of approximately $47,000, and are seeking to settle the other case. We may be subject to litigation in the future from these plaintiffs and others alleging exposure to asbestos due to alleged failure to properly encapsulate or remove friable asbestos on our vessels, as well as for exposure to second-hand smoke and other matters. For a related discussion of insurance coverage, please read "Business and Properties—Insurance Program" in Items 1 and 2 of this report.

Our predecessors have agreed to indemnify us for certain liabilities. For more information, please read "Certain Relationships and Related Transactions—Omnibus Agreement—Indemnification" in Item 13 of this report.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.

No matters were submitted to a vote of security holders during the quarter ended June 30, 2008.

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PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SECURITYHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Market Price of Common Units, Distributions and Related Unitholder Matters

Our common units are listed on the New York Stock Exchange under the symbol "KSP." As of September 15, 2008, there were 13,633,200 outstanding common units, representing an aggregate 85.6% limited partner interest in us, which were held by approximately 50 holders of record, representing approximately 5,000 beneficial owners. The following table sets forth, for the periods indicated, the high and low sales prices per common unit, as reported on the New York Stock Exchange, and the amount of cash distributions declared per common unit:

	Price Range

	Price Range				Cash Distribution(1)
	High		Low		Cash Distribution(1)
*2008 Fiscal Year*
Fourth Quarter Ended June 30, 2008	$	38.08	$	31.53	$	0.77
Third Quarter Ended March 31, 2008	$	38.22	$	31.14	$	0.76
Second Quarter Ended December 31, 2007	$	40.67	$	33.90	$	0.74
First Quarter Ended September 30, 2007	$	48.50	$	36.23	$	0.72
*2007 Fiscal Year*
Fourth Quarter Ended June 30, 2007	$	48.00	$	40.01	$	0.70
Third Quarter Ended March 31, 2007	$	40.97	$	35.15	$	0.68
Second Quarter Ended December 31, 2006	$	36.40	$	33.56	$	0.66
First Quarter Ended September 30, 2006	$	34.35	$	30.70	$	0.64

(1): Distributions are shown for the quarter with respect to which they were declared. For each of the indicated quarters for which distributions have been made, an identical per unit cash distribution was paid on the subordinated units.

The aggregate amount of distributions declared in respect of the 2008 and 2007 fiscal years on common units, subordinated units and general partner units, including incentive distribution rights, totaled $44.6 million and $28.2 million, respectively.

Cash Distribution Policy

Within 45 days after the end of each quarter, we distribute all of our available cash from operating surplus to unitholders of record on the applicable record date. Our available cash from operating surplus consists generally of all cash on hand at the end of the fiscal quarter, plus all cash on hand resulting from working capital borrowings made after the end of the quarter up to the date of determination of available cash, less the amount of cash that our general partner determines is necessary or appropriate to, among others:

•: provide for the proper conduct of our business, including reserves for future capital and maintenance expenditures;
•: comply with applicable law, any of our debt instruments, or other agreements; or
•: provide funds for distributions to our unitholders and to our general partner for any one or more of the next four quarters.

Our ability to distribute available cash is contractually restricted by the terms of our credit facilities, which require us to maintain certain financial ratios and generally prohibit distributions to unitholders if the distribution would cause an event of default, or an event of default is existing, under

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our credit facilities. Please read "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Credit Agreement" in Item 7 of this report.

Subordination Period

During the subordination period, the common units have the right to receive distributions of available cash from operating surplus in an amount equal to the minimum quarterly distribution of $0.50 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. Upon expiration of the subordination period, each outstanding subordinated unit will convert into one common unit and will participate pro rata with the other common units in distributions of available cash.

Definition of Subordination Period. The subordination period will extend until the first day of any quarter, beginning after December 31, 2008, that each of the following tests are met:

•: distributions of available cash from operating surplus on each of the outstanding common units and subordinated units equaled or exceeded the minimum quarterly distribution for each of the three consecutive, non-overlapping four-quarter periods immediately preceding that date;
•: the "adjusted operating surplus," as defined in our partnership agreement, generated during each of the three consecutive, non-overlapping four-quarter periods immediately preceding that date equaled or exceeded the sum of the minimum quarterly distributions on all of the outstanding common units and subordinated units during those periods on a fully diluted basis and the related distribution on the general partner interest during those periods; and
•: there are no arrearages in payment of the minimum quarterly distribution on the common units.

Adjusted operating surplus is intended to reflect the cash generated from operations during a particular period and; therefore, excludes net increases in working capital borrowings and net drawdowns of reserves of cash generated in prior periods.

Conversion of Subordinated Units. Our partnership agreement provides that up to 50% of the subordinated units, or 2,082,500 subordinated units, may convert into common units on a one-for-one basis immediately upon the achievement of certain financial tests. Because we met the required tests for early conversion, 1,041,250 (25%) of our subordinated units converted to common units on each of February 14, 2007 and February 14, 2008. We expect to satisfy the tests for conversion of the remaining subordinated units in February 2009.

Incentive Distribution Rights

Incentive distribution rights represent the right to receive an increasing percentage of quarterly distributions of available cash from operating surplus after the minimum quarterly distribution and certain target distribution levels have been achieved. Our general partner currently holds the incentive distribution rights, but may transfer these rights separately from its general partner interest, subject to restrictions in the partnership agreement.

If for any quarter, we have distributed available cash from operating surplus a) to the common and subordinated unitholders an amount equal to the minimum quarterly distribution, and b) on the common units an amount necessary to eliminate any cumulative arrearages in payment of the minimum quarterly distribution, then we will distribute any additional available cash from operating surplus for that quarter among the unitholders and our general partner in the following manner:

•: first, 98.73% to all unitholders, pro rata, and 1.27% to our general partner, until each unitholder receives a total of $0.55 per unit for that quarter;

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•: second, 85.73% to all unitholders, pro rata, and 14.27% to our general partner, until each unitholder receives a total of $0.625 per unit for that quarter;
•: third, 75.73% to all unitholders, pro rata, and 24.27% to our general partner, until each unitholder receives a total of $0.75 per unit for that quarter; and
•: thereafter, 50.73% to all unitholders, pro rata, and 49.27% to our general partner.

The percentage interests set forth above for our general partner include its 1.27% general partner interest and assume the general partner has not transferred the incentive distribution rights. The percentage interests set forth above may change if we issue additional partnership interests and our general partner does not elect to maintain its percentage interest by acquiring additional general partner units.

Issuer Purchases of Equity Securities

We did not repurchase any of our common units during the fourth quarter of fiscal 2008.

ITEM 6. SELECTED FINANCIAL DATA.

The following table sets forth selected historical financial and operating data of K-Sea Transportation Partners L.P. and its predecessors. On January 14, 2004, EW Transportation LLC contributed assets and liabilities constituting its business to us in connection with our initial public offering of common units. Therefore, the historical financial and operating data presented below for the period prior to January 14, 2004 are for EW Transportation LLC. The following table should be read in conjunction with the consolidated financial statements, including the notes thereto, included elsewhere in this report, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of this report.

		Years Ended June 30,

		2008			2007			2006			2005			2004
Income Statement Data:
Voyage revenue		$	312,680		$	216,924		$	176,650		$	118,811		$	93,899
Bareboat charter and other revenue			13,600			9,650			6,118			2,583			1,900

Total revenues			326,280			226,574			182,768			121,394			95,799
Voyage expenses			79,427			45,875			37,973			24,220			16,339
Vessel operating expenses			124,551			96,005			77,325			49,296			38,809
General and administrative expenses			28,947			20,472			17,309			11,163			8,149
Depreciation and amortization			48,311			33,415			26,810			21,399			18,643
Net (gain) loss on sale of vessels			(601	)		102			(313	)		(264	)		255

Total operating expenses			280,635			195,869			159,104			105,814			82,195

Operating income			45,645			30,705			23,664			15,580			13,604
Interest expense (income), net			21,275			14,097			10,118			5,949			6,370
Net loss on reduction of debt(1)			—			—			7,224			1,359			3,158
Other (income) expense, net			(1,827	)		(63	)		(64	)		(27	)		(253	)

Income before provision (benefit) for income taxes			26,197			16,671			6,386			8,299			4,329
Provision (benefit) for income taxes(2)			529			851			484			163			(16,845	)

Net income			25,668		$	15,820		$	5,902		$	8,136		$	21,174

Net income per unit	—basic		1.97		$	1.56		$	0.60		$	0.95		$	2.26
	—diluted		1.95		$	1.55		$	0.60		$	0.95		$	2.25

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			Years Ended June 30,

			2008			2007			2006			2005			2004
Balance Sheet Data (at year end):
Vessels and equipment, net			$	608,209		$	358,580		$	316,237		$	235,490		$	193,646
Total assets				798,308			439,833			389,220			275,267			228,144
Total debt				439,206			244,287			193,380			114,005			78,817
Partners' capital/members' equity				275,178			152,653			163,943			141,940			135,698
Cash Flow Data:
Net cash provided by (used in):
	Operating activities			40,507		$	41,176		$	20,072		$	24,163		$	10,904
	Investing activities			(292,196	)		(63,704	)		(105,398	)		(55,901	)		(59,167	)
	Financing activities			252,529			22,614			86,064			31,447			48,616
Other Financial Data:
Capital expenditures(3):
	Maintenance			27,836		$	20,337		$	13,753		$	8,024		$	7,957
	Expansion (including vessel and company acquisitions)			240,710			25,960			98,073			39,337			52,747

		Total		268,546		$	46,297		$	111,826		$	47,361		$	60,704

Construction of tank vessels				51,987		$	33,315		$	20,702		$	16,816		$	16,512

Distributions declared per common unit in respect of the period			$	2.990		$	2.680		$	2.380		$	2.180		$	0.955
Operating Data:
Number of tank barges (at period end)				74			60			61			44			34
Number of tankers (at period end)				1			1			2			2			2
Number of tugboats (at period end)				66			44			41			25			19
Total barrel-carrying capacity (in thousands at period end)				4,423			3,464			3,357			2,561			2,410
Net utilization(4)				84	%		85	%		83	%		85	%		86	%
Average daily rate(5)			$	11,334		$	10,097		$	9,245		$	8,734		$	8,095

(1): Fiscal 2006 and fiscal 2005 include losses of $7.2 million and $1.4 million, respectively, in connection with the restructuring of our revolving credit facility and repayment of certain term loans, including our Title XI debt in fiscal 2006. Fiscal 2004 includes a $3.2 million loss on prepayment of certain EW Transportation LLC debt using proceeds of our initial public offering.
(2): Fiscal 2004 includes a non-cash tax benefit of $17.6 million solely attributable to a reduction in deferred taxes resulting from the change in income tax status of the assets and liabilities constituting the business of EW Transportation LLC that were transferred to us at the date of the initial public offering.
(3): We define maintenance capital expenditures as capital expenditures required to maintain, over the long term, the operating capacity of our fleet, and expansion capital expenditures as those capital expenditures that increase, over the long term, the operating capacity of our fleet. Examples of maintenance capital expenditures include costs related to drydocking a vessel, retrofitting an existing vessel or acquiring a new vessel to the extent such expenditures maintain the operating capacity of our fleet. Capital expenditures associated with retrofitting an existing vessel, or acquiring a new vessel, which increase the operating capacity of our fleet over the long term whether through increasing our aggregate barrel-carrying capacity, improving the operational performance of a vessel or otherwise, are classified as expansion capital expenditures. Drydocking expenditures are more extensive in nature than normal routine maintenance and, therefore, are

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capitalized and amortized over three years. For more information regarding our accounting treatment of drydocking expenditures, please read "Management's Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies—Amortization of Drydocking Expenditures" in Item 7 of this report.

(4): "Net utilization" is a percentage equal to the total number of days actually worked by a tank vessel or group of tank vessels during a defined period, divided by the number of calendar days in the period multiplied by the total number of tank vessels operating or in drydock during that period.
(5): "Average daily rate" equals the net voyage revenue earned by a tank vessel or group of tank vessels during a defined period, divided by the total number of days actually worked by that tank vessel or group of tank vessels during that period.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following is a discussion of the historical consolidated financial condition and results of operations of K-Sea Transportation Partners L.P. and should be read in conjunction with our historical consolidated financial statements and notes thereto included elsewhere in this report.

GENERAL

We are a leading provider of marine transportation, distribution and logistics services for refined petroleum products in the United States. We currently operate a fleet of 74 tank barges and 66 tugboats that serves a wide range of customers, including major oil companies, oil traders and refiners. With approximately 4.4 million barrels of capacity, we believe we currently operate the largest coastwise tank barge fleet in the United States.

Demand for our services is driven primarily by demand for refined petroleum products in the areas in which we operate. We generate revenue by charging customers for the transportation and distribution of their products utilizing our tank vessels and tugboats. These services are generally provided under the following four basic types of contractual relationships:

•: time charters, which are contracts to charter a vessel for a fixed period of time, generally one year or more, at a set daily rate;
•: contracts of affreightment, which are contracts to provide transportation services for products over a specific trade route, generally for one or more years, at a negotiated per barrel rate;
•: voyage charters, which are charters for shorter intervals, usually a single round-trip, that are made on either a current market rate or advance contractual basis; and
•: bareboat charters, which are longer-term agreements that allow a customer to operate one of our vessels and utilize its own operating staff without taking ownership of the vessel.

In addition, a variation of a voyage charter is known as a "consecutive voyage charter." Under this arrangement, consecutive voyages are performed for a specified period of time.

The table below illustrates the primary distinctions among these types of contracts:

	Time Charter	Contract of Affreightment	Voyage Charter(1)	Bareboat Charter

Typical contract length	One year or more	One year or more	Single voyage	Two years or more
Rate basis	Daily	Per barrel	Varies	Daily
Voyage expenses(2)	Customer pays	We pay	We pay	Customer pays
Vessel operating expenses(2)	We pay	We pay	We pay	We pay
Idle time	Customer pays as long as vessel is available for operations	Customer does not pay	Customer does not pay	Customer pays

(1): Under a consecutive voyage charter, the customer pays for idle time.
(2): See "Definitions" below.

For contracts of affreightment and voyage charters, revenue is recognized based upon the relative transit time in each period, with expenses recognized as incurred. Although contracts of affreightment and certain contracts for voyage charters may be effective for a period in excess of one year, revenue is recognized over the transit time of individual voyages, which are generally less than ten days in duration. For time charters and bareboat charters, revenue is recognized ratably over the contract period, with expenses recognized as incurred.

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One of the principal distinctions among these types of contracts is whether the vessel operator or the customer pays for voyage expenses, which include fuel, port charges, pilot fees, tank cleaning costs and canal tolls. Some voyage expenses are fixed, and the remainder can be estimated. If we, as the vessel operator, pay the voyage expenses, we typically pass these expenses on to our customers by charging higher rates under the contract or re-billing such expenses to them. As a result, although voyage revenue from different types of contracts may vary, the net revenue that remains after subtracting voyage expenses, which we call net voyage revenue, is comparable across the different types of contracts. Therefore, we principally use net voyage revenue, rather than voyage revenue, when comparing performance between different periods. Since net voyage revenue is a non-GAAP measurement, it is reconciled to the nearest GAAP measurement, voyage revenue, under "Results of Operations" below.

SIGNIFICANT EVENTS DURING FISCAL 2008

On August 14, 2007, we completed the acquisition of all of the equity interests in Smith Maritime, Ltd., Go Big Chartering, LLC, and Sirius Maritime, LLC (collectively, the "Smith Maritime Group"). This transaction was part of our business strategy to expand our fleet through strategic and accretive acquisitions. The Smith Maritime Group provides marine transportation and logistics services to major oil companies, oil traders and refiners in Hawaii and along the West Coast of the United States. The aggregate purchase price was $203.7 million, consisting of $168.9 million of cash, including $1.5 million of direct expenses, $23.5 million of assumed debt and common units valued at approximately $11.3 million. As further described below, we financed the cash portion of the purchase through additional borrowings under our revolving credit agreement and a bridge loan.

The acquisition of the Smith Maritime Group added eleven petroleum tank barges and ten tugboats, aggregating 777,000 barrels of capacity (of which 669,000 barrels, or 86%, are double-hulled) to our fleet, representing a 22% increase in our barrel-carrying capacity as of the acquisition date.

Acquisition Financing

To finance the acquisition of the Smith Maritime Group, on August 14, 2007 we amended and restated our revolving credit agreement with KeyBank National Association, as administrative agent and lead arranger, to provide for (1) an increase in availability to $175.0 million under our senior secured revolving credit facility, with an increase in the term to seven years, (2) a $45.0 million 364-day senior secured revolving credit facility, (3) amendments to certain financial covenants and (4) a reduction in interest rate margins. We also entered into a bridge loan facility for up to $60.0 million with an affiliate of KeyBank National Association. On August 14, 2007, we borrowed $67.0 million under the revolving facility, $45.0 million under the 364-day facility, and $60.0 million under the bridge loan facility to fund the cash portion of the purchase price of the Smith Maritime Group. See "Liquidity and Capital Resources—Credit Agreement" below for further discussion of these facilities.

Common Unit Offering

On September 26, 2007, we completed a public offering of 3,500,000 common units representing limited partner interests. The price to the public was $39.50 per unit. The net proceeds of $131.9 million from the offering, after payment of underwriting discounts and commissions and expenses, were used to repay borrowings under our revolving credit agreement, including the $45.0 million 364-day facility, and also the $60.0 million bridge loan described above.

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RECENT DEVELOPMENT

On August 20, 2008, we completed a public offering of 2,000,000 common units representing limited partner interests. The price to the public was $25.80 per unit. The net proceeds of $50 million from the offering, after payment of underwriting discounts and commissions, were used to repay borrowings under our credit agreements and to make construction progress payments in connection with our vessel new building program.

DEFINITIONS

In order to understand our discussion of our results of operations, it is important to understand the meaning of the following terms used in our analysis and the factors that influence our results of operations:

•: Voyage revenue. Voyage revenue includes revenue from time charters, contracts of affreightment and voyage charters, where we, as vessel operator, pay the vessel operating expenses. Voyage revenue is impacted by changes in charter and utilization rates and by the mix of business among the types of contracts described in the preceding sentence.
•: Voyage expenses. Voyage expenses include items such as fuel, port charges, pilot fees, tank cleaning costs and canal tolls, which are unique to a particular voyage. Depending on the form of contract and customer preference, voyage expenses may be paid directly by customers or by us. If we pay voyage expenses, they are included in our results of operations when they are incurred. Typically when we pay voyage expenses, we add them to our freight rates at an approximate cost.
•: Net voyage revenue. Net voyage revenue is equal to voyage revenue less voyage expenses. As explained above, the amount of voyage expenses we incur for a particular contract depends upon the form of the contract. Therefore, in comparing revenues between reporting periods, we use net voyage revenue to improve the comparability of reported revenues that are generated by the different forms of contracts. Since net voyage revenue is a non-GAAP measurement, it is reconciled to the nearest GAAP measurement, voyage revenue, under "Results of Operations" below.
•: Bareboat charter and other revenue. Bareboat charter and other revenue includes revenue from bareboat charters and from towing and other miscellaneous services.
•: Vessel operating expenses. The most significant direct vessel operating expenses are wages paid to vessel crews, routine maintenance and repairs and marine insurance. We may also incur outside towing expenses during periods of peak demand and in order to maintain our operating capacity while our tugs are drydocked or otherwise out of service for scheduled and unscheduled maintenance.
•: Depreciation and amortization. We incur fixed charges related to the depreciation of the historical cost of our fleet and the amortization of expenditures for drydockings. The aggregate number of drydockings undertaken in a given period, the size of the vessels and the nature of the work performed determine the level of drydocking expenditures. We capitalize expenditures incurred for drydocking and amortize these expenditures over 36 months. We also amortize, over periods ranging from three to twenty years, intangible assets in connection with vessel acquisitions.
•: General and administrative expenses. General and administrative expenses generally consist of employment costs of shoreside staff and the cost of facilities, as well as legal, audit, insurance and other administrative costs.

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•: Total tank vessel days. Total tank vessel days is equal to the number of calendar days in the period multiplied by the total number of tank vessels operating or in drydock during that period.
•: Scheduled drydocking days. Scheduled drydocking days are days designated for the inspection and survey of tank vessels, and identification and completion of required refurbishment work, as required by the U.S. Coast Guard and the American Bureau of Shipping to maintain the vessels' qualification to work in the U.S. coastwise trade. Generally, drydockings are required twice every five years and last between 30 and 60 days, based upon the size of the vessel and the type and extent of work required.
•: Net utilization. Net utilization is a primary measure of operating performance in our business. Net utilization is a percentage equal to the total number of days worked by a tank vessel or group of tank vessels during a defined period, divided by total tank vessel days for that tank vessel or group of tank vessels. Net utilization is adversely impacted by scheduled drydocking, scheduled and unscheduled maintenance and idle time not paid for by the customer.
•: Average daily rate. Average daily rate, another key measure of our operating performance, is equal to the net voyage revenue earned by a tank vessel or group of tank vessels during a defined period, divided by the total number of days actually worked by that tank vessel or group of tank vessels during that period. Fluctuations in average daily rates result not only from changes in charter rates charged to our customers, but also from changes in vessel utilization and efficiency, which could result from internal factors, such as newer and more efficient tank vessels, and from external factors such as weather or other delays.
•: Coastwise and local trades. Our business is segregated into coastwise trade and local trade. Our coastwise trade generally comprises voyages of between 200 and 1,000 miles by vessels with greater than 40,000 barrels of barrel-carrying capacity. These voyages originate from the mid-Atlantic states to points as far north as Canada and as far south as Cape Hatteras, from points within the Gulf Coast region to other points within that region or to the Northeast, to and from points on the West Coast of the United States and Alaska, and to and from points within the Hawaiian islands. We also own two non-Jones Act tank barges that transport petroleum products internationally. Our local trade generally comprises voyages by smaller vessels of less than 200 miles. The term U.S. coastwise trade is an industry term used generally for Jones Act purposes, and would include both our coastwise and local trades.

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RESULTS OF OPERATIONS

The following table summarizes our results of operations for the periods presented (dollars in thousands, except average daily rates):

				For the Years Ended June 30,

				2008			2007			2006
Voyage revenue				$	312,680		$	216,924		$	176,650
Bareboat charter and other revenue					13,600			9,650			6,118

		Total revenues			326,280			226,574			182,768
Voyage expenses					79,427			45,875			37,973
Vessel operating expenses					124,551			96,005			77,325
			% of voyage and vessel operating expenses to total revenues		62.5	%		62.6	%		63.1	%
General and administrative expenses					28,947			20,472			17,309
			% of total revenues		8.9	%		9.0	%		9.5	%
Depreciation and amortization					48,311			33,415			26,810
Net (gain) loss on sale of vessels					(601	)		102			(313	)

		Operating income			45,645			30,705			23,664
			% of total revenues		14.0	%		13.6	%		12.9	%
Interest expense, net					21,275			14,097			10,118
Net loss on reduction of debt					—			—			7,224
Other (income) expense, net					(1,827	)		(63	)		(64	)

		Income before provision for income taxes			26,197			16,671			6,386
Provision for income taxes					529			851			484

		Net income		$	25,668		$	15,820		$	5,902

Net voyage revenue by trade
	Coastwise
		Total tank vessel days			15,103			11,032			9,430
		Days worked			13,174			9,954			8,467
		Scheduled drydocking days			831			511			403
		Net utilization			87	%		90	%		90	%
		Average daily rate		$	13,731		$	12,375		$	11,967
			Total coastwise net voyage revenue(a)	$	180,893		$	123,182		$	101,324
	Local
		Total tank vessel days			9,267			8,864			8,537
		Days worked			7,406			6,987			6,534
		Scheduled drydocking days			174			232			317
		Net utilization			80	%		79	%		77	%
		Average daily rate		$	7,070		$	6,851		$	5,717
			Total local net voyage revenue(a)	$	52,360		$	47,867		$	37,353
	Tank vessel fleet
		Total tank vessel days			24,370			19,896			17,967
		Days worked			20,580			16,941			15,001
		Scheduled drydocking days			1,005			743			720
		Net utilization			84	%		85	%		83	%
		Average daily rate		$	11,334		$	10,097		$	9,245
			Total fleet net voyage revenue(a)	$	233,253		$	171,049		$	138,677

(a): Net voyage revenue is a non-GAAP measure which is defined above under "Definitions" and reconciled to Voyage revenue, the nearest GAAP measure, under "Voyage Revenue and Voyage Expenses" in the period-to-period comparisons below.

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Fiscal Year Ended June 30, 2008 Compared to the Fiscal Year Ended June 30, 2007

Voyage Revenue and Voyage Expenses

Voyage revenue was $312.7 million for the fiscal year ended June 30, 2008, an increase of $95.8 million, or 44%, as compared to voyage revenue of $216.9 million for the fiscal year ended June 30, 2007. Voyage expenses were $79.4 million for the fiscal year ended June 30, 2008, an increase of $33.5 million, or 73%, as compared to voyage expenses of $45.9 million for the fiscal year ended June 30, 2007.

Net Voyage Revenue

Net voyage revenue was $233.3 million for the fiscal year ended June 30, 2008, an increase of $62.3 million, or 36%, as compared to net voyage revenue of $171.0 million for the fiscal year ended June 30, 2007. In our coastwise trade, net voyage revenue was $180.9 million for the fiscal year ended June 30, 2008, an increase of $57.7 million, or 47%, as compared to $123.2 million for the fiscal year ended June 30, 2007. Net utilization in our coastwise trade was 87% for the fiscal year ended June 30, 2008 as compared to 90% for the fiscal year ended June 30, 2007. Net utilization in fiscal 2008 was adversely affected by a larger than usual number of shipyard days. The acquisition of the Smith Maritime Group in August 2007 resulted in increased coastwise net voyage revenue of $42.4 million for the fiscal year ended June 30, 2008. Net voyage revenue increased by an additional $13.4 million during the fiscal year ended June 30, 2008 due to an increase in the number of working days for (1) the DBL 104, which began operations in April 2007, (2) the DBL 134, which was in shipyard being coupled with the Irish Sea in the prior fiscal period, (3) the DBL 151, which was in shipyard for an extended stay in the prior fiscal period and (4) the Columbia, which was purchased and placed in service in September 2007. Average daily rates in our coastwise trade increased 11% to $13,731 for the fiscal year ended June 30, 2008 from $12,375 for the fiscal year ended June 30, 2007.

Net voyage revenue in our local trade for the fiscal year ended June 30, 2008 increased by $4.5 million, or 9%, to $52.4 million from $47.9 million for the year ended June 30, 2007. Local net voyage revenue increased by $8.3 million for the fiscal year ended June 30, 2008 due to the increased number of work days for the new-build barges DBL 27, DBL 22, DBL 23, DBL 24 and DBL 25 delivered in January 2007, June 2007, September 2007, December 2007 and March 2008, respectively. This increase was partially offset by the retirement of four single-hulled tank vessels, which decreased net voyage revenue by $2.1 million, and also by weakness in the market for certain older, smaller units and an unseasonably warm winter in the northeast, which reduced demand for heating oil. Net utilization in our local trade was 80% for the fiscal year ended June 30, 2008, compared to 79% for the fiscal year ended June 30, 2007. Average daily rates in our local trade increased 3% to $7,070 for the fiscal year ended June 30, 2008 from $6,851 for the fiscal year ended June 30, 2007. Net utilization in fiscal 2008 was positively impacted by higher utilization for our new build barges.

Bareboat Charter and Other Revenue

Bareboat charter and other revenue was $13.6 million for the fiscal year ended June 30, 2008, compared to $9.7 million for the fiscal year ended June 30, 2007. Of this $3.9 million increase, the Smith Maritime Group contributed $5.2 million and the eight tugboats purchased from Roehrig Maritime in June 2008 contributed $0.8 million. These increases were partially offset by a $2.3 million decrease in chartering of tank barges to third parties.

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Vessel Operating Expenses

Vessel operating expenses were $124.6 million for the fiscal year ended June 30, 2008, an increase of $28.6 million, or 30%, as compared to $96.0 million for the fiscal year ended June 30, 2007. Voyage and vessel operating expenses as a percentage of total revenues decreased to 62.5% for the fiscal year ended June 30, 2008 from 62.6% for the fiscal year ended June 30, 2007. Vessel labor and related costs increased $18.6 million during fiscal 2008 as a result of contractual labor rate increases and a higher average number of employees due to the operation of the additional barges described under "—Net voyage revenue" above, the acquisition of the Smith Maritime Group during August 2007 and additional tugboats purchased during fiscal 2008. Insurance costs and vessel repairs and supplies increased $9.7 during fiscal 2008 million as a result of the operation of the larger number of vessels. Additionally, outside towing costs decreased $1.3 million due to additional tugboats purchased during fiscal 2008.

Depreciation and Amortization

Depreciation and amortization was $48.3 million for the fiscal year ended June 30, 2008, an increase of $14.9 million, or 45%, as compared to $33.4 million for the fiscal year ended June 30, 2007. The increase resulted from additional depreciation and drydocking amortization on our newbuild and purchased vessels described above in addition to the vessels acquired in the Smith Maritime Group transaction.

General and Administrative Expenses

General and administrative expenses were $28.9 million for the fiscal year ended June 30, 2008, an increase of $8.4 million, or 41%, as compared to general and administrative expenses of $20.5 million for the fiscal year ended June 30, 2007. As a percentage of total revenues, general and administrative expenses decreased to 8.9% for the fiscal year ended June 30, 2008 from 9.0% for the fiscal year ended June 30, 2007. The $8.4 million increase during fiscal 2008 was mainly a result of increased personnel costs resulting from the Smith Maritime Group acquisition, additional increased headcount to support our growth, and the additional facilities costs of our new offices in Philadelphia and Hawaii.

Interest Expense, Net

Net interest expense was $21.3 million for the fiscal year ended June 30, 2008, or $7.2 million higher than the $14.1 million incurred in fiscal year ended June 30, 2007. The increase resulted from higher average debt balances resulting from increased credit line and term loan borrowings in connection with our acquisition and vessel new building program. In addition, we incurred $1.1 million of interest expense during fiscal 2008 for bridge financing in connection with the Smith Maritime Group acquisition.

Provision for Income Taxes

For the fiscal year ended June 30, 2008, our effective tax rate was 2.0% as compared to a rate of 5.1% for the fiscal year ended June 30, 2007. Our effective tax rate comprises the New York City Unincorporated Business Tax and foreign taxes on our operating partnership, plus federal, state, local and foreign corporate income taxes on the taxable income of our operating partnership's corporate subsidiaries. Our effective tax rate for the fiscal year ended June 30, 2008 was lower than the comparable prior year period primarily due to adjustments to the estimated tax liabilities for certain foreign jurisdictions based on tax returns filed.

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Net Income

Net income was $25.7 million for the fiscal year ended June 30, 2008, an increase of $9.9 million compared to net income of $15.8 million for the fiscal year ended June 30, 2007. This increase resulted primarily from a $14.9 million increase in operating income, a $1.8 million increase in other income and a $0.3 decrease in the provision for income taxes, partially offset by a $7.2 million increase in interest expense.

Fiscal Year Ended June 30, 2007 Compared to the Fiscal Year Ended June 30, 2006

Voyage Revenue and Voyage Expenses

Voyage revenue was $216.9 million for the fiscal year ended June 30, 2007, an increase of $40.2 million, or 23%, as compared to voyage revenue of $176.7 million for the fiscal year ended June 30, 2006. Voyage expenses were $45.9 million for the fiscal year ended June 30, 2007, an increase of $7.9 million, or 21%, as compared to voyage expenses of $38.0 million for the fiscal year ended June 30, 2006.

Net Voyage Revenue

Net voyage revenue was $171.0 million for the fiscal year ended June 30, 2007, an increase of $32.3 million, or 23%, as compared to net voyage revenue of $138.7 million for the fiscal year ended June 30, 2006. In our coastwise trade, net voyage revenue was $123.2 million for the fiscal year ended June 30, 2007, an increase of $21.9 million, or 22%, as compared to $101.3 million for the fiscal year ended June 30, 2006. Net utilization in our coastwise trade remained constant at 90% for both the fiscal year ended June 30, 2007 and 2006. The acquisition of Sea Coast Transportation LLC, or Sea Coast, in October 2005 resulted in increased coastwise net voyage revenue of $14.3 million for the fiscal year ended June 30, 2007, as compared to the fiscal year ended June 30, 2006. Increases totaling $7.6 million in coastwise net voyage revenue resulted from an increase in days worked by the following vessels: (1) the DBL 103, which was placed in service in January 2006, (2) the DBL 104, which was placed in service in April 2007, (3) the McCleary's Spirit, which was purchased in October 2005, and (4) the DBL 53, which commenced operations in June 2006 after being rebuilt. These increases were partially offset by a $1.0 million decrease in coastwise net voyage revenue resulting from the loss of the DBL 152 in the previously reported November 2005 barge incident. Average daily rates in our coastwise trade increased 3% to $12,375 for the fiscal year ended June 30, 2007 from $11,967 for the fiscal year ended June 30, 2006, which accounted for approximately $3.5 million of increased net voyage revenue.

Net voyage revenue in our local trade for the fiscal year ended June 30, 2007 increased by $10.5 million, or 28%, to $47.9 million from $37.4 million for the year ended June 30, 2006. The acquisition of Sea Coast in October 2005 resulted in increased local net voyage revenue of $1.8 million for the fiscal year ended June 30, 2007, as compared to the fiscal year ended June 30, 2006. Additionally, local net voyage revenue increased by $8.6 million for the fiscal year ended June 30, 2007 due to the increased number of work days for the newbuild barges DBL 28, DBL 29 and DBL 26, and DBL 27 delivered in March 2006, May 2006, August 2006, and January 2007, respectively. This was partially offset by the retirement of three small tank vessels which decreased net voyage revenue by $3.4 million. Net utilization in our local trade was 79% for the fiscal year ended June 30, 2007, compared to 77% for the fiscal year ended June 30, 2006. Average daily rates in our local trade increased 20% to $6,851 for the fiscal year ended June 30, 2007 from $5,717 for the fiscal year ended June 30, 2006, reflecting the positive impact of higher charter rates resulting from strong market conditions, particularly for short term charters. Increased charter rates accounted for approximately $5.1 million of increased net voyage revenue for the fiscal year ended June 30, 2007.

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Bareboat Charter and Other Revenue

Bareboat charter and other revenue was $9.7 million for the fiscal year ended June 30, 2007, compared to $6.1 million for the fiscal year ended June 30, 2006. Of this $3.6 million increase, $1.5 million was generated by increased outside chartering of tank barges and $1.9 million was generated by a small lube oil operation purchased in the fall of 2006.

Vessel Operating Expenses

Vessel operating expenses were $96.0 million for the fiscal year ended June 30, 2007, an increase of $18.7 million, or 24%, as compared to $77.3 million for the fiscal year ended June 30, 2006. Voyage and vessel operating expenses as a percentage of total revenues decreased to 62.6% for the fiscal year ended June 30, 2007 from 63.1% for the fiscal year ended June 30, 2006. Vessel labor and related costs increased $11.4 million as a result of contractual labor rate increases and a higher average number of employees due to the operation of the additional barges described under "—Net voyage revenue" above, and additional tugboats purchased in October 2005, November 2006, and April 2007. Insurance costs and vessel repairs and supplies increased $4.0 million as a result of the operation of the larger number of vessels. Additionally, outside towing increased $1.3 million during fiscal 2007 due to higher shipyard days of our tugboats.

Depreciation and Amortization

Depreciation and amortization was $33.4 million for fiscal 2007, an increase of $6.6 million, or 25%, as compared to $26.8 million for the fiscal year ended June 30, 2006. The increase resulted from additional depreciation and drydocking amortization on our newbuild and purchased vessels described above, plus $0.4 million in increased amortization of certain intangible assets acquired in our acquisition of Sea Coast.

General and Administrative Expenses

General and administrative expenses were $20.5 million for the fiscal year ended June 30, 2007, an increase of $3.2 million, or 18%, as compared to general and administrative expenses of $17.3 million for the fiscal year ended June 30, 2006. As a percentage of total revenues, general and administrative expenses decreased to 9.0% for the fiscal year ended June 30, 2007 from 9.5% for the fiscal year ended June 30, 2006. The $3.2 million increase included $1.1 million of increased personnel and facilities costs resulting from the Sea Coast acquisition, and also a $2.2 million increase relating to increased headcount and facilities costs of our new corporate office and a small satellite office in Philadelphia to support our growth.

Interest Expense, Net

Net interest expense was $14.1 million for the fiscal year ended June 30, 2007, or $4.0 million higher than the $10.1 million incurred in fiscal year ended June 30, 2006. The increase resulted from higher average debt balances resulting from increased credit line and term loan borrowings in connection with our acquisition and vessel newbuilding program, and higher average interest rates.

Loss on Reduction of Debt

In November 2005, in connection with our redemption of the Title XI bonds (see "—Liquidity and Capital Resources- Title XI Borrowings" below), we made a make-whole payment of $4.0 million. After writing off $2.7 million in unamortized deferred financing costs relating to the Title XI bonds, and after

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costs and expenses relating to the transaction, we recorded a loss on reduction of debt of $6.9 million. We recorded an additional $0.3 million of loss on reduction of debt in April 2006 resulting from the write-off of deferred financing costs relating to a downsizing of our revolving credit facility.

Provision for Income Taxes

For fiscal 2007, our effective tax rate decreased to 5.1%, compared to 7.6% in fiscal 2006. Our effective tax rate comprises the New York City Unincorporated Business Tax and foreign taxes on our operating partnership, plus federal, state, local and foreign corporate income taxes on the income of our operating partnership's corporate subsidiaries. Our effective tax rate for the fiscal year ended June 30, 2007 was lower than the comparable prior year period primarily because a smaller percentage of our pre-tax book income related to our corporate subsidiaries.

Net Income

Net income was $15.8 million for the fiscal year ended June 30, 2007, an increase of $9.9 million compared to net income of $5.9 million for the fiscal year ended June 30, 2006. This increase resulted primarily from a $7.2 million decrease in net loss on reduction of debt and a $7.0 million increase in operating income partially offset by a $4.0 million increase in interest expense and a $0.4 million increase in the provision for income taxes.

LIQUIDITY AND CAPITAL RESOURCES

Operating Cash Flows. Net cash provided by operating activities was $40.5 million in fiscal 2008, $41.2 million in fiscal 2007 and $20.1 million in fiscal 2006. The decrease of $0.7 million in fiscal 2008, compared to fiscal 2007, resulted from a $12.9 million negative impact from changes in operating working capital and by increased drydocking payments of $10.6 million, offset by $22.8 million of improved operating results, after adjusting for non-cash expenses such as depreciation and amortization. The increase of $21.1 million in fiscal 2007, compared to fiscal 2006, resulted primarily from $14.7 million of improved operating results, after adjusting for non-cash expenses such as depreciation and amortization and net loss on reduction of debt, and a $9.2 million positive impact from changes in operating working capital, partially offset by increased drydocking payments of $2.9 million. During fiscal 2008, our working capital increased mainly due to increased accounts receivable as a result of increased revenues, and increased prepaid expenses as a result of increased fuel inventory which resulted from higher fuel prices. During fiscal 2007, our working capital decreased mainly due to increases in accrued expenses and other current liabilities resulting from increased payroll, self-insured medical and claim accruals, and decreased prepaid and other current assets resulting mainly from the collection of insurance claim receivables.

Investing Cash Flows. Net cash used in investing activities totaled $292.2 million in fiscal 2008, $63.7 million in fiscal 2007 and $105.4 million in fiscal 2006. Fiscal 2008 included the $168.9 million cash portion of the purchase price for the Smith Maritime Group. Vessel acquisitions for fiscal 2008 included $60.5 million to acquire two existing barges and eleven additional tugs. The seller issued a $3.0 million note on one of the barge purchases, which was paid in November 2007. Vessel acquisitions totaled $16.2 million for fiscal 2007, which related to the purchase of five tugboats and certain small tank vessels. In fiscal 2006, we spent $76.5 million in cash, net, to acquire Sea Coast in October 2005. Also during fiscal 2006, we acquired an 85,000-barrel integrated tug-barge unit for approximately $13.1 million. Tank vessel construction for fiscal 2008 aggregated $52.0 million and included progress payments on the construction of three new 80,000-barrel tank barges, three new 28,000-barrel tank barges, a new 50,000-barrel tank barge, a new 100,000-barrel tank barge and a new 185,000-barrel articulated tug-barge unit. Tank vessel construction of $33.3 million in fiscal 2007 included progress

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payments on construction of a new 100,000-barrel tank barge, three new 80,000-barrel tank barges and six new 28,000-barrel tank barges. Construction of tank vessels for fiscal 2006 totaled $20.7 million, including payments for two new 100,000-barrel tank barges and four new 28,000-barrel tank barges. Other capital expenditures, totaling $13.3 million in fiscal 2008, related primarily to the coupling of tugboats to our newbuild tank barges, tank renovations on two tank barges and improvements to a newly purchased tug. Capital expenditures of $14.8 million in fiscal 2007 included the coupling of tugboats to our newbuild tank barges and the rebuilding of one of our larger existing tank barges. Other capital expenditures of $9.1 million in fiscal 2006 related primarily to re-powering of, and installation of coupling systems on, certain tugboats used with our newbuild tank barges, and expenditures related to upgrading the vessels acquired in December 2004. Capital expenditures made in the normal course of business are generally financed by cash from operations and, where necessary, borrowings under our credit agreement.

Financing Cash Flows. Net cash provided by financing activities was $252.5 million in fiscal 2008, $22.6 million in fiscal 2007 and $86.1 million in fiscal 2006. The primary financing activities for fiscal 2008 were $138.3 million in gross proceeds from the issuance of 3.5 million new common units in September 2007, $105.0 million of borrowings related to the Smith Maritime Group acquisition, which were repaid with the equity offering proceeds, and $161.9 million of other term loans to finance our vessel newbuilding program, certain tug and barge purchases including the purchase of eight tugboats from Roehrig Maritime LLC as described under "—Term Loans" below. Repayment of term loans during fiscal 2008 totaled $171.8 million, which included the $105.0 million related to the Smith Maritime Group referred to above and $27.5 million of bridge financing for the purchase of eight tugboats from Roehrig Maritime LLC. We also increased our credit line borrowings by $69.0 million relating to the Smith Maritime Group acquisition and for progress payments on barges under construction, and paid $40.4 million in distributions to partners as described under "—Payment of Distributions" below.

During fiscal 2007, we increased our credit line borrowings by $43.1 million, increased borrowings on term loans by $14.9 million to finance the construction of new tank barges, repaid term loans by $7.7 million, and paid $27.1 million in distributions to partners.

In fiscal 2006, our primary financing activities were the issuance of $109.4 million in new term loans and $34.0 million in gross proceeds from the sale of 950,000 common units in October 2005. These proceeds were used to finance the Sea Coast acquisition and the other investing activities described above. Additionally, we paid $36.8 million to redeem the principal balance of the Title XI bonds, and made $23.0 million of distributions to partners. We also amended our revolving credit agreement (see "—Credit Agreement" below) and increased our credit line borrowings by $6.9 million.

Payment of Distributions. The board of directors of K-Sea General Partner GP LLC declared the following quarterly distributions to unitholders: $0.70 per unit in respect of the quarter ended June 30, 2007, which was paid on July 24, 2007 to unitholders of record on July 18, 2007; $0.72 per unit in respect of the quarter ended September 30, 2007, which was paid on November 14, 2007 to unitholders of record on November 8, 2007; $0.74 per unit in respect of the quarter ended December 31, 2007, which was paid on February 14, 2008 to unitholders of record on February 8, 2008; and $0.76 per unit in respect of the quarter ended March 31, 2008, which was paid on May 15, 2008 to unitholders of record on May 8, 2008. Additionally, the board declared a quarterly distribution of $0.77 per unit in respect to the quarter ended June 30, 2008, which was paid on August 14, 2008 to unitholders of record on August 6, 2008.

Oil Pollution Act of 1990. Tank vessels are subject to the requirements of OPA 90. OPA 90 mandates that all single-hull tank vessels operating in U.S. waters be removed from petroleum and petroleum product transportation services at various times through January 1, 2015, and provides a

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schedule for the phase-out of the single-hull vessels based on their age and size. At September 1, 2008, approximately 76% of the barrel-carrying capacity of our tank vessel fleet was double-hulled in compliance with OPA 90, and the remainder will be in compliance with OPA 90 until January 2015.

Ongoing Capital Expenditures. Marine transportation of refined petroleum products is a capital intensive business, requiring significant investment to maintain an efficient fleet and to stay in regulatory compliance. We estimate that, over the next five years, we will spend an average of approximately $23.0 million per year to drydock and maintain our fleet. We expect drydocking and maintenance expenditures to approximate $22.0 million in fiscal 2009. In addition, we anticipate that we will spend $1.0 million annually for other general capital expenditures. Periodically, we also make expenditures to acquire or construct additional tank vessel capacity and/or to upgrade our overall fleet efficiency. For a further discussion of maintenance and expansion capital expenditures, please read footnote 3 to the table in "Selected Financial Data" in Item 6 of this report. The following table summarizes total maintenance capital expenditures, including drydocking expenditures, and expansion capital expenditures for the periods presented (in thousands):

		Years Ended June 30,

		2008		2007		2006
Maintenance capital expenditures		$	27,836	$	20,337	$	13,753
Expansion capital expenditures (including vessel and company acquisitions)			240,710		25,960		98,073

	Total capital expenditures	$	268,546	$	46,297	$	111,826

Construction of tank vessels		$	51,987	$	33,315	$	20,702

During fiscal 2008, we took delivery of the following newbuild vessels: in June 2008, an 80,000-barrel tank barge, the DBL 77; in March 2008, a 28,000-barrel tank barge, the DBL 25; in December 2007, a 28,000-barrel tank barge, the DBL 24; and in September 2007, a 28,000-barrel tank barge, the DBL 23. In total, we have agreements with shipyards for the construction of eight additional new tank barges as follows:

Vessels		Expected Delivery

Two 80,000-barrel tank barges		1^st – 2^nd Quarter fiscal 2009
One 185,000-barrel articulated tug-barge unit		2^nd Quarter of fiscal 2010
One 100,000-barrel tank barge		2^nd Quarter fiscal 2010
Four 50,000-barrel tank barges		3^rd Q fiscal 2010 – 2^nd Q fiscal 2011

The above tank barges are expected to cost, in the aggregate and after the addition of certain special equipment, approximately $165.0 million, of which $40.4 million has been spent as of June 30, 2008. We have an agreement for a long-term charter for the 185,000-barrel unit with a major customer that is expected to commence upon delivery.

Additionally, we intend to retire, retrofit or replace 25 (including four chartered-in) single-hull tank vessels by December 2014, which at September 1, 2008 represented approximately 24% of our barrel-carrying capacity. The capacity of certain of these single-hulled vessels has already been effectively replaced by double-hulled vessels placed into service in the past several years. We estimate that the current cost to replace the remaining capacity with newbuildings and by retrofitting certain of our existing vessels totals approximately $50.0 million. This capacity can also be replaced by acquiring existing double-hulled tank vessels as opportunities arise. We evaluate the most cost-effective means to replace this capacity on an ongoing basis.

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Liquidity Needs. Our primary short-term liquidity needs are to fund general working capital requirements, distributions to unitholders, and drydocking expenditures while our long term liquidity needs are primarily associated with expansion and other maintenance capital expenditures. Expansion capital expenditures are primarily for the purchase of vessels, while maintenance capital expenditures include drydocking expenditures and the cost of replacing tank vessel operating capacity. Our primary sources of funds for our short term liquidity needs are cash flows from operations and borrowings under our credit agreement, while our long term sources of funds are cash from operations, long term bank borrowings and other debt or equity financings.

We believe that cash flows from operations and borrowings under our credit agreement, described under "—Credit Agreement" below, will be sufficient to meet our liquidity needs for the next 12 months.

Credit Agreement. We maintain a revolving credit agreement with a group of banks, with KeyBank National Association as administrative agent and lead arranger, to provide financing for our operations. On August 14, 2007, we amended and restated our revolving credit agreement to provide for (1) an increase in availability to $175.0 million under the primary revolving facility, with an increase in the term to seven years, (2) an additional $45.0 million 364-day senior secured revolving credit facility, (3) amendments to certain financial covenants and (4) a reduction in interest rate margins. Under certain conditions, we have the right to increase the primary revolving facility by up to $75.0 million, to a maximum total facility amount of $250.0 million. On November 7, 2007, we exercised this right and increased the facility by $25.0 million to $200.0 million. The primary revolving facility is, and the 364-day facility was, collateralized by a first perfected security interest in vessels having a total fair market value of approximately $275.0 million and certain equipment and machinery related to such vessels. On August 14, 2007, we borrowed $67.0 million under the revolving facility and $45.0 million under the 364-day facility to fund a portion of the purchase price of the Smith Maritime Group.

Also on August 14, 2007, we entered into a bridge loan facility for up to $60.0 million with an affiliate of KeyBank National Association in connection with the Smith Maritime Group acquisition. While outstanding, the bridge loan facility bore interest at an annual rate of LIBOR plus 1.5%, and was to mature on November 12, 2007.

Both the $45.0 million 364-day senior secured facility and the $60.0 million bridge loan were repaid on September 26, 2007 upon closing of an offering of common units by us. See "—Issuance of Common Units" below. As of June 30, 2008, we had $162.4 million outstanding on the revolving facility.

The following table summarizes the rates of interest and commitment fees for the revolving credit agreement:

Ratio of Total Funded Debt to EBITDA

Less than 2.00 : 1.00	0.70	%	0.00	%	0.150	%
Greater than or equal to 2.00 : 1.00 and less than 2.50 : 1.00	0.85	%	0.00	%	0.150	%
Greater than or equal to 2.50 : 1.00 and less than 3.00 : 1.00	1.10	%	0.00	%	0.200	%
Greater than or equal to 3.00 : 1.00 and less than 3.50 : 1.00	1.25	%	0.00	%	0.200	%
Greater than or equal to 3.50 : 1.00	1.50	%	0.25	%	0.300	%

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Interest on a base rate loan is payable monthly over the five-year term of the credit agreement. Interest on a LIBOR-based loan is due, at our election, one, two or three months after such loan is made. Outstanding principal amounts are due upon termination of the credit agreement.

Loan proceeds under the credit agreement may be used for any purpose in the ordinary course of business, including vessel acquisitions, ongoing working capital needs and distributions. Amounts borrowed and repaid may be re-borrowed. Borrowings made for working capital purposes must be reduced to zero for a period of at least 15 consecutive days once each year.

The credit agreement contains covenants that include, among others:

•

the maintenance of the following financial ratios (all as defined in the agreement):

•: EBITDA to fixed charges of at least 1.85 to 1.00,
•: total funded debt to EBITDA of no greater than 4.00 to 1.00;

•

restrictions on creating liens on or disposing of the vessels collateralizing the credit agreement, subject to permitted exceptions;

•

restrictions on merging and selling assets outside the ordinary course of business;

•

prohibitions on making distributions to limited or general partners of ours during the continuance of an event of default; and

•

restrictions on transactions with affiliates and materially changing our business.

The credit agreement contains customary events of default. If a default occurs and is continuing, we must repay all amounts outstanding under the agreement.

We also maintain a separate $5.0 million revolver with a commercial bank to support our daily cash management activities. Advances under this facility bear interest at 30-day LIBOR plus a margin of 1.40%; amounts outstanding at June 30, 2008 totaled $3.7 million.

On November 30, 2007, we entered into agreements with a financial institution to swap the LIBOR-based, variable rate interest payments on $104.9 million of our credit agreement borrowings to fixed rates, for a term of three years. The fixed rates to be paid by us average 4.01% plus the applicable margin. The fair value of the swap contracts ($1.2 million) as of June 30, 2008 is included in other liabilities in the consolidated balance sheet.

Term Loans. On June 5, 2008, we closed the last of eleven fixed-rate term loans aggregating $72.1 million, which were entered into between April 30, 2008 and June 5, 2008. These loans were arranged with a financial institution, which assigned all but two to other financial institutions. The loans have a term of ten years, maturing between April 1, 2018 and June 1, 2018, except one loan for $16.5 million which has a term of seven years and matures on June 1, 2015. These loans bear a weighted average interest rate of 6.35% and are repayable in an aggregate fixed monthly payment of $0.6 million. Final balloon payments of principal total $10.7 million on June 1, 2015 and $24.8 million between April 1, 2018 and June 1, 2018. The loans are collateralized by eleven tank barges and tugboats. The proceeds of these loans were used to repay borrowings under our credit agreement, except for $15.0 million which was used to repay an advance on such loans which was used to repay a separate term loan. These term loan agreements contain customary events of default, including a cross default to our credit agreement, and also the fixed charge coverage ratio requirement that is included in the credit agreement. Borrowings outstanding on these loans totaled $71.9 million at June 30, 2008.

Also on June 5, 2008, in connection with the acquisition of eight tugboats and ancillary equipment from Roehrig Maritime LLC, we entered into a $31.7 million bridge loan agreement with a financial institution. The bridge loan was to mature on October 5, 2008; we have since refinanced $27.5 million of the bridge loan with term loans and repaid the balance on July 13, 2008 using our revolving credit

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agreement. The term loans all have terms of seven years. Two of the loans totaling $19.9 million bear a weighted average interest rate of 6.52% and are repayable in an aggregate fixed monthly amount of $0.2 million, with final balloon payments of principal totaling $12.1 million due at maturity on July 1, 2015. A third term loan bears interest at LIBOR plus 2.0%, is repayable in fixed principal amounts ranging from $30,896 to $41,946 monthly, plus interest, and matures on July 1, 2015 at which time a final balloon payment of principal of $4.6 million is due. These term loans are collateralized by six tugboats. Borrowings outstanding on these term loans totaled $27.5 million at June 30, 2008.

On June 4, 2008, we entered into a credit agreement (the "ATB Agreement") with a financial institution pursuant to which the lender agreed to provide financing during the construction period, and thereafter, for a 185,000-barrel articulated tug-barge unit in an amount equal to 80% of the acquisition costs of the unit, up to a maximum of $57.6 million. Obligations under the ATB Agreement are collateralized during the construction period by an assignment of our rights under the construction contract with the related shipyard and, after delivery, by a first preferred mortgage interest in the tug-barge unit. Interest is payable quarterly at the applicable LIBOR rate plus a margin ranging from 1.05% to 1.85% based upon our ratio of Total Funded Debt to EBITDA, as defined in the agreement. At the delivery date of the unit, which is expected during the fourth quarter of calendar 2009, the aggregate of the advances taken during the construction period will be converted to a term loan repayable in twenty-eight quarterly payments covering 37.5% of the term loan, which are expected to approximate $0.8 million each, plus interest at LIBOR plus the applicable margin. The twenty eighth and final payment will also include a balloon payment of 62.5% of the term loan, estimated at $36.0 million. The ATB Agreement contains the same financial covenants as are contained in our credit agreement described above, as well as customary events of default. We had outstanding borrowings of $10.4 million at June 30, 2008 under the ATB agreement. On June 13, 2008, we also entered into an agreement with the financial institution to swap the LIBOR-based, variable rate interest payments on the outstanding balance of the ATB agreement to a fixed rate of 5.08% over the same term, resulting in a total fixed interest rate of 5.08% plus the applicable margin. The fair value of the swap contract of ($0.9 million) as of June 30, 2008 is included in other liabilities in the consolidated balance sheet.

On February 22, 2008, we closed a new ten-year, $5.4 million term loan to finance purchase of a tugboat. The loan bears interest at 6.15%, and is repayable in monthly installments of $46,220 with a final payment at maturity of $2.4 million. The loan is collateralized by the related tugboat. The principal balance of the loan was $5.4 million at June 30, 2008.

On August 14, 2007, in connection with the acquisition of the Smith Maritime Group, we assumed two term loans totaling $23.5 million. The first, in the amount of $19.5 million, bears interest at LIBOR plus 1.25% and is repayable in equal monthly installments of $147,455, plus interest, through August 2018. The second, in the amount of $4.0 million, bears interest at LIBOR plus 1.0% and is repayable in monthly installments ranging from $59,269 to $81,320, plus interest, through May 2012. These loans are collateralized by three tank barges. We also agreed with the lender to assume the two existing interest rate swaps relating to these two loans. The LIBOR-based, variable rate interest payments on these loans have been swapped for fixed payments at an average rate of 5.44%, plus a margin, over the same terms as the loans. Borrowings outstanding on the term loans were $21.4 million at June 30, 2008. The fair value of the swap contract of ($1.2 million) as of June 30, 2008 is included in other liabilities in the consolidated balance sheet.

On April 3, 2006, we entered into an agreement with a lending institution under which we borrowed $80.0 million, for which we pledged six tugboats and six tank barges as collateral. We used the proceeds of these loans to repay indebtedness under our credit agreement. Borrowings are represented by six loans which have been assigned to other lending institutions. These loans bear interest at a rate equal to LIBOR plus 1.40%, and are repayable in 84 monthly installments with the remaining principal payable at maturity. The agreement contains certain prepayment premiums. Borrowings outstanding on these loans totaled $71.9 million as of June 30, 2008. Also on April 3, 2006,

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we entered into an agreement with the lending institution to swap the one-month, LIBOR based, variable interest payments on the $80.0 million of loans for a fixed payment at a rate of 5.2275%, over the same terms as the loans. This swap results in a fixed interest rate on the loans of 6.6275% for their seven-year term. The fair value of the swap contract of ($3.5 million) and $0.4 million as of June 30, 2008 and 2007, respectively, is included in other liabilities and other assets in the consolidated balance sheet.

The interest rate swap contracts referred to above have all been designated as cash flow hedges and, therefore, the unrealized gains and losses resulting from the change in fair value of each of the contracts are being reflected in other comprehensive income.

On December 19, 2005, one of our subsidiaries entered into a seven year Canadian dollar term loan to refinance the purchase of an integrated tug-barge unit. The proceeds of US $13.0 million were used to repay borrowings under our credit agreement, which had been used to finance the purchase of the unit. The loan bears interest at a fixed rate of 6.59% and is repayable in 60 monthly installments of CDN $136,328 and 23 monthly installments of CDN $215,991 with the remaining principal amount of CDN $7.7 million payable at maturity. This loan is collateralized by the related tug-barge unit and one other tank barge. Borrowings outstanding on this loan totaled US $13.2 million as of June 30, 2008.

In May 2006, we entered into an agreement to borrow up to $23.0 million to partially finance construction of two 28,000-barrel and one 100,000-barrel tank barges. The loan bears interest at 30-day LIBOR plus 1.40%, and is repayable in monthly principal payments of $120,958, plus accrued interest, over seven years, with the remaining principal amount of $10.3 million payable at maturity. The loan is collateralized by the related tank barges and two other tank vessels. Borrowings outstanding on this loan totaled $18.9 million at June 30, 2008.

In June 2005, we entered into an agreement to borrow up to $18.0 million to finance the purchase of an 80,000-barrel double-hull tank barge and construction of two 28,000-barrel double-hull tank barges. The loan bears interest at 30-day LIBOR plus 1.71%, and is repayable in monthly principal installments of $107,143 with the remaining principal amount of $9.0 million payable at maturity. The loan is collateralized by the related tank barges. Borrowings outstanding on this loan were $15.3 million at June 30, 2008.

In March 2005, we entered into an agreement to borrow up to $11.0 million to partially finance construction of a 100,000-barrel tank barge. The loan bears interest at 30-day LIBOR plus 1.05%, and is repayable in monthly principal installments of $65,500 with the remaining principal amount of $5.5 million payable at maturity. The loan is collateralized by the related tank barge. Borrowings outstanding on this loan totaled $9.1 million at June 30, 2008.

Title XI Borrowings. On June 7, 2002, to provide financing for four newbuild tank vessels, we privately placed $40.4 million of bonds ("Title XI bonds"), which were guaranteed by the Maritime Administration of the U.S. Department of Transportation, or MARAD, pursuant to Title XI of the Merchant Marine Act of 1936. The proceeds of $39.1 million, net of certain closing fees, were deposited in a reserve account with the U.S. Department of the Treasury and used to fund construction of the related vessels. On November 29, 2005, we redeemed the outstanding $36.8 million principal balance of bonds, paid $0.8 million of accrued interest, and made a make-whole payment of $4.0 million as required under the trust indenture. We funded the redemption using funds from our revolving credit agreement. After writing off $2.7 million in unamortized deferred financing costs, and after costs and expenses relating to the transaction, we recorded a loss on reduction of debt of $6.9 million in fiscal 2006. Retirement of the Title XI bonds improved our borrowing flexibility, and eliminated certain restrictive covenants, collateral requirements, and working capital constraints.

Restrictive Covenants. The agreements governing our credit facility and term loans contain restrictive covenants that, among others, (a) prohibit distributions under defined events of default,

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(b) restrict investments and sales of assets, and (c) require us to adhere to certain financial covenants, including defined ratios of fixed charge coverage and funded debt to EBITDA (earnings before interest, taxes, depreciation and amortization, as defined).

Issuances of Common Units. On August 14, 2007, we issued 250,000 common units to certain sellers in connection with our acquisition of the Smith Maritime Group. On September 26, 2007, we completed a public offering of 3,500,000 common units representing limited partner interests. The price to the public was $39.50 per unit. The net proceeds of $131.9 million from the offering, after payment of underwriting discounts and commissions and expenses, were used to repay borrowings under the credit agreement.

On October 14, 2005, we sold 950,000 common units in a public offering under our shelf registration statement. The net proceeds of $33.1 million from the offering, after payment of underwriting discounts and commissions but before payment of expenses, were used to repay borrowings under our credit agreement. On October 18, 2005, we issued 125,000 units to the seller in connection with our acquisition of Sea Coast.

On August 20, 2008, we completed a public offering of 2,000,000 common units. The price to the public was $25.80 per unit. The net proceeds of $50.0 million from the offering, after payment of underwriting discounts and commissions but before payment of expenses, were used to repay borrowings under our credit agreements and to make construction progress payments in connection with our vessel new building program.

Conversion of Subordinated Units. On January 14, 2004, we completed our initial public offering of common units representing limited partner interests and, in connection therewith, also issued to our predecessor companies an aggregate of 4,165,000 subordinated units representing limited partner interests. During the subordination period, the subordinated units are not entitled to receive any distributions until the common units have received their minimum quarterly distribution plus any arrearages from prior quarters. The subordination period will end once we meet certain financial tests described in the partnership agreement, but it generally cannot end before December 31, 2008. When the subordination period ends, all subordinated units will convert into common units on a one-for-one basis, and the common units will no longer be entitled to arrearages. We have met certain financial tests in our partnership agreement and, accordingly, 50% (or 2,082,500) of the subordinated units have already converted into common units.

Contractual Obligations and Contingencies. Our contractual obligations at June 30, 2008 consisted of the following (in thousands):

Payments Due by Period

	Total		Less than 1 Year		2-3 Years		4-5 Years		After 5 Years

Long-term debt and capital lease obligations	$	439,206	$	16,754	$	39,967	$	112,249	$	270,236
Interest on long-term debt and capital lease obligations(1)		71,541		12,884		23,325		19,141		16,191
Operating lease obligations		6,844		3,146		1,647		1,112		939
Purchase obligations(2)		124,105		76,561		47,544		—		—

	$	641,696	$	109,345	$	112,483	$	132,502	$	287,366

(1): Interest is only on fixed rate debt, which has a weighted-average interest rate of 6.5%. See Item 7A—Quantitative and Qualitative Disclosures About Market Risk—for discussion of interest on variable rate debt.

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(2): Capital expenditures relating to shipyard payments for the construction of two new 80,000-barrel double-hull tank barges, one new 100,000-barrel double-hull tank barge, four new 50,000-barrel double-hull tank barges and one 185,000-barrel double-hull articulated tug-barge unit.

Certain executive officers of K-Sea General Partner GP LLC have entered into employment agreements with K-Sea Transportation Inc., our indirect wholly owned corporate subsidiary. Each of these employment agreements had an initial term of one year, which is automatically extended for successive one-year terms unless either party gives 30 days written notice prior to the end of the term that such party desires not to renew the employment agreement. These executive officers currently receive aggregate base annual salaries of $960,000. In addition, each employee is eligible to receive an annual bonus award based upon consideration of our partnership performance and individual performance. If the employee's employment is terminated without cause or if the employee resigns for good reason, the employee will be entitled to severance in an amount equal to the greater of (a) the product of 1.3125 (1.75 multiplied by .75) multiplied by the employee's base salary at the time of termination or resignation and (b) the product of 1.75 multiplied by the remaining term of the employee's non-competition provisions multiplied by the employee's base salary at the time of termination or resignation.

The European Union is currently working toward a new directive for the insurance industry, called "Solvency 2", that is expected to become law within four to five years and require increases in the level of free, or unallocated, reserves required to be maintained by insurance entities, including protection and indemnity clubs that provide coverage for the maritime industry. The West of England Ship Owners Insurance Services Ltd. ("WOE"), a mutual insurance association based in Luxembourg, provides our protection and indemnity insurance coverage and would be impacted by the new directive. In anticipation of these new regulatory requirements, the WOE has assessed its members an additional capital call which it believes will contribute to achievement of the projected required free reserve increases. Our capital call of $1.1 million was paid during calendar 2007. A further request for capital may be made in the future; however, the amount of such further assessment, if any, cannot be reasonably estimated at this time. As a shipowner member of the WOE, we have an interest in the WOE's free reserves, and therefore have recorded the additional $1.1 million capital call as an investment, at cost, subject to periodic review for impairment. This amount is included in other assets in the June 30, 2008 balance sheet.

We are the subject of various claims and lawsuits in the ordinary course of business for monetary relief arising principally from personal injuries, collisions and other casualties. Although the outcome of any individual claim or action cannot be predicted with certainty, we believe that any adverse outcome, individually or in the aggregate, would be substantially mitigated by applicable insurance or indemnification from previous owners of our assets, and would not have a material adverse effect on our financial position, results of operations or cash flows. We are also subject to deductibles with respect to its insurance coverage that range from $25,000 to $100,000 per incident and provides on a current basis for estimated payments thereunder.

Inflation

During the last three years, inflation has had a relatively minor effect on our financial results. Our contracts generally contain escalation clauses whereby certain cost increases, including labor and fuel, can be passed through to our customers.

Related Party Transactions

For information regarding related party transactions, please read "Certain Relationships and Related Transactions" in Item 13 of this report.

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Seasonality

We operate our tank vessels in markets that exhibit seasonal variations in demand and, as a result, in charter rates. For example, movements of clean oil products, such as motor fuels, generally increase during the summer driving season. In certain regions, movements of black oil products and distillates, such as heating oil, generally increase during the winter months, while movements of asphalt products generally increase in the spring through fall months. Unseasonably cold winters result in significantly higher demand for heating oil in the northeastern United States. Meanwhile, our operations along the West Coast and in Alaska historically have been subject to seasonal variations in demand that vary from those exhibited in the East Coast and Gulf Coast regions. The summer driving season can increase demand for automobile fuel in all of our markets and, accordingly, the demand for our services. A decline in demand for, and level of consumption of, refined petroleum products could cause demand for tank vessel capacity and charter rates to decline, which would decrease our revenues and cash flows. Our West Coast operations provide seasonal diversification primarily as a result of its services to our Alaskan markets, which experience the greatest demand for petroleum products in the summer months, due to weather conditions. Considering the above, we believe seasonal demand for our services is lowest during our third fiscal quarter. We do not see any significant seasonality in the Hawaiian market.

CRITICAL ACCOUNTING POLICIES

The accounting treatment of a particular transaction is governed by generally accepted accounting principles, or GAAP, and, in certain circumstances, requires us to make estimates, judgments and assumptions that we believe are reasonable based upon information available. We base our estimates, judgments and assumptions on historical experience and known facts that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions and conditions. We believe that, of our significant accounting policies discussed in note 2 to our audited consolidated financial statements, the following may involve a higher degree of judgment.

Revenue Recognition

We earn revenue under contracts of affreightment, voyage charters, time charters and bareboat charters. For contracts of affreightment and voyage charters, revenue is recognized based upon the relative transit time in each period, with expenses recognized as incurred. Although contracts of affreightment and certain contracts for voyage charters may be effective for a period in excess of one year, revenue is recognized over the transit time of individual voyages, which are generally less than ten days in duration. For time charters and bareboat charters, revenue is recognized ratably over the contract period, with expenses recognized as incurred. Estimated losses on contracts of affreightment and charters are accrued when such losses become evident.

Depreciation

Vessels and equipment are recorded at cost, including capitalized interest where appropriate, and depreciated using the straight-line method over the estimated useful lives of the individual assets as follows: tank vessels—ten to twenty-five years; tugboats—ten to twenty years; and pier and office equipment—five years. For single-hull tank vessels, these useful lives are limited to the remaining period of operation prior to mandatory retirement as required by OPA 90. Also included in vessels are drydocking expenditures that are capitalized and amortized over three years. Major renewals and betterments of assets are capitalized and depreciated over the remaining useful lives of the assets. Maintenance and repairs that do not improve or extend the useful lives of the assets are expensed. To date, our experience confirms that these policies are reasonable, although there may be events or changes in circumstances in the future that indicate the recovery of the carrying amount of a vessel might not be possible. Examples of events or changes in circumstances that could indicate that the

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recoverability of a vessel's carrying amount should be assessed might include a change in regulations such as OPA 90, or continued operating losses, or projections thereof, associated with a vessel or vessels. If events or changes in circumstances as set forth above indicate that a vessel's carrying amount may not be recoverable, we would then be required to estimate the undiscounted future cash flows expected to result from the use of the vessel and its eventual disposition. If the sum of the undiscounted expected future cash flows is less than the carrying amount of the vessel, we would recognize an impairment loss to the extent the carrying value exceeds its fair value by appraisal. Our assumptions and estimates would include, but not be limited to, the estimated fair market value of the assets and their estimated future cash flows, which are based on additional assumptions such as asset utilization, length of service of the asset and estimated salvage values. Although we believe our assumptions and estimates are reasonable, deviations from the assumptions and estimates could produce a materially different result.

Amortization of Drydocking Expenditures

Drydocking expenditures are capitalized and amortized over three years based on regulatory drydocking requirements. Drydocking of vessels is required by both the U.S. Coast Guard and by the applicable classification society, which in our case is the American Bureau of Shipping. Such drydocking activities include, but are not limited to, the inspection, refurbishment and replacement of steel, engine components, tailshafts, mooring equipment and other parts of the vessel. Amortization of drydocking expenditures is included in depreciation and amortization expense.

Accounts Receivable

We extend credit to our customers in the normal course of business. We regularly review our accounts, estimate the amount of uncollectible receivables each period, and establish an allowance for uncollectible amounts. The amount of the allowance is based on the age of unpaid amounts, information about the current financial strength of customers, and other relevant information. Estimates of uncollectible amounts are revised each period, and changes are recorded in the period they become known. Historically, credit risk with respect to our trade receivables has generally been considered minimal because of the financial strength of our customers.

Deferred Income Taxes

We provide deferred taxes for the tax effects of differences between the financial reporting and tax bases of assets and liabilities at enacted tax rates in effect in the jurisdictions where we operate for the years in which the differences are expected to reverse. A valuation allowance is provided, if necessary, for deferred tax assets that are not expected to be realized.

New Accounting Pronouncements

In February 2006, the Financial Accounting Standards Board ("FASB") issued FASB Statement No. 155, "Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and 140" ("FAS 155"). FAS 155 amends FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" and FASB Statement No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". We adopted FAS 155 as of July 1, 2007, and such adoption did not have any impact on our financial position, results of operations or cash flows.

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recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. We adopted FIN 48 as of July 1, 2007, and such adoption did not have any impact on our financial position, results of operations or cash flows.

At the date of the adoption of FIN 48, there were no unrecognized tax benefits and consequently no related interest and penalties. The significant jurisdictions in which we file tax returns and are subject to tax include New York City, Venezuela and Puerto Rico. The significant jurisdictions in which our corporate subsidiaries file tax returns and are subject to tax include the United States and Canada. The tax returns filed in the United States and state jurisdictions are subject to examination for the years 2004 through 2007 and in foreign jurisdictions for the years 2005 through 2007. We have adopted a policy to record tax related interest and penalties under interest expense and general and administrative expenses, respectively.

In September 2006, the FASB issued FASB Statement No. 157, "Fair Value Measurements" ("FAS 157"). FAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. FAS 157 applies under other accounting pronouncements that require or permit fair value measurements. FAS 157 is effective for fiscal years beginning after November 15, 2007, and we are currently analyzing its impact, if any.

In February 2007, the FASB issued FASB Statement No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" ("FAS 159"). FAS 159 provides an option to report selected financial assets and liabilities at fair value. FAS 159's objective is to reduce both complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. FAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. FAS 159 is effective for fiscal years beginning after November 15, 2007, and we are currently analyzing its impact, if any.

In December 2007, the FASB issued FASB Statement No. 141 (revised 2007), "Business Combinations" ("FAS 141(R)") which replaces FAS No.141, "Business Combinations." FAS 141(R) retains the underlying concepts of FAS 141 in that all business combinations are still required to be accounted for at fair value under the purchase method of accounting, but FAS 141(R) changed the method of applying the purchase method in a number of significant aspects. FAS 141(R) is effective on a prospective basis for all business combinations for which the acquisition date is on or after the beginning of the first fiscal year subsequent to December 15, 2008, with the exception of the accounting for valuation allowances on deferred taxes and acquired tax contingencies. FAS 141(R) amends FAS 109 such that adjustments made to valuation allowances on deferred taxes and acquired tax contingencies associated with acquisitions that closed prior to the effective date of FAS 141(R) would also apply the provisions of FAS 141(R). We are currently analyzing the impact, if any, of this standard.

In December 2007, the FASB issued FASB Statement No. 160, "Non-controlling Interests in Consolidated Financial Statements, an Amendment of ARB 51" ("FAS 160"). FAS 160 amends ARB 51 to establish new standards that will govern the accounting for and reporting of (1) non-controlling interest in partially owned consolidated subsidiaries and (2) the loss of control of subsidiaries. FAS 160 is effective on a prospective basis for all fiscal years, and interim periods within those fiscal years beginning, on or after December 15, 2008, except for the presentation and disclosure requirements, which will be applied retrospectively. We are currently analyzing the impact, if any, of this standard.

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disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. FAS 161 is effective for fiscal years beginning after November 15, 2008. We are currently analyzing the impact, if any, of this standard.

In April 2008, the FASB issued FSP No. FAS 142-3, Determination of the Useful Life of Intangible Assets (FSP FAS 142-3). FSP 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 142, Goodwill and Other Intangible Assets. FSP FAS 142-3 allows an entity to use its own historical experience in renewing or extending similar arrangements, adjusted for entity-specific factors, in developing assumptions about renewal or extension used to determine the useful life of a recognized intangible asset. As a result, the determination of intangible asset useful lives is now consistent with the method used to determine the period of expected cash flows used to measure the fair value of the intangible assets, as described in other accounting principles. The guidance for determining the useful life of a recognized intangible asset is to be applied prospectively to intangible assets acquired after the effective date. Disclosure requirements are to be applied prospectively to all intangible assets recognized as of, and subsequent to, the effective date. The provisions of FSP FAS 142-3 are effective as of the beginning of our fiscal year 2010. We are currently analyzing the impact, if any, of this standard.

In May 2008, the FASB issued FASB Statement (SFAS) No. 162, The Hierarchy of Generally Accepted Accounting Principles (FAS 162). FAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements that are presented in conformity with generally accepted accounting principles in the United States. This statement is not expected to change existing practices but rather reduce the complexity of financial reporting. This statement will go into effect 60 days after the Securities and Exchange Commission approves related auditing rules and is not expected to have a material effect on our consolidated financial statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Our primary market risk is the potential impact of changes in interest rates on our variable rate borrowings. After considering the interest rate swap agreements discussed below, as of June 30, 2008 approximately $312.4 million of our long- term debt bears interest at fixed interest rates ranging from 5.26% to 6.81%. Borrowings under our revolving credit agreement and certain other term loans, totaling $126.8 million at June 30, 2008, bear interest at a floating rate based on LIBOR, which will subject us to increases or decreases in interest expense resulting from movements in that rate. Based on our total outstanding floating rate debt as of June 30, 2008, the impact of a 1% change in interest rates would result in a change in interest expense, and a corresponding impact on income before income taxes, of approximately $1.3 million annually.

As of June 30, 2008, we had six outstanding interest rate swap agreements that expire over the periods from 2012 to 2018, concurrently with the hedged loans. As of June 30, 2008, the notional amount of the swaps was $198.2 million and we were paying a weighted average fixed rate of 5.91%, and were receiving a weighted average variable rate of 3.77%. The primary objective of these contracts is to reduce the aggregate risk of higher interest costs associated with variable rate debt. The interest rate swap contracts we hold have been designated as cash flow hedges and, accordingly, gains and losses resulting from changes in the fair value of these contracts are recognized as other comprehensive income as required by Statement of Financial Accounting Standards No. 133. We are exposed to credit related losses in the event of non-performance by counterparties to these instruments; however, the counterparties are major financial institutions and we consider such risk of loss to be minimal. We do not hold or issue derivative financial instruments for trading purposes.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The financial statements set forth on pages F-1 to F-31 of this report are incorporated herein by reference.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

ITEM 9A. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

In accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of June 30, 2008 because of the material weakness in our internal control over financial reporting discussed below.

Notwithstanding the material weakness, based upon additional analysis and other post closing procedures, we have concluded that our audited consolidated financial statements for the year ended June 30, 2008 are fairly stated in all material respects in accordance with generally accepted accounting principles in the United States of America for each of the periods presented herein.

Management's Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Management assessed the effectiveness of our internal control over financial reporting as of June 30, 2008 based on the criteria established in "Internal Control—Integrated Framework," issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO").

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

We did not maintain effective controls over the accuracy of depreciation expense and accumulated depreciation. Specifically, an effective control was not designed and in place to compare depreciation expense as calculated under the mid-year convention to what would have been calculated using the dates fixed assets were placed in service. This deficiency led to material misstatements and the restatement of our financial statements for the quarters ended September 30, 2007, December 31, 2007 and March 31, 2008, along with audit adjustments to the consolidated financial statements for the fiscal year ended June 30, 2008. We have determined that this control deficiency constitutes a material weakness which, if not remediated, could result in further material misstatements of our annual or interim consolidated financial statements that would not be prevented or detected.

As a result of the material weakness identified above, management has concluded that we did not maintain effective internal control over financial reporting as of June 30, 2008 based on the criteria established in Internal Control—Integrated Framework issued by the COSO.

Management excluded Smith Maritime LLC and K-Sea Hawaii Inc. from its assessment of internal control over financial reporting as of June 30, 2008 because they were acquired in a purchase business combination during fiscal 2008. Smith Maritime LLC and K-Sea Hawaii Inc. are wholly-owned

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subsidiaries whose total assets and total revenues represent $136.2 million and $27.3 million, respectively, of the related consolidated financial statement amounts as of and for the year ended June 30, 2008.

The effectiveness of our internal control over financial reporting as of June 30, 2008 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included under the heading "Report of Independent Registered Public Accounting Firm" on page F-2.

Remediation Plan for Material Weakness

We have established a control over the accuracy of depreciation expense by changing our depreciation control with respect to the calculation of depreciation for assets placed in service in the current period.

Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting that occurred during the three months ended June 30, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION.

None.

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PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

K-Sea General Partner GP LLC, as the general partner of K-Sea General Partner L.P., our general partner, manages our operations and activities. Our general partner is not elected by our unitholders and is not subject to re-election on a regular basis. Unitholders are not entitled to elect the directors of K-Sea General Partner GP LLC or directly or indirectly participate in our management or operation.

Set forth below is information concerning the directors and executive officers of K-Sea General Partner GP LLC as of September , 2008. Executive officers and directors are elected for one-year terms.

Name		Position with K-Sea General Partner GP LLC

James J. Dowling	62	Chairman of the Board
Timothy J. Casey	48	President, Chief Executive Officer and Director
Anthony S. Abbate	68	Director
Barry J. Alperin	68	Director
Brian P. Friedman	52	Director
Frank Salerno	49	Director
John J. Nicola	54	Chief Financial Officer
Thomas M. Sullivan	49	Chief Operating Officer and President—Atlantic Region
Richard P. Falcinelli	47	Executive Vice President and Secretary
Gregory J. Haslinsky	45	Vice President, Sales and Marketing
Charles Kauffman	57	Vice President, Corporate Development
Gordon Smith	39	President, Pacific Region

James J. Dowling has served as our Chairman of the Board since July 2003, has served as Chairman of the Board of EW Transportation LLC (formerly K-Sea Transportation LLC) since January 2002 and has served as a director of EW Transportation LLC since its formation in April 1999. Mr. Dowling has been a Managing Director of Jefferies Capital Partners, a private investment firm, since January 2002, and is a director of various private companies in which Jefferies Capital Partners has an interest. Jefferies Capital Partners is the manager of Furman Selz Investors II L.P. and its affiliated entities, principal owners of our general partner.

Timothy J. Casey has served as our President, Chief Executive Officer and Director since July 2003. Mr. Casey has served as President, Chief Executive Officer and Director of EW Transportation LLC since April 1999. Mr. Casey is also a Vice Chairman for American Waterways Operators, a board member of The Seamen's Church Institute and a member of the American Bureau of Shipping.

Anthony S. Abbate has served as a Director since February 2004. Mr. Abbate was President, Chief Executive Officer and a director of Interchange Financial Services Corporation, a bank holding company, since 1984 until his retirement in 2007 and President, Chief Executive Officer and a director of its principal subsidiary, Interchange Bank, from 1981 until his retirement in 2007. In April 2007, Mr. Abbate joined the Board of Directors of Sussex Bancorp, a bank holding company.

Barry J. Alperin has served as a Director since February 2004. Mr. Alperin is a business consultant who retired from Hasbro Inc. in 1996 after 11 years in various senior executive positions, including Vice Chairman and Director. Mr. Alperin is currently on the board of Henry Schein, Inc., a distributor of healthcare products to office-based practitioners, and The Hain Celestial Group, Inc., a natural and organic beverage, snack, specialty food and personal care products company.

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Brian P. Friedman has served as a director since July 2003. Since 1997, Mr. Friedman has been President of Jefferies Capital Partners, a private equity investment firm. Mr. Friedman also serves as Chairman of the Executive Committee of Jefferies & Company, Inc., a global securities and investment banking firm, and as a director of Jefferies Group, Inc. As a result of his management of various private equity funds and the significant equity positions those funds hold in their portfolio companies, Mr. Friedman serves on several boards of directors of private portfolio companies.

Frank Salerno has served as a Director since February 2004. Mr. Salerno has served as a director for WisdomTree Investments, Inc. (formerly known as Index Development Partners) since July 2005 and as a director for Crystal International Travel Group since April 2006. From mid-1999 until his retirement in February 2004, Mr. Salerno was Managing Director and Chief Operating Officer of Merrill Lynch Investment Advisors—Americas Institutional Division, an investment advisory company.

John J. Nicola has served as our Chief Financial Officer since July 2003, and has served as Chief Financial Officer of EW Transportation LLC since July 2000. Mr. Nicola was employed from November 1993 to July 2000 by Maersk Sealand, a container shipping company, in various senior financial management roles, including Chief Financial Officer of Maersk's East Coast and Gulf terminal operating subsidiary. Mr. Nicola is a Certified Public Accountant and a member of the American Institute of Certified Public Accountants.

Thomas M. Sullivan has served as Chief Operating Officer and President—Atlantic Region since April 2008. Mr. Sullivan served as Vice President of Operations from July 2003 to April 2008. Mr. Sullivan served as Vice President of Operations for EW Transportation LLC since April 1999. Mr. Sullivan also served as Vessel Supervisor for EW Transportation LLC's predecessor from March 1995 until April 1999.

Richard P. Falcinelli has served as Executive Vice President and Secretary since April 2008. Mr. Falcinelli served as Vice President of Administration and Secretary from July 2003 to April 2008. Mr. Falcinelli has served as Vice President of Administration and Secretary of EW Transportation LLC since April 1999.

Gregory J. Haslinsky has served as our Vice President, Sales and Marketing since October 2005 and has been employed by K-Sea Transportation since December 1999 in various sales capacities. Mr. Haslinsky was employed from November 1988 to November 1999 by Maritrans, a marine transportation company, holding various sales and marketing positions within the organization.

Charles Kauffman has served as our Vice President, Corporate Development since the acquisition of Sea Coast Transportation in October 2005. Mr. Kauffman was employed from February 1984 to October 2005 by Saltchuk Resources Inc., a privately held maritime company, where he held various senior management positions, including President of Sea Coast Transportation since July 2002.

Gordon Smith has served as our President—Pacific Region since April 2008. From August 2007 to April 2008, Mr. Smith served as Vice Chairman. Mr. Smith was President of Smith Maritime, Ltd. from 1992 and Vice President of Sirius Maritime LLC from 2002 until our acquisition of that company in August 2007.

Meetings and Committees of the Board of Directors

Meetings

K-Sea General Partner GP LLC's board of directors held eight meetings during fiscal 2008. During fiscal 2008, each director attended at least 75% of the aggregate of (1) the total number of meetings of the board of directors of K-Sea General Partner GP LLC and (2) the total number of meetings held by all committees of such board on which he served.

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Audit Committee

K-Sea General Partner GP LLC has a standing audit committee consisting of Messrs. Abbate, Alperin (Chairman) and Salerno. The board of directors of K-Sea General Partner GP LLC has determined that all members of the audit committee are independent within the meaning of the listing standards of the New York Stock Exchange and the applicable rules of the Securities and Exchange Commission. In addition, the board of directors of K-Sea General Partner GP LLC has determined that Mr. Abbate is an audit committee financial expert within the meaning of the rules of the Securities and Exchange Commission.

The primary responsibilities of the audit committee are to assist the board of directors of K-Sea General Partner GP LLC in overseeing (1) the integrity of our financial statements, (2) our independent registered public accounting firm's qualifications, independence, and performance, (3) the effectiveness of our internal controls and procedures and our internal audit function, and (4) our compliance with legal and regulatory requirements. The audit committee has the sole authority to appoint, retain and terminate our independent registered public accounting firm, which reports directly to the audit committee.

The audit committee has established procedures for the receipt, retention and treatment of complaints we receive regarding accounting, internal accounting controls or auditing matters and the confidential, anonymous submission by our employees of concerns regarding questionable accounting or auditing matters.

Compensation Committee

K-Sea General Partner GP LLC has a standing compensation committee consisting of Messrs. Alperin, Dowling and Friedman. The compensation committee, among other tasks, determines and approves the chief executive officer's compensation, makes recommendations to the board with respect to other executive officer compensation, and reviews from time to time the compensation and benefits of non-employee directors.

Conflicts Committee

K-Sea General Partner GP LLC has a standing conflicts committee consisting of Messrs. Abbate, Alperin and Salerno. The conflicts committee reviews specific matters that the board of directors of K-Sea General Partner GP LLC believes may involve conflicts of interest and takes such other action as may be required under the terms of our partnership agreement.

Finance Committee

K-Sea General Partner GP LLC has a standing finance committee consisting of Messrs. Dowling and Casey. The finance committee is authorized to review and approve derivative transactions (including interest rate swaps) with respect to up to 50% of our total outstanding indebtedness.

Director Independence

For information on director independence, please read "Item 13. Certain Relationships and Related Transactions, and Director Independence."

Policies and Procedures for Approval of Related Person Transactions

The Board of Directors of K-Sea General Partner GP LLC has adopted a policy pursuant to which related party transactions are reviewed, approved or ratified. The policy applies to any transaction in which (1) we are a participant, (2) any related person has a direct or indirect material interest and (3) the amount involved exceeds $120,000, but excludes any transaction that does not require disclosure under Item 404(a) of Regulation S-K. The Conflicts Committee is responsible for reviewing, approving

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and ratifying any related person transaction, except those related to compensation which is the responsibility of the compensation committee.

Code of Business Conduct and Ethics

The board of directors of K-Sea General Partner GP LLC has adopted a code of business conduct and ethics for all employees, officers and directors. If any amendments are made to the code or if K-Sea General Partner GP LLC grants any waiver, including any implicit waiver, from a provision of the code that the SEC or the New York Stock Exchange ("NYSE") requires us to disclose, we will disclose the nature of such amendment or waiver on our website or in a current report on Form 8-K.

Corporate Governance Guidelines

The board of directors of K-Sea General Partner GP LLC has adopted corporate governance guidelines in accordance with the rules of the New York Stock Exchange.

Availability of Corporate Governance Documents

Copies of the board committee charters, code of business conduct and ethics and corporate governance guidelines are available, without charge, on our website at www.k-sea.com and in print, free of charge, upon written request to the Secretary, K-Sea General Partner GP LLC, One Tower Center Blvd., 17^th Floor, East Brunswick, New Jersey 08816.

Annual Certification

We have filed the required certifications under Section 302 of the Sarbanes-Oxley Act of 2002 as Exhibits 31.1 and 31.2 to this report. For fiscal 2007, we submitted to the NYSE the CEO certification required by Section 303A.12(a) of the NYSE's Listed Company Manual. For fiscal 2008, we expect to submit this certification to the NYSE within 30 days after filing this report.

Executive Sessions of the Board of Directors

Messrs. Abbate, Alperin, Dowling, Friedman and Salerno, who are non-management directors of K-Sea General Partner GP LLC, meet at regularly scheduled executive sessions without management. These meetings are chaired on a rotating basis by the chairmen of the audit committee and compensation committee. Persons wishing to communicate with our non-management directors may do so by writing to them at K-Sea General Partner GP LLC, c/o Board of Directors, One Tower Center Blvd., 17^th Floor, East Brunswick, New Jersey 08816.

Messrs. Abbate, Alperin, and Salerno, who are independent non-management directors of K-Sea General Partner GP LLC, meet at least annually in executive sessions without management and the other directors. Mr. Abbate serves as the presiding director at those executive sessions.

Communications with Independent Directors

Persons wishing to communicate with our independent non-management directors may do so by writing to them at K-Sea General Partner GP LLC, c/o Board of Directors, One Tower Center Blvd., 17^th Floor, East Brunswick, New Jersey 08816.

Payments to Our General Partner

K-Sea General Partner LP does not receive any management fee or other compensation in connection with its management of us; however, K-Sea General Partner LP or its affiliates who perform services for us and/or our subsidiaries are reimbursed at cost for all expenses incurred on our behalf which are necessary or appropriate to the conduct of our business. There were no reimbursable expenses in fiscal 2008 or fiscal 2007. We also directly pay the fees of the independent directors of

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K-Sea General Partner GP LLC and reimburse meeting-related expenses of all directors of K-Sea General Partner GP LLC.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires our officers and directors, and persons who own more than 10% of a registered class of our equity securities, to file reports of beneficial ownership and changes in beneficial ownership with the SEC. Officers, directors and greater than 10% unitholders are required by SEC regulations to furnish us with copies of all Section 16(a) forms.

Based solely on our review of the copies of such forms we received, or representations from certain reporting persons that no Form 4s were required for those persons, we believe that during the fiscal year ended June 30, 2008, all of our officers, directors, and greater than 10% beneficial owners complied on a timely basis with all applicable filing requirements under Section 16(a) of the Securities Exchange Act of 1934, except for the failure to timely file a Form 3 by Mr. Smith and the failure to timely file four Form 4s by Mr. Sullivan.

ITEM 11. EXECUTIVE COMPENSATION.

Compensation Discussion and Analysis

This Compensation Discussion and Analysis is intended to provide investors with an understanding of our compensation policies and decisions regarding our named executive officers for fiscal 2008. Our named executive officers are our Chief Executive Officer, our Chief Financial Officer and our three other most highly compensated executive officers for fiscal 2008.

Executive Compensation Philosophy

In establishing executive compensation, we believe that:

•: base salaries should reflect the basic duties and responsibilities of the executive and be reasonably competitive with comparator group companies;
•: annual cash bonuses should reflect our annual results, performance against budget, progress toward our short and long-term strategic and operating goals, and individual performance and contribution; and
•: equity awards encourage significant executive equity ownership to further align executive interests to our unitholders.

Purpose of Our Executive Compensation Program

Our primary business objective is to increase our distributable cash flow ("DCF") per unit, which serves as a basis for our distribution payments to unitholders, by executing the following business strategies:

•: expanding our fleet through newbuildings and accretive and strategic acquisitions;
•: maximizing fleet utilization and improving productivity;
•: maintaining safe, low-cost and efficient operations;
•: balancing our fleet deployment between long-term contracts and short-term business to provide stable cash flows through business cycles, while preserving flexibility to respond to changing market conditions; and
•: attracting and maintaining customers by adhering to high standards of performance, reliability and safety.

For additional information regarding our business strategies, please see "Items 1 and 2. Business and Properties—Our Partnership."

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The purpose of our executive compensation program is to assist us in achieving our business objectives by developing and retaining talented senior executives with a competitive compensation package, and to motivate them to achieve our strategic goals and increase our DCF and unitholder value. DCF is a non-GAAP financial measure which is among the measures used to evaluate our operating performance and our ability to make cash distributions.

Role of the Compensation Committee

Responsibilities and Authority

The Compensation Committee of K-Sea General Partner GP LLC has overall responsibility for determining the compensation of our named executive officers. The specific duties and responsibilities of the Compensation Committee are described above under "Item 10. Directors, Executive Officers and Corporate Governance—Meetings and Committees of the Board of Directors—Compensation Committee" and in the charter of the Compensation Committee, which is available on the "Investor Relations—Governance" section of our website at www.k-sea.com.

For fiscal 2008, the compensation payable to all of our named executive officers was reviewed and approved by the Compensation Committee. The Compensation Committee seeks input from Timothy J. Casey, our President and Chief Executive Officer, regarding the amount of compensation payable to, and the individual performance of, our named executive officers (other than Mr. Casey).

Independent Compensation Consultant

In fiscal 2007, the Compensation Committee retained Pearl Meyer and Partners ("PMP") as an independent consultant on executive compensation matters. The Compensation Committee met with PMP multiple times over several months during late fiscal 2007 and early fiscal 2008 to review and refine the partnership's compensation methodology. The Compensation Committee considered advice and information from PMP in determining the amount and form of compensation for named executive officers and other employees. This work included establishing a comparator group of companies, providing relevant market data and alternatives to consider for named executive officer compensation, and meeting with the Compensation Committee and Mr. Casey to discuss executive compensation matters. The Partnership has not engaged PMP for any other purpose.

The Compensation Committee did not retain PMP or any other compensation consultant with respect to the determination of base salaries for fiscal 2009 or the amount or form of incentive compensation to be paid to executive officers with respect to performance in fiscal 2008.

Timing of Decisions

The Compensation Committee meets after the end of each fiscal year to review base salaries for the then-current year, to consider incentive compensation (consisting of cash bonuses and equity-based awards) and to review and, as appropriate, make changes to our executive compensation program. The Compensation Committee also meets at other times during the year and acts by written consent when necessary and appropriate. During fiscal 2008, the Compensation Committee met three times. The Chairman of the Compensation Committee also met with members of our management team on several occasions to discuss our executive compensation policies and programs.

We do not time the release of material non-public information for the purpose of affecting the values of executive compensation. At the time of making equity-based compensation decisions, the Compensation Committee may be aware of material non-public information and takes such information into account, but it does not adjust the size of grants to reflect possible market reaction. Prior to August 2007, the Compensation Committee made grants of equity-based compensation on a periodic basis to reflect specific achievements. In August 2007, the Compensation Committee decided to consider grants of equity-based compensation on an annual basis shortly after the end of each fiscal

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year, although specific grants may be made at other times to recognize the promotion of an employee, a change in responsibility or a specific achievement.

Elements of Compensation

Our executive compensation program includes three main elements: a base salary, an annual cash bonus and an annual equity-based incentive award. These individual components are designed to:

•: through a market-competitive base salary that is consistent with the executive's position and level of responsibility, provide a minimum level of compensation to each individual;
•: through an annual cash bonus, reward individuals who contribute to the financial and operational success of our partnership; and
•: through equity-based incentive awards, reward individuals who contribute to the financial and operational success of our partnership and, at the same time, further align the executives' interests with the long-term interests of our unitholders.

We view the various components of compensation as related, but distinct, and emphasize "pay for performance." A significant portion of total executive compensation reflects a risk aspect and is tied to our financial and strategic goals. Our compensation philosophy is to foster entrepreneurship at all levels of the organization by making long-term equity-based incentives, in particular through participation in the growth of our quarterly distributions, a significant component of executive compensation. We determine the appropriate level for each compensation component based in part, but not exclusively, on our view of internal equity and consistency, and other considerations we deem relevant, such as rewarding extraordinary performance. The Compensation Committee has not yet adopted any policies for allocating compensation between long-term and currently paid out compensation, between cash and non-cash compensation, or among different forms of non-cash compensation.

As described in more detail below, our executive compensation program is designed to reward partnership and individual performance.

•: Partnership Performance: Partnership performance is measured by various metrics, such as EBITDA (earnings before interest, taxes and depreciation), DCF on an aggregate and per unit basis, vessel utilization and average daily rates, other vessel operating measures, and financing and compliance objectives. The Compensation Committee also considers other achievements during the year when evaluating our performance.
•: Individual Performance: Individual performance is evaluated based on individual expertise, leadership, ethics and personal performance against goals and objectives.

Employment Agreements

Timothy J. Casey, John J. Nicola, Thomas M. Sullivan and Richard P. Falcinelli have entered into employment agreements with K-Sea Transportation Inc., one of our indirect wholly owned subsidiaries. The employment agreements contemplate that each employee will serve as an officer of the general partner of our general partner and other affiliates. Each of the employment agreements had an initial term of one year. The term of each employment agreement is automatically extended for successive one-year terms unless either party gives 30-days written notice prior to the end of the term that such party desires not to renew the employment agreement.

Each employment agreement established an annual base salary for the named executive officer, which has been subsequently increased by the Compensation Committee. Under the employment agreement, each employee is eligible to receive an annual incentive bonus based upon the financial performance of us and our subsidiaries. The board of directors of K-Sea GP will determine the amount of any incentive bonus award and may issue additional awards to each employee in the amounts and at the times it so determines. Further, Messrs. Casey, Nicola, Sullivan and Falcinelli are each furnished an

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automobile for business use and reimbursed for reasonable costs of insurance, gasoline and repairs for the automobile in accordance with our reimbursement policies.

Each employment agreement also provides for certain payments upon termination of employment. For more information, please read below "Executive Compensation Tables—Potential Payments upon Termination or Change in Control." The Compensation Committee is currently evaluating potential revisions to the employment agreements.

Comparator Group

In late fiscal 2007 and early fiscal 2008, the Compensation Committee evaluated the executive compensation programs and practices for our executive officers against a comparator group in order to achieve a competitive level of compensation. The comparator group was selected based on, among other things, industry, EBITDA, equity market capitalization and enterprise value. For fiscal 2007, the comparator group consisted of the following 12 transportation companies and six master limited partnerships:

Transportation Companies

•: Celadon Group, Inc.
•: Covenant Transportation Group, Inc.
•: International Shipholding Corporation
•: Maritrans, Inc.
•: Marten Transport, Ltd.
•: P.A.M. Transportation Services, Inc.
•: Patriot Transportation Holding, Inc.
•: Saia, Inc.
•: U.S. Shipping Partners L.P.
•: U.S. Xpress Enterprises, Inc.
•: Universal Truckload Services, Inc.
•: USA Truck, Inc.

Master Limited Partnerships

•: Atlas Pipeline Partners, L.P.
•: Global Partners L.P.
•: Hiland Partners, L.P.
•: Holly Energy Partners, L.P.
•: Martin Midstream Partners, L.P.
•: Exterran Partners, L.P.

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The Compensation Committee did not review fiscal 2008 comparator group data when setting fiscal 2009 base salaries for our executive officers or awarding incentive compensation with respect to performance in fiscal 2008.

In late fiscal 2007 and early fiscal 2008, the Compensation Committee compared the companies' executive compensation programs as a whole, and also compared the pay of individual executives if the jobs were sufficiently similar to make a comparison meaningful.

In late fiscal 2007 and early fiscal 2008, the Compensation Committee used the comparator group data to ensure that executive officer compensation as a whole was appropriately competitive, given our performance. The Compensation Committee, however, did not target a specific percentile of comparator group compensation in determining the level of executive officer compensation. The composition of the comparator group is subject to change from time to time based on a review by the Compensation Committee to reflect, among other things, best practices in executive compensation, changes in our business including the size and complexity thereof, and changes in the competitive marketplace resulting from mergers and acquisitions or other activity.

Partnership Performance

In September 2008, the Compensation Committee evaluated our financial condition and results of operations, our fiscal 2008 performance in light of industry fundamentals and how effectively management adapted to changing industry conditions and opportunities during fiscal 2008. In addition, the Compensation Committee considered the following accomplishments, among others, in measuring partnership performance during fiscal 2008:

•: fiscal 2008 DCF was a record and meaningfully above the prior year's DCF;
•: increases in per unit distributions to unitholders for each quarter of fiscal 2008;
•: the acquisition and integration of the Smith Maritime Group;
•: the partnership's progress toward replacing its single-hull vessels;
•: the acquisition of several tug boats to improve the efficiency of the partnership's tank barge fleet;
•: improvements in average daily rates for the partnership's coastwise and local tank barge fleets;
•: consistency in the partnership's net utilization of its tank barges; and
•: improvements in safety results.

Base Salary

In evaluating the base salaries of our named executive officers for fiscal 2009, the Compensation Committee considered the historical and expected future performance of each such executive and competitive market data provided by PMP in early fiscal 2008. Based on these factors, together with the partnership's performance and the individual performance of each executive during fiscal 2008, the Compensation Committee increased the base salaries of our named executive officers for fiscal 2009 as follows:

Name	Fiscal 2009 Base Salary(1)		Increase Over Fiscal 2008

Timothy J. Casey	$	300,000	$	0
John J. Nicola	$	220,000	$	10,000
Thomas Sullivan	$	220,000	$	10,000
Richard P. Falcinelli	$	220,000	$	10,000
Gregory J. Haslinksy	$	220,000	$	20,000

(1): Effective July 1, 2008.

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Annual Cash Bonus

The amount of the annual cash bonus is determined by the Compensation Committee on an annual basis after considering partnership and individual performance. For fiscal 2008, the Compensation Committee had targeted an annual cash bonus of 80% of base salary for Mr. Casey and 40% of base salary for other named executive officers. The partnership performed at the Compensation Committee's expectations in fiscal 2008. Based on that performance and after considering the individual performance of each named executive officer, the Compensation Committee decided to award cash bonuses at approximately the targeted amounts. The following table sets forth the amount of each named executive officer's annual cash bonus for fiscal 2008 and the percentage of such bonus in relation to the named executive officer's base salary for fiscal 2008:

Name	Total Annual Cash Bonus for Fiscal 2008

Timothy J. Casey	$	240,000	80	%
John J. Nicola	$	84,000	40	%
Thomas Sullivan	$	84,000	40	%
Richard P. Falcinelli	$	84,000	40	%
Gregory J. Haslinsky	$	84,000	42	%

Equity-Based Incentive Awards

In respect of fiscal 2008, the Compensation Committee made phantom unit grants in amounts intended to result in approximately 50% of the executive's total annual incentive compensation being equity based. A "phantom" unit entitles the grantee to receive a common unit upon the vesting of the phantom unit or, in the discretion of the Compensation Committee, cash equivalent to the fair market value of a common unit. Holders of phantom units also have the right to receive an amount in cash equal to, and payable at the same time as, the cash distribution made with respect to a common unit during the period the phantom unit is outstanding. The Compensation Committee believes that making a portion of an executive's compensation contingent on long-term unit price performance more closely aligns the executive's interests with those of our unitholders. Like cash bonuses, phantom unit awards reflect progress toward our corporate goals and individual performance.

The following table sets forth awards of phantom units in September 2008 with respect to each named executive officer's performance in fiscal 2008:

Name		Grant Date Fair Value(1)

Timothy J. Casey	9,700	$	240,269
John J. Nicola	3,400	$	84,218
Thomas Sullivan	3,400	$	84,218
Richard P. Falcinelli	3,400	$	84,218
Gregory J. Haslinsky	3,400	$	84,218

(1): Determined by multiplying the number of phantom units granted to the named executive officer by $24.77, the closing price of our common units on the NYSE on September 8, 2008, which was the date of grant.

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The awards of phantom units in the table above vest in five equal annual installments beginning on October 1, 2009, subject to earlier vesting or forfeiture as provided in the applicable award agreement.

Perquisites and Other Benefits

Messrs. Casey, Nicola, Sullivan, Falcinelli and Haslinsky are furnished an automobile for business use and reimbursed for reasonable costs of insurance, gasoline and repairs for the automobile in accordance with our reimbursement policies.

We seek to provide benefit plans, such as medical, life and disability insurance, in line with market conditions. Executive officers are eligible for the same benefit plans provided to other exempt employees, including insurance plans and supplemental plans chosen and paid for by employees who wish additional coverage. We do not have any special insurance plans for executive officers.

Other Compensation Related Matters

Equity Ownership

Although we encourage our executive officers to retain ownership in our partnership, we do not have a policy requiring maintenance of a specified equity ownership level. In the aggregate, as of June 30, 2008, our named executive officers beneficially owned an aggregate of 264,860 common units and 40,000 phantom units. Additionally, our named executive officers receive an aggregate of approximately 9.4% of the cash distributions received by our general partner and its affiliates through their ownership interest in these entities. These arrangements further tie the interests of these executive officers to the interests of unitholders.

Our policies prohibit our executive officers from using puts, calls or options to hedge the economic risk of their ownership.

Recovery of Prior Awards

We do not have a policy with respect to adjustment or recovery of awards or payments if relevant performance measures upon which previous awards were based are restated or otherwise adjusted in a manner that would reduce the size of such award or payment.

Impact of Tax and Accounting Treatment

Accounting Treatment

Effective July 1, 2005, we adopted SFAS 123R, which requires that companies recognize in their financial statements the cost of employee services received in exchange for awards of equity instruments based on the grant date fair value of those awards.

Tax Treatment

Section 162(m) of the Code generally disallows a tax deduction to publicly traded corporations for compensation in excess of $1 million paid to the Chief Executive Officer or any of the four other most highly compensated officers. Because we are organized as a limited partnership, we are not subject to the provisions of Section 162(m) of the Code.

Section 409A of the Code imposes new constraints on nonqualified deferred compensation, and some awards under our long-term incentive plan and severance benefits under employment agreements with our officers may be subject to these new rules. Failure to comply with Section 409A may result in the early taxation of deferred compensation and the imposition of a 20% penalty. Employers generally will have until December 31, 2008 to amend plans and arrangements to comply with Section 409A. We

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intend to design our compensation arrangements to be either exempt from Section 409A or to comply with Section 409A, and we may be required to amend certain arrangements before December 31, 2008.

COMPENSATION COMMITTEE REPORT

The Compensation Committee has reviewed and discussed with management the compensation discussion and analysis required by Item 402(b) of Regulation S-K. Based on the review and discussion referred to above, the Compensation Committee recommended to the board of directors that this compensation discussion and analysis be included in this Form 10-K.


		Compensation Committee:
		James J. Dowling (Chairman) Barry J. Alperin Brian P. Friedman

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

None of our executive officers serves as a member of the board of directors or compensation committee of any entity that has one or more of its executive officers serving as a member of our general partner's board of directors or compensation committee.

There are no matters relating to interlocks or insider participation that we are required to report.

EXECUTIVE COMPENSATION TABLES

Summary Compensation Table

Name and Principal Position			Salary ($)		Bonus ($)		Stock Awards ($)(1)		Option Awards ($)		Non-Equity Incentive Plan Compensation ($)		Change in Pension Value and Nonqualified Deferred Compensation Earnings ($)		All Other Compensation ($)(2)		Total ($)

Timothy J. Casey		2008	$	300,000	$	240,000	$	251,174	$	—	$	—	$	—	$	25,862	$	817,036
	President and	2007	$	250,000	$	300,750	$	202,117	$	—	$	—	$	—	$	21,616	$	774,483
	Chief Executive
	Officer
John J. Nicola		2008	$	210,000	$	84,000	$	82,089	$	—	$	—	$	—	$	22,820	$	398,909
	Chief Financial	2007	$	200,000	$	90,225	$	67,372	$	—	$	—	$	—	$	18,194	$	375,791
	Officer
Thomas M. Sullivan		2008	$	210,000	$	84,000	$	82,089	$	—	$	—	$	—	$	20,510	$	396,599
	Vice President,	2007	$	200,000	$	90,225	$	67,372	$	—	$	—	$	—	$	18,911	$	376,508
	Operations
Richard P. Falcinelli		2008	$	210,000	$	84,000	$	82,089	$	—	$	—	$	—	$	21,468	$	397,557
	Vice President,	2007	$	200,000	$	90,225	$	67,372	$	—	$	—	$	—	$	20,741	$	378,338
	Administration
	and Secretary
Gregory J. Haslinsky		2008	$	200,000	$	84,000	$	66,464	$	—	$	—	$	—	$	18,983	$	369,447
	Vice President,
	Sales

(1): This amount reflects the compensation cost recognized by us during each of the fiscal years shown under SFAS 123R for grants made in such year. Pursuant to SEC rules, the amounts shown exclude the impact of estimated forfeitures related to service-based vesting conditions. These amounts reflect our recognized compensation expense for these awards under SFAS 123R, and do not correspond to the actual value that will be recognized by the named executive officers.

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(2): Represents contributions to our 401(k) Savings Plan during fiscal 2008 and the value of personal use of an automobile.

Grants of Plan-Based Awards Table

The following table sets forth awards of phantom units granted in fiscal 2008 for each of our named executive officers.

Name			Grant Date Fair Value of Stock and Option Awards(2)

T. Casey	8/7/2007	7,000	$	299,250
J. Nicola	8/7/2007	2,100	$	89,775
T. Sullivan	8/7/2007	2,100	$	89,775
R. Falcinelli	8/7/2007	2,100	$	89,775
G. Haslinsky	8/7/2007	2,100	$	89,775

(1): Represents phantom units granted in respect of fiscal 2007.
(2): The fair value in this column was calculated in accordance with FAS 123(R).

Outstanding Equity Awards at Fiscal Year-End

The following table sets forth information concerning the outstanding equity awards made for each named executive officer as of June 30, 2008.

	Stock Awards(1)

Name	Number of Shares or Units of Stock That Have Not Vested (#)		Market Value of Shares or Units of Stock That Have Not Vested ($)(2)		Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#)		Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested (#)
T. Casey		22,000	$	698,940		—		—
J. Nicola		7,100	$	225,567		—		—
T. Sullivan		7,100	$	225,567		—		—
R. Falcinelli		7,100	$	225,567		—		—
G. Haslinsky		6,100	$	193,797		—		—

(1): Represents phantom unit awards that vest in five annual installments. All phantom unit awards are subject to accelerated vesting on a change in control or the termination of the employee's employment due to death, disability or retirement and to such other terms as are set forth in the award agreement. Holders of phantom units have the right to receive an amount in cash equal to, and payable at the same time as, the cash distribution made with respect to a common unit during the period the phantom unit is outstanding.
(2): Calculated by multiplying the number of common units as of June 30, 2008 by $31.77, which was the closing price of our common units on the NYSE on June 30, 2008

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Option Exercises and Stock Vested Table

The following table sets forth the number of shares acquired upon the vesting of phantom unit awards, and the value realized upon exercise or vesting of such awards, for each of our named executive officers in fiscal 2008.

	Stock Awards

Name	Number of Shares Acquired on Vesting (#)		Value Realized on Vesting ($)(1)
T. Casey		6,000	$	232,500
J. Nicola		2,000	$	77,500
T. Sullivan		2,000	$	77,500
R. Falcinelli		2,000	$	77,500
G. Haslinsky		1,500	$	58,125

(1): Represents the number of common units multiplied by the closing price of our common units on the NYSE on the vesting date.

Pension Benefits

We do not maintain any plans that provide for payments or other benefits at, following or in connection with retirement, other than a 401(k) plan that is available to all U.S. employees.

Non-Qualified Deferred Compensation

We do not maintain any defined contribution or other plan that provides for the deferral of compensation on a basis that is not tax-qualified under the Internal Revenue Code.

Potential Payments upon Termination or Change-in-Control

Timothy J. Casey, John J. Nicola, Thomas M. Sullivan and Richard P. Falcinelli have entered into employment agreements with K-Sea Transportation Inc., one of our indirect wholly owned subsidiaries. The employment agreements do not provide for any payments in the event of a change in control. If the employee's employment is terminated without cause or if the employee resigns for good reason, the employee is entitled to severance in an amount equal to the greater of (a) the product of 1.3125 (1.75 multiplied by 0.75) multiplied by the employee's base salary at the time of termination or resignation and (b) the product of 1.75 multiplied by the remaining term of the employee's non-competition provisions multiplied by the employee's base salary at the time of termination or resignation. In addition, we will make COBRA payments on behalf of the employee for a period of one year. If the employee is terminated for cause or terminates employment without good reason (other than death or disability), the employee is entitled to receive only earned but unpaid compensation and benefits. If the employee is terminated due to death, the employee's designated beneficiary or, if none, his estate, is entitled to receive an amount equal to one-half of the employee's annual base salary at the time of death. If the employee is terminated due to disability, the employee is entitled to receive an amount equal to one-half of the employee's annual base salary at the time of disability and, if the employee so elects, COBRA payments for one year following termination.

Under the employment agreements, "cause" and "good reason" are defined as follows:

•: Cause: the employee (1) after repeated notices and warnings, fails to perform his reasonably assigned duties as reasonably determined by us, (2) materially breaches certain provisions of the employment agreement, or (3) commits or engages in a felony or any intentional dishonest, unethical or fraudulent act which materially damages our reputation.

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•: Good reason: the resignation of the employee after the relocation of our principal office outside of a 75-mile radius of our current location unless the new location is mutually agreed upon by us and the employee.

If a change in control were to have occurred as of June 30, 2008, all phantom units awarded to named executive officers awards under our long-term incentive plan would have immediately vested. In addition, all such awards would immediately vest upon the death, disability or retirement (after reaching age 65) of the named executive. If the named executive officer is terminated other than in connection with a change in control or the executive's death, disability or retirement (after reaching age 65), any unvested phantom units awarded to such executive would be forfeited.

The following tables set forth potential amounts payable to our named executive officers upon termination of employment under various circumstances, as if terminated on June 30, 2008.

	Change in Control

	Casey		Nicola		Sullivan		Falcinelli		Haslinsky
Accelerated vesting of phantom units(1)	$	698,940	$	225,567	$	225,567	$	225,567	$	193,797

(1): Determined by multiplying the number of unvested phantom units as of June 30, 2008 by $31.77, which was the closing price of our common units on the NYSE on June 30, 2008.

	Termination Without Cause or Resignation for Good Reason(1)

	Casey		Nicola		Sullivan		Falcinelli		Haslinsky
Severance payment	$	1,050,000	$	735,000	$	735,000	$	735,000		—
COBRA payments		13,260		13,260		13,260		13,260		—

Total	$	1,063,260	$	748,260	$	748,260	$	748,260		—

(1): If the employee is terminated for cause or terminates employment without good reason (other than death or disability), the employee is entitled to receive only earned but unpaid compensation and benefits.

	Termination in the Event of Death

	Casey		Nicola		Sullivan		Falcinelli		Haslinsky
Severance payment	$	150,000	$	105,000	$	105,000	$	105,000	$	—
COBRA payments		13,260		13,260		13,260		13,260		—
Accelerated vesting of phantom units		698,940		225,567		225,567		225,567		193,797

Total	$	862,200	$	343,827	$	343,827	$	343,827	$	193,797

	Termination in the Event of Disability

	Casey		Nicola		Sullivan		Falcinelli		Haslinsky
Severance payment	$	150,000	$	105,000	$	105,000	$	105,000	$	—
COBRA payments		13,260		13,260		13,260		13,260		—
Accelerated vesting of phantom units		698,940		225,567		225,567		225,567		193,797

Total	$	862,200	$	343,827	$	343,827	$	343,827	$	193,797

Director Compensation

K-Sea GP pays no additional remuneration to its employees for serving as directors. Also, neither Mr. Dowling nor Mr. Friedman received any remuneration during fiscal 2008 for serving as a director; however, they were reimbursed for expenses attendant to board membership.

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The following table sets forth a summary of the compensation paid to non-employee directors in fiscal 2008:

Name	Fees Earned or Paid in Cash ($)		Stock Awards ($)(1)		Option Awards ($)		Non-Equity Incentive Plan Compensation ($)		Change in Pension Value and Nonqualified Deferred Compensation Earnings ($)		All Other Compensation ($)		Total ($)(2)(3)

Brian P. Friedman	$	—	$	—	$	—	$	—	$	—	$	—	$	—
James J. Dowling		—	$	93,750		—		—		—		—	$	93,750
Anthony S. Abbate	$	22,000	$	50,724		—		—		—		—	$	72,724
Barry J. Alperin	$	28,000	$	50,724		—		—		—		—	$	78,724
Frank Salerno	$	21,500	$	50,724		—		—		—		—	$	72,224

(1): Represents the number of previously issued phantom units that vested during fiscal 2008 multiplied by the closing price of our common units on the date of grant.
(2): Each of Messrs. Abbate, Alperin and Salerno receive an annual retainer of $10,000 in consideration of their services as director of our K-Sea GP. In addition, for each board meeting that Messrs. Abbate, Alperin and Salerno attend, they receive a fee of $1,000. Furthermore, Messrs. Abbate, Alperin and Salerno, receive $1,000 for each committee meeting they attend (or $500 in the case of an audit committee meeting that falls on the same day as a board meeting). Mr. Alperin receives an additional $1,000 for each audit committee meeting for his services as chairman of the audit committee. On August 7, 2007, the Compensation Committee granted each of Messrs. Abbate, Alperin and Salerno 5,000 phantom units, which vest in five equal annual installments beginning on October 1, 2008. Holders of phantom units also have the right to receive an amount in cash equal to, and payable at the same time as, the cash distribution made with respect to a common unit during the period the phantom unit is outstanding.
(3): We also reimburse directors for out-of-pocket expenses attendant to Board membership.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SECURITYHOLDER MATTERS.

A diagram depicting our current organizational structure is presented below.

K-Sea Transportation Partners L.P.

The following table sets forth the beneficial ownership of units of K-Sea Transportation Partners L.P. as of September 1, 2008 by beneficial owners of 5% or more of such units by each

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director and named executive officer of K-Sea General Partner GP LLC and by all directors and named executive officers as a group.

Name of Beneficial Owners(1)

*Beneficial Owners of 5% or More*
EW Transportation LLC(3)	2,082,500	15.3	%	2,082,500	100.0	%	26.5	%
EW Holding Corp.(4)	—	—		1,181,818	56.8	%	7.5	%
EW Transportation Corp.	—	—		454,545	21.8	%	2.9	%
Tortoise Energy Infrastructure Corporation(5)	612,800	4.5	%	—	—		3.9	%
Tortoise Capital Advisors, L.L.C.(5).	1,165,685	8.6	%	—	—		7.4	%
*Directors and Executive Officers*
James J. Dowling	25,000	*		—	—		*
Timothy J. Casey	26,400	*		—	—		*
Anthony S. Abbate	16,500	*		—	—		*
Barry J. Alperin	11,500	*		—	—		*
Brian P. Friedman(6)	2,126,412	15.6	%	2,082,500	100.0	%	26.8	%
Frank Salerno	5,800	*		—	—		*
John J. Nicola	17,620	*		—	—		*
Thomas M. Sullivan	8,605	*		—	—		*
Richard P. Falcinelli	8,620	*		—	—		*
Gregory J. Haslinsky	5,695	*		—	—		*
All directors and executive officers as a group (12 persons)	2,455,572	18.0	%	2,082,500	100.0	%	28.9	%

*: Less than 1%.
(1): Unless otherwise noted, each beneficial owner has sole voting and dispositive power with respect to the common and subordinated units set forth opposite such holder's name.
(2): Holders of restricted units do not have voting or investment power with respect to such units prior to vesting. Restricted units that are exercisable within 60 days of the date of this report are deemed outstanding for purposes of determining the beneficial ownership and computing the percentage ownership of such person, but are not deemed outstanding for purposes of computing the percentage ownership of any other person. Accordingly, the following common units that may be issued upon the vesting of restricted units are included in the table: Mr. Dowling—3,000; Mr. Casey—7,400; Mr. Nicola—2,420; Mr. Sullivan—2,420; Mr. Falcinelli—2,420; and Mr. Haslinsky—1,920.
(3): EW Transportation LLC is owned by individual investors, including certain of our directors and executive officers, and by KSP Investors A L.P., KSP Investors B L.P. and KSP Investors C L.P. (each, a "KSP Entity"). The table below sets forth the economic interest in, and beneficial ownership of equity interests of, EW Transportation LLC., which beneficial ownership includes units beneficially owned by EW Holding Corp. and EW Transportation Corp., its wholly owned

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subsidiaries. The address of EW Transportation LLC is One Tower Center Blvd. 17^th FL, East Brunswick, New Jersey 08816.

Name of Beneficial Owner			Equity Interest

KSP Investors A L.P(a).	57.6	%	62.9%
KSP Investors B L.P(a).	19.8	%	21.7%
KSP Investors C L.P(a).	12.6	%	13.7%
Park Avenue Transportation Inc.(a)	90.0	%	98.3%
James J. Dowling(b)	—		—
Timothy J. Casey	5.5	%	*
Anthony S. Abbate	—		*
Barry J. Alperin	—		*
Brian P. Friedman(a)	90.0	%	98.3%
Frank Salerno	—		*
John J. Nicola	1.3	%	*
Thomas M. Sullivan	1.3	%	*
Richard P. Falcinelli	1.3	%	*
Gregory S. Haslinsky	*		*
All directors and executive officers of K-Sea General Partner GP LLC as a group (12 persons)	99.5	%	99.9%

*: Less than 1%.
(a): Park Avenue Transportation Inc. is the general partner of each of KSP Investors A L.P., KSP Investors B L.P. and KSP Investors C L.P. (each, a "KSP Entity") and, therefore, has sole voting and dispositive power with respect to the equity interests of EW Transportation LLC owned by each KSP Entity. Mr. Friedman owns 51% of the outstanding shares of capital stock of Park Avenue Transportation Inc., the general partner of each KSP Entity. In addition, Mr. Friedman has an economic interest in FS Private Investments LLC, which in turn has an economic interest in each KSP Entity. Mr. Friedman also has direct economic interests in certain of the KSP Entities.
(b): Mr. Dowling is a limited partner in KSP Investors C L.P. and has an effective 1.38% economic interest in EW Transportation LLC.

(4): EW Holding Corp.'s beneficial ownership includes units beneficially owned by EW Transportation Corp., its wholly owned subsidiary. The address of each entity is One Tower Center Blvd. 17^th FL, East Brunswick, New Jersey 08816.
(5): Based solely on a Schedule 13G/A filed with the Securities and Exchange Commission on February 12, 2008 by Tortoise Energy Infrastructure Corporation ("TYG") and Tortoise Capital Advisors, L.L.C., an investment advisor to TYG and certain managed accounts ("TCA"). TCA acts as an investment advisor to certain closed-end investment companies, including TYG. TCA, by virtue of investment advisory agreements with these investment companies, has all investment and voting power over securities owned of record by these investment companies. However, despite their delegation of investment and voting power to TCA, these investment companies may be deemed to be the beneficial owner of the securities they own of record because they have the right to acquire investment and voting power through termination of their investment advisory agreement with TCA. Thus, TCA has reported that it shares voting power and dispositive power over the securities owned of record by these investment companies, and TYG has reported that it shares voting power and dispositive power over the securities owned of record by it. TCA also acts as an investment advisor to certain managed accounts. Under contractual agreements with individual account holders, TCA, with respect to the securities held in the managed accounts,

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shares investment and voting power with certain account holders, and has no voting power but shares investment power with certain other account holders. Including shares owned of record by TYG and certain managed accounts, TCA has shared voting power with respect to 1,103,518 common units and shared dispositive power with respect to 1,165,685 common units. TYG has shared voting and dispositive power with respect to 612,800 common units. TCA is not the record owner of any common units and disclaims any beneficial interest in such common units. The address of each entity is 10801 Mastin Boulevard, Suite 222, Overland Park, Kansas 66210.

(6): Mr. Friedman owns 51% of Park Avenue Transportation Inc., the general partner of each KSP Entity and, therefore, may be deemed to beneficially own the common and subordinated units held by EW Transportation LLC. The address of each KSP Entity and Park Avenue Transportation Inc. is 520 Madison Avenue, 12^th Floor, New York, New York 10022.

K-Sea General Partner GP LLC

The following table sets forth the economic interest in, and the beneficial ownership of equity interests of, K-Sea General Partner GP LLC, the general partner of our general partner, as of September 1, 2008:

Name of Beneficial Owner

KSP Investors A L.P.	57.6	%
KSP Investors B L.P.	19.8	%
KSP Investors C L.P.	12.6	%
Park Avenue Transportation Inc.(1)	90.0	%
James J. Dowling(2)	—
Timothy J. Casey	5.5	%
Anthony S. Abbate	—
Barry J. Alperin	—
Brian P. Friedman(1)	90.0	%
Frank Salerno	—
John J. Nicola	1.3	%
Thomas M. Sullivan	1.3	%
Richard P. Falcinelli	1.3	%
Gregory S. Haslinsky	—
All directors and executive officers of K-Sea General Partner GP LLC as a group (12 persons)	99.5	%

*: Less than 1%.
(1): Park Avenue Transportation Inc. is the general partner of each of KSP Investors A L.P., KSP Investors B L.P. and KSP Investors C L.P. (each, a "KSP Entity") and, therefore, has sole voting and dispositive power with respect to the equity interests of K-Sea General Partner GP LLC owned by each KSP Entity. Mr. Friedman owns 51% of the outstanding shares of capital stock of the general partner of each KSP Entity.
(2): Mr. Dowling has an effective 1.38% economic interest in K-Sea General Partner GP LLC.

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Equity Compensation Plan Information

The following table sets forth in tabular format a summary of our equity plan information as of September 1, 2008:

		(a)		(b)		(c)

Plan Category		Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans approved by securityholders(1)			—		—		279,769	(2)
Equity compensation plans not approved by securityholders			—		—		—
	Total		—		—		279,769

(1): The K-Sea Transportation Partners L.P. Long-Term Incentive Plan is our only equity compensation plan. No options, warrants or rights have been issued under this plan.
(2): An aggregate of 160,231 restricted units have been issued under the K-Sea Transportation Partners L.P. Long-Term Incentive Plan.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

Distributions and Payments to Our General Partner and Its Affiliates

We generally distribute 98.73% of our available cash to our unitholders, including EW Transportation LLC, EW Holding Corp. and EW Transportation Corp. in their capacity as holders of an aggregate of 2,082,500 subordinated units and 2,082,500 common units, and the remaining 1.27% of our available cash to our general partner. If distributions exceed the $0.50 per unit minimum quarterly distribution and other higher target levels, our general partner is entitled to increasing percentages of the distributions, up to 50% of the distributions above the highest target level. We refer to the rights to the increasing distributions as "incentive distribution rights." Please read "Market For Registrant's Common Equity, Related Securityholder Matters and Issuer Purchases of Equity Securities—Incentive Distribution Rights" in Item 5 of this report. Assuming we pay the $0.50 per unit minimum quarterly distribution on all of our outstanding units, our general partner would receive an annual distribution of $404,894 on its 1.27% general partner interest, and affiliates of our general partner would receive an annual distribution of approximately $4,165,000 on their subordinated units and $4,165,000 on their common units. In July 2008, the board of directors of the general partner of our general partner increased the quarterly cash distribution to $0.77 per common unit. If distributions continue at that level on all of our outstanding units, our general partner would receive an annual distribution of $4,969,972 on its 1.27% general partner interest and incentive distribution rights, and affiliates of our general partner would receive an annual distribution of approximately $6,414,100 on their subordinated units and $6,414,100 on their common units. No assurances can be made, however, that distributions will continue at that level.

Our general partner and its affiliates do not receive a management fee or other compensation for the management of our partnership. Our general partner and its affiliates are entitled to be reimbursed, however, for all direct and indirect expenses incurred on our behalf. Our general partner has sole discretion in determining the amount of these expenses. There were no reimbursed expenses in fiscal 2008 or fiscal 2007.

If our general partner withdraws or is removed, its general partner interest and its incentive distribution rights will either be sold to the new general partner for cash or converted into common units, in each case for an amount equal to the fair market value of those interests.

Upon our liquidation, the partners, including our general partner, will be entitled to receive liquidating distributions according to their particular capital account balances.

Omnibus Agreement

We are a party to an omnibus agreement with KSP Investors A L.P. ("KSP A"), KSP Investors B L.P. ("KSP B"), KSP Investors C L.P. ("KSP C" and, together with KSP A and KSP B, the "KSP Entities"), EW Transportation LLC, EW Acquisition Corp., EW Holding Corp., EW Transportation Corp., K-Sea General Partner LP (our general partner), K-Sea General Partner GP LLC (the general partner of our general partner), K-Sea OLP GP LLC (the general partner of our operating partnership) and K-Sea Operating Partnership L.P. (our operating partnership).

Noncompetition

Under the omnibus agreement, neither the KSP Entities nor their controlled affiliates may engage, either directly or indirectly, in the business of providing refined petroleum product marine transportation, distribution and logistics services in the United States to the extent such business generates qualifying income for federal income tax purposes. The restriction does not apply to the assets that were retained by our predecessors at the closing of our initial public offering in

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January 2004. Except as provided above, neither the KSP Entities nor their controlled affiliates are prohibited from engaging in activities in which they compete directly or indirectly with us. Jefferies Capital Partners, and the funds it manages, are not prohibited from owning assets or engaging in businesses that compete directly or indirectly with us.

Indemnification

Under the omnibus agreement, the KSP Entities, EW Transportation LLC and the subsidiaries of EW Transportation LLC (collectively, "the Indemnitors") have jointly and severally agreed to indemnify us until January 14, 2009 against certain environmental and toxic tort liabilities and, until January 14, 2014, against certain other toxic tort liabilities associated with the operation of the assets before January 14, 2004. Liabilities resulting from changes in law after the closing of our initial public offering are excluded from the environmental indemnity. We have agreed to indemnify the Indemnitors for events and conditions associated with the operation of our assets that occur on or after January 14, 2004 to the extent the Indemnitors are not required to indemnify us. There is an aggregate cap of $10 million on the amount of indemnity coverage provided by the Indemnitors for the environmental and toxic tort liabilities.

The Indemnitors have also agreed to indemnify us for liabilities related to:

•: certain defects in title to the assets contributed to us and failure to obtain certain consents and permits necessary to conduct our business that arise before January 14, 2008;
•: events and conditions associated with any assets retained by the Indemnitors or any of their respective affiliates, whether occurring before or after January 14, 2004;
•: certain liabilities retained by EW Holding Corp., EW Transportation LLC and EW Transportation Corp.; and
•: certain income tax liabilities attributable to the operation of the assets contributed to us prior to the time they were contributed to us in connection with our initial public offering.

Amendments

The omnibus agreement may not be amended without the prior approval of the conflicts committee if the proposed amendment will, in the reasonable discretion of our general partner, adversely affect holders of our common units.

Operations Manager

We currently employ William Sullivan as an operations manager at our Staten Island, New York location. William Sullivan is the brother of Thomas M. Sullivan, Chief Operating Officer and President—Atlantic Region. William Sullivan received total compensation of approximately $164,790 in respect of fiscal 2008. Additionally, we currently employ Bernard Casey as an operations manager at our Honolulu, Hawaii location. Bernard Casey is the brother of Timothy J. Casey, President, Chief Executive Officer and Director. Bernard Casey received total compensation of approximately $184,611, including a housing allowance and relocation expenses, in respect of fiscal 2008. The compensation for Mr. William Sullivan and Mr. Bernard Casey is reviewed and approved by the Compensation Committee.

Purchase of Tugboats

On June 5, 2008, we completed the acquisition of eight tugboats and ancillary equipment from Roehrig Maritime LLC and its affiliates, or Roehrig. The purchase price was $41.5 million in cash. Roehrig and EW Transportation LLC each owned a 50% interest in a joint venture that owned one of

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the tugboats. We paid $5.2 million for the tugboat, which was the estimated fair market value of the tugboat. The transaction was approved by the Conflicts Committee of K-Sea General Partner GP LLC.

Properties

We lease our Staten Island, New York office and pier facilities from, and charter certain vessels to, affiliates of an employee who is not an executive officer or director. Additionally, we utilize one of these affiliates for tank cleaning services. Please read note 7 to our audited consolidated financial statements included elsewhere in this report.

We lease a parcel of land used for storage of vessel parts and equipment from Gordon Smith for $12,000 per month.

Director Independence

The board of directors of K-Sea General Partner GP LLC has determined that Messrs. Abbate, Alperin and Salerno are independent within the meaning of the listing standards for general independence of the New York Stock Exchange. Under the listing standards, the audit committee is required to be composed solely of directors who are independent. The standards for audit committee membership include additional requirements under rules of the SEC.

The listing standards relating to general independence consist of both a requirement for a board determination that the director has no material relationship with the listed company and a listing of several specific relationships that preclude independence. To assist it in making determinations of independence, the board has adopted categorical standards as permitted under the listing standards. Although the board considers all relevant facts and circumstances in assessing whether a director is independent, relationships falling within the categorical standards are not required to be disclosed or separately discussed in this report in connection with the board's independence determinations. A relationship falls within the categorical standards adopted by the board if it:

•

is a type of relationship addressed in

•: the rules of the SEC requiring proxy statement disclosure of relationships and transactions, or
•: the provisions of the New York Stock Exchange Listed Company Manual listing relationships that preclude a determination of independence,

but under those rules neither requires disclosure nor precludes a determination of independence, or

•: consists of charitable contributions by us to an organization where a director is an executive officer and does not exceed the greater of $1 million or 2% of the organization's gross revenue in any of the last three years.

None of the independent directors had relationships relevant to an independence determination that were outside the scope of the board's categorical standards.

Because we are a limited partnership, the listing standards of the New York Stock Exchange do not require K-Sea General Partner GP LLC to have a majority of independent directors or a nominating/corporate governance or compensation committee.

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ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

The following table presents fees for services rendered by PricewaterhouseCoopers LLP during fiscal 2008 and fiscal 2007.

	Year Ended June 30, 2008		Year Ended June 30, 2007

Audit fees(1)	$	1,480,359	$	1,341,700
Audit-related fees(2)		406,159		53,146
Tax fees(3)		861,001		586,939
All other fees		—		—

Total	$	2,747,519	$	1,981,785

(1): Fees for audit of annual financial statements and internal control over financial reporting under the Sarbanes Oxley Act of 2002, reviews of the related quarterly financial statements, and reviews of documents filed with the SEC.
(2): Fees for professional services for consultations related to financial accounting and reporting standards and due diligence related to acquisitions.
(3): Fees related to professional services for tax compliance, tax advice and tax planning.

The audit committee has considered whether the provision of the non-audit services described above is compatible with maintaining the independence of PricewaterhouseCoopers LLP and determined that the provision of such services was compatible with maintaining such independence.

Audit Committee Policies and Procedures for Pre-approval of Audit and Non-Audit Services

Consistent with SEC policies regarding auditor independence, the audit committee is responsible for pre-approving all audit and non-audit services performed by the independent registered public accounting firm. In addition to its approval of the audit engagement, the audit committee takes action at least annually to authorize the performance by the independent registered public accounting firm of several specific types of services within the categories of audit-related services and tax services. Audit-related services include assurance and related services that are reasonably related to the performance of the audit or review of the financial statements. Authorized tax services include compliance-related services such as services involving tax filings, as well as consulting services such as tax planning, transaction analysis and opinions. Services are subject to pre-approval of the specific engagement if they are outside the specific types of services included in the periodic approvals or if they are in excess of specified fee limitations. The audit committee may delegate pre-approval authority to subcommittees. During 2008 no pre-approval requirements were waived.

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PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a)(1) Financial Statements.

See "Index to Financial Statements" set forth on page F-1.

(a)(2) Financial Statement Schedules.

None.

(a)(3) Exhibits.

Exhibit Number		Description

2.1*	—	Agreement and Plan of Merger, dated June 25, 2007, by and among K-Sea Acquisition1, LLC, K-Sea Transportation Partners L.P., Smith Maritime, Ltd., Go Big Chartering, LLC, Gordon L. K. Smith, The Gordon L. K. Smith Trust, Barbara Smith SML Trust, 235LX, LLC and the other parties signatory thereto (incorporated by reference to Exhibit 10.1 to the Partnership's Current Report on Form 8-K filed with the with the Securities and Exchange Commission on June 27, 2007).
3.1.1*	—	Certificate of Limited Partnership of K-Sea Transportation Partners L.P. (incorporated by reference to Exhibit 3.1 to the Partnership's Registration Statement on Form S-1 (Registration No. 107084), as amended (the "Registration Statement"), originally filed with the Securities and Exchange Commission on July 16, 2003).
3.2.2*	—	Amendment No. 1 to the Third Amended and Restated Agreement of Limited Partnership of K-Sea Transportation Partners L.P. (incorporated by reference to Exhibit 3.1 to the Partnership's Current Report on Form 8-K filed with the Securities and Exchange Commission on December 20, 2007).
3.2*	—	Third Amended and Restated Agreement of Limited Partnership of K-Sea Transportation Partners L.P. (including specimen unit certificate for the common units) (incorporated by reference to Exhibit 3.1 to the Partnership's Current Report on Form 8-K filed with the Securities and Exchange Commission on May 5, 2006).
3.3*	—	Certificate of Limited Partnership of K-Sea Operating Partnership L.P. (incorporated by reference to Exhibit 3.3 to the Registration Statement).
3.4*	—	Amended and Restated Agreement of Limited Partnership of K-Sea Operating Partnership L.P. (incorporated by reference to Exhibit 3.4 to the Partnership's Quarterly Report on Form 10-Q for the period ended December 31, 2003).
3.5*	—	Certificate of Limited Partnership of K-Sea General Partner L.P. (incorporated by reference to Exhibit 3.5 to the Registration Statement).
3.6*	—	First Amended and Restated Agreement of Limited Partnership of K-Sea General Partner L.P. (incorporated by reference to Exhibit 3.6 to the Partnership's Quarterly Report on Form 10-Q for the period ended December 31, 2003).
3.7*	—	Certificate of Formation of K-Sea General Partner GP LLC (incorporated by reference to Exhibit 3.7 to the Registration Statement).
3.8*	—	First Amended and Restated Limited Liability Company Agreement of K-Sea General Partner GP LLC (incorporated by reference to Exhibit 3.8 to the Partnership's Quarterly Report on Form 10-Q for the period ended December 31, 2003).

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Exhibit Number		Description

10.1*	—	Contribution, Conveyance and Assumption Agreement, dated as of January 14, 2004, among K-Sea Investors L.P., K-Sea Transportation LLC, EW Holding Corp., K-Sea Transportation Corp., K-Sea Transportation Partners L.P. and K-Sea Operating Partnership L.P. (incorporated by reference to Exhibit 10.2 to the Partnership's Quarterly Report on Form 10-Q for the period ended December 31, 2003).
10.2*	—	Omnibus Agreement, dated as of January 14, 2004, among K-Sea Investors L.P., K-Sea Acquisition Corp., New EW Holding Corp., New K-Sea Transportation Corp., K-Sea General Partner L.P., K-Sea General Partner GP LLC, K-Sea Transportation Partners L.P., K-Sea OLP GP, LLC and K-Sea Operating Partnership L.P. (incorporated by reference to Exhibit 10.3 to the Partnership's Quarterly Report on Form 10-Q for the period ended December 31, 2003).
10.3.1*	—	K-Sea Transportation Partners L.P. Long-Term Incentive Plan (incorporated by reference to Exhibit 10.7 to the Partnership's Quarterly Report on Form 10-Q for the period ended March 31, 2004).
10.3.2*	—	Form of Director Phantom Unit Award Agreement (incorporated by reference to Exhibit 10.1 to the Partnership's Current Report on Form 8-K filed with the Securities and Exchange Commission on October 7, 2004).
10.3.3*	—	Form of Employee Phantom Unit Award Agreement (incorporated by reference to Exhibit 10.2 to the Partnership's Current Report on Form 8-K filed with the Securities and Exchange Commission on October 7, 2004).
10.4*	—	K-Sea Transportation Partners L.P. Employee Unit Purchase Plan (incorporated by reference to Exhibit 4.2 to the Partnership's Registration Statement on Form S-8 (Registration No. 333-117251) filed on July 9, 2004).
10.5*†	—	Employment Agreement, dated as of January 14, 2004, between K-Sea Transportation Inc. and Timothy J. Casey (incorporated by reference to Exhibit 10.9 to the Partnership's Quarterly Report on Form 10-Q for the period ended December 31, 2003).
10.6*†	—	Employment Agreement, dated as of January 14, 2004, between K-Sea Transportation Inc. and John J. Nicola (incorporated by reference to Exhibit 10.10 to the Partnership's Quarterly Report on Form 10-Q for the period ended December 31, 2003).
10.7*†	—	Employment Agreement, dated as of January 14, 2004, between K-Sea Transportation Inc. and Richard P. Falcinelli (incorporated by reference to Exhibit 10.11 to the Partnership's Quarterly Report on Form 10-Q for the period ended December 31, 2003).
10.8*†	—	Employment Agreement, dated as of January 14, 2004, between K-Sea Transportation Inc. and Thomas M. Sullivan (incorporated by reference to Exhibit 10.12 to the Partnership's Quarterly Report on Form 10-Q for the period ended December 31, 2003).
10.9*†	—	Form of Indemnification Agreement (incorporated by reference to Exhibit 10.12 to the Partnership's Annual Report on Form 10-K for the fiscal year ended June 30, 2005)

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Exhibit Number		Description

10.10*	—	Amended and Restated Loan and Security Agreement, dated as of August 14, 2007, among K-Sea Operating Partnership L.P., as borrower, LaSalle Bank National Association and Citibank, N.A., as co-syndication agents, Citizens Bank of Pennsylvania and HSBC Bank USA National Association, as co-documentation agents, and KeyBank National Association, as administrative agent and collateral trustee, and the lenders party thereto (incorporated by reference to Exhibit 10.1 to the Partnership's Current Report on Form 8-K filed with the with the Securities and Exchange Commission on August 20, 2007).
10.12*	—	Master Loan and Security Agreement dated as of April 3, 2006 by and among K-Sea Operating Partnership L.P., as Borrower, Key Equipment Finance Inc., as Lender, and K-Sea Transportation Partners L.P., K-Sea Transportation Inc. and Sea Coast Transportation LLC, as Guarantors (incorporated by reference to Exhibit 10.1 to the Partnership's Current Report on Form 8-K filed with the Securities and Exchange Commission on April 7, 2006).
21.1	—	List of Subsidiaries.
23.1	—	Consent of PricewaterhouseCoopers LLP.
31.1	—	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	—	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	—	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	—	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.1*	—	Loan Agreement, dated as of March 17, 2005, between K-Sea Operating Partnership L.P. and First Union Commercial Corporation (incorporated by reference to Exhibit 10.3 to the Partnership's Quarterly Report on Form 10-Q for the period ended March 31, 2005).
99.2*	—	Loan Agreement, dated as of June 28, 2005, between K-Sea Operating Partnership L.P. and Citizens Asset Finance, a d/b/a of Citizens Leasing Corporation (incorporated by reference to Exhibit 10.16 to the Partnership's Annual Report on Form 10-K for the fiscal year ended June 30, 2005).
99.3*	—	Loan Agreement dated December 19, 2005 between K-Sea Canada Corp. (as Borrower) and Citizens Leasing Corp. d/b/a Citizens Asset Finance (as Lender) (incorporated by reference to Exhibit 10.3 to the Partnership's Quarterly Report on Form 10-Q for the period ended December 31, 2005).
99.4*	—	Loan Agreement dated as of May 12, 2006 among K-Sea Operating Partnership L.P., as Borrower, Citizens Leasing Corporation, as Lender, and Citizens Leasing Corporation, as agent and collateral trustee for the other lenders that may become parties to the loan agreement (incorporated by reference to Exhibit 99.4 to the Partnership's Annual Report on Form 10-K for the fiscal year ended June 30, 2006).

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Exhibit Number					Description

99.5			—		Secured Term Loan Credit Facility dated June 4, 2008 by K-Sea Operating Partnership L.P., as Borrower, and DnB NOR Bank ASA, as Mandated Lead Arranger, Bookrunner, Administrative Agent and Security Trustee, and the banks and financial institutions indentified therein, as Lenders.

*: Incorporated by reference, as indicated.
†: Management contract, compensatory plan or arrangement.

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INDEX TO CONSOLIDATED STATEMENTS

		Page

Report of Independent Registered Public Accounting Firm		F-2
Consolidated Balance Sheets as of June 30, 2008 and 2007		F-4
Consolidated Statements of Operations for the fiscal years ended June 30, 2008, 2007 and 2006		F-5
Consolidated Statements of Partners' Capital for the fiscal years ended June 30, 2008, 2007 and 2006		F-6
Consolidated Statements of Cash Flows for the fiscal years ended June 30, 2008, 2007 and 2006		F-7
Notes to Consolidated Financial Statements		F-9

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Report of Independent Registered Public Accounting Firm

To the General Partner and Unitholders of K-Sea Transportation Partners L.P.,

In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of K-Sea Transportation Partners L.P. and its subsidiaries (collectively, the "Partnership") at June 30, 2008 and June 30, 2007, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2008 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Partnership did not maintain, in all material respects, effective internal control over financial reporting as of June 30, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) because of a material weakness in internal control over financial reporting related to the accuracy of recording depreciation expense and accumulated depreciation, specifically, an effective control was not designed and in place to compare the depreciation expense as calculated under the mid-year convention to what would have been calculated using the dates fixed assets were placed in service. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness referred to above is described in Management's Report on Internal Control over Financial Reporting appearing on Item 9A of this Annual Report on Form 10-K. We considered this material weakness in determining the nature, timing, and extent of audit tests applied in our audit of the consolidated financial statements as of and for the year ended June 30, 2008 and our opinion regarding the effectiveness of the Partnership's internal control over financial reporting does not affect our opinion on those consolidated financial statements. The Partnership's management is responsible for these financial statements and for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in management's report referred to above. Our responsibility is to express opinions on these financial statements and on the Partnership's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

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

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reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

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

As described in Management's Report on Internal Control over Financial Reporting, management has excluded Smith Maritime LLC and K-Sea Hawaii Inc. from its assessment of internal control over financial reporting as of June 30, 2008 because they were acquired by the Partnership in a purchase business combination during fiscal 2008. We have also excluded Smith Maritime LLC and K-Sea Hawaii Inc. from our audit of internal control over financial reporting. Smith Maritime LLC and K-Sea Hawaii Inc. are wholly-owned subsidiaries whose total assets and total revenues represent $136.2 million and $27.3 million, respectively, of the related consolidated financial statement amounts as of and for the year ended June 30, 2008.

PricewaterhouseCoopers LLP
Florham Park, New Jersey
September 10, 2008

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K-SEA TRANSPORTATION PARTNERS L.P.

CONSOLIDATED BALANCE SHEETS

(in thousands)

			June 30,

			2008		2007
Assets
Current Assets
	Cash and cash equivalents		$	1,752	$	912
	Accounts receivable, net			42,090		30,683
	Deferred taxes			1,184		948
	Prepaid expenses and other current assets			19,861		5,073

		Total current assets		64,887		37,616
	Vessels and equipment, net			608,209		358,580
	Construction in progress			40,370		13,285
	Deferred financing costs, net			3,829		1,106
	Goodwill			54,300		16,385
	Other assets			26,713		12,861

		Total assets	$	798,308	$	439,833

Liabilities and Partners' Capital
Current Liabilities
	Current portion of long-term debt		$	16,754	$	9,270
	Accounts payable			35,335		17,091
	Accrued expenses and other current liabilities			19,211		12,044
	Deferred revenue			14,219		10,019

		Total current liabilities		85,519		48,424
	Term loans and capital lease obligation			256,381		137,946
	Credit line borrowings			166,071		97,071
	Other liabilities			6,707		—
	Deferred taxes			3,933		3,739

		Total liabilities		518,611		287,180

	Non-controlling interest in equity of joint venture			4,519		—

Commitments and contingencies
Partners' Capital				275,178		152,653

		Total liabilities and partners' capital	$	798,308	$	439,833

See accompanying notes to consolidated financial statements.

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K-SEA TRANSPORTATION PARTNERS L.P.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per unit amounts)

		For the Years Ended June 30,

		2008			2007			2006
Voyage revenue		$	312,680		$	216,924		$	176,650
Bareboat charter and other revenue			13,600			9,650			6,118

	Total revenues		326,280			226,574			182,768

Voyage expenses			79,427			45,875			37,973
Vessel operating expenses			124,551			96,005			77,325
General and administrative expenses			28,947			20,472			17,309
Depreciation and amortization			48,311			33,415			26,810
Net (gain) loss on sale of vessels			(601	)		102			(313	)

	Total operating expenses		280,635			195,869			159,104

	Operating income		45,645			30,705			23,664
Interest expense, net			21,275			14,097			10,118
Net loss on reduction of debt			—			—			7,224
Other (income) expense, net			(1,827	)		(63	)		(64	)

	Income before provision for income taxes		26,197			16,671			6,386
Provision for income taxes			529			851			484

	Net income	$	25,668		$	15,820		$	5,902
Other comprehensive income:
Fair market value adjustment for interest rate swap, net of taxes			(6,720	)		(698	)		1,136
Foreign currency translation adjustment			10			2			85

	Comprehensive income	$	18,958		$	15,124		$	7,123

General partner's interest in net income		$	405		$	316		$	118
Limited partners' interest:
	Net income	$	25,263		$	15,504		$	5,784
	Net income per unit—basic	$	1.97		$	1.56		$	0.60
	—diluted	$	1.95		$	1.55		$	0.60
	Weighted average units outstanding—basic		12,847			9,936			9,605
	—diluted		12,952			10,020			9,672

See accompanying notes to consolidated financial statements.

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K-SEA TRANSPORTATION PARTNERS L.P.

CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL

(in thousands)

		Limited Partners

		Common					Subordinated
		Common					Subordinated						General Partner			Accumulated Other Comprehensive Income
		Units		$			Units			$			General Partner			Accumulated Other Comprehensive Income			TOTAL
Balance of Partners' Capital at June 30, 2005			4,667	$	96,842			4,165		$	43,688		$	1,410					$	141,940
Issuance of common units under long-term incentive plan			13		390															390
Issuance of common units, net of costs of $1,645			950		32,365															32,365
Issuance of common units for
	Sea Coast acquisition		125		4,376															4,376
Capital contribution														792						792
Fair market value adjustment for interest rate swap																$	1,136			1,136
Foreign currency translation adjustment																	85			85
Distributions to partners					(12,739	)					(9,663	)		(641	)					(23,043	)
Net income					3,276						2,508			118						5,902

Balance of Partners' Capital at June 30, 2006			5,755	$	124,510			4,165		$	36,533		$	1,679		$	1,221		$	163,943
Issuance of common units under long-term incentive plan			23		731															731
Conversion of subordinated units to common units			1,041		8,575			(1,041	)		(8,575	)								—
Fair market value adjustment for interest rate swap, net of taxes																	(698	)		(698	)
Foreign currency translation adjustment																	2			2
Distributions to partners					(15,713	)					(10,121	)		(1,311	)					(27,145	)
Net income					9,619						5,885			316						15,820

Balance of Partners' Capital at June 30, 2007			6,819	$	127,722			3,124		$	23,722		$	684		$	525		$	152,653

Issuance of common units under long-term incentive plan			23		725															725
Conversion of subordinated units to common units, net of tax related adjustments (note 1)			1,041		3,382			(1,041	)		(3,382	)								—
Fair market value adjustment for interest rate swap, net of taxes																	(6,720	)		(6,720	)
Foreign currency translation adjustment																	10			10
Issuance of common units, net of transaction costs of $6,332			3,500		131,918															131,918
Issuance of common units for the Smith Maritime Group			250		11,298															11,298
Distributions to partners					(29,076	)					(8,330	)		(2,968	)					(40,374	)
Net income					19,892						5,371			405						25,668

Balance of Partners' Capital at June 30, 2008			11,633	$	265,861			2,083		$	17,381		$	(1,879	)	$	(6,185	)	$	275,178

See accompanying notes to consolidated financial statements.

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K-SEA TRANSPORTATION PARTNERS L.P.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

				For the Years Ended June 30

				2008			2007			2006
Cash flows from operating activities:
	Net income			$	25,668		$	15,820		$	5,902
	Adjustments to reconcile net income to net cash provided by operating activities:
	Depreciation and amortization				48,820			33,720			27,144
	Payment of drydocking expenditures				(25,908	)		(15,357	)		(12,506	)
	Provision for doubtful accounts				549			454			232
	Deferred income taxes				478			395			172
	Net (gain) loss on sale of vessels				(601	)		102			(313	)
	Gain on settlement of legal proceedings				(2,073	)		—			—
	Unit compensation costs				1,156			803			499
	Net loss on reduction of debt				—			—			7,224
	Prepayment costs on long-term debt				—			—			(4,196	)
	Other				245			167			71
	Changes in operating working capital:
		Accounts receivable			(12,248	)		(4,623	)		(6,488	)
		Prepaid expenses and other current assets			(13,437	)		3,159			(2,362	)
		Accounts payable			7,957			547			1,898
		Accrued expenses and other current liabilities			5,505			2,176			(1,677	)
		Deferred revenue			4,200			3,827			4,187
		Other assets			196			(14	)		285

			Net cash provided by operating activities		40,507			41,176			20,072

Cash flows from investing activities:
	Vessel acquisitions				(60,475	)		(16,184	)		(13,105	)
	Acquisition of the Smith Maritime Group, net of cash acquired				(168,881	)		—			—
	Acquisition of Sea Coast, net of cash acquired				—			—			(76,512	)
	Construction of tank vessels				(51,987	)		(33,315	)		(20,702	)
	Other capital expenditures				(13,282	)		(14,756	)		(9,050	)
	Proceeds from Title XI reserve funds				—			—			2,876
	Proceeds from settlement of legal proceedings				2,073			—			—
	Net proceeds on sale of vessels				2,192			740			11,095
	Investment in joint venture				(1,836	)		—			—
	Other				—			(189	)		—

			Net cash used in investing activities		(292,196	)		(63,704	)		(105,398	)

Cash flows from financing activities:
	Net increase in credit line borrowings				69,000			43,056			6,903
	Gross proceeds from equity offering				138,250			—			34,010
	Payments to Title XI reserve funds				—			—			(674	)
	Proceeds from issuance of long-term debt				266,931			14,891			109,437
	Redemption of Title XI bonds				—			—			(36,788	)
	Payment of term loans				(171,840	)		(7,722	)		(2,059	)
	Financing costs paid—equity offerings				(6,234	)		(98	)		(1,645	)
	Financing costs paid—debt issuance				(3,204	)		(368	)		(869	)
	Capital contribution from general partner				—			—			792
	Distributions to partners				(40,374	)		(27,145	)		(23,043	)

			Net cash provided by financing activities		252,529			22,614			86,064

Cash and cash equivalents:
	Net increase (decrease)				840			86			738
	Balance at beginning of year				912			826			88

			Balance at end of year	$	1,752		$	912		$	826

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K-SEA TRANSPORTATION PARTNERS L.P.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(in thousands)

					For the Years Ended June 30

					2008		2007		2006
Supplemental disclosure of cash flow information:
	Cash paid during the year for:
		Interest, net of amounts capitalized			$	21,799	$	14,457	$	9,767

		Income taxes			$	375	$	13	$	322

Supplemental disclosure of non-cash investing and financing activities:
		Acquisition of the Smith Maritime Group:
			Value of common units issued to sellers		$	11,298

			Debt assumed		$	23,511

			Acquisition of the Sea Coast Transportation LLC:
				Value of common units issued to sellers					$	4,376

				Debt assumed					$	—

			Purchase of vessel with note payable		$	3,000

See accompanying notes to consolidated financial statements.

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K-SEA TRANSPORTATION PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except unit and per unit amounts)

Note 1: Basis of Presentation

K-Sea Transportation Partners L.P. (the "Partnership") provides marine transportation, distribution and logistics services for refined petroleum products in the United States. On January 14, 2004, the Partnership completed its initial public offering of common units representing limited partner interests and, in connection therewith, also issued to its predecessor companies an aggregate of 4,165,000 subordinated units representing limited partner interests. During the subordination period the subordinated units are not entitled to receive any distributions until the common units have received their minimum quarterly distribution plus any arrearages from prior quarters. The subordination period will end once the Partnership meets certain financial tests described in its partnership agreement, but it generally cannot end before December 31, 2008. When the subordination period ends, all subordinated units will convert into common units on a one-for-one basis, and the common units will no longer be entitled to arrearages. The Partnership met certain financial tests described in its partnership agreement for early conversion of the first 50% of subordinated units and, as a result, 1,041,250 of these subordinated units converted to common units on each of February 14, 2007 and February 14, 2008. The Partnership's consolidated statement of partners' capital includes a reclassification of $4,676 related to the allocation of a deferred tax benefit from common limited partners capital to subordinated limited partners capital. Such reclassification is included in the line item "Conversion of subordinated units to common units, net of tax related adjustments" in such statement. Additionally, certain prior year amounts have been reclassified to conform to the current year presentation.

The Partnership's general partner, K-Sea General Partner L.P., holds 202,447 general partner units, representing a 1.45% general partner interest in the Partnership as of June 30, 2008, as well as certain incentive distribution rights in the Partnership. Incentive distribution rights represent the right to receive an increasing percentage of cash distributions after the minimum quarterly distribution, any cumulative arrearages on common units, and certain target distribution levels have been achieved. The target distribution levels entitle the general partner to receive an additional 13% of total quarterly cash distributions in excess of $0.55 per unit until all unitholders have received $0.625 per unit, an additional 23% of total quarterly cash distributions in excess of $0.625 per unit until all unitholders have received $0.75 per unit, and an additional 48% of total quarterly cash distributions in excess of $0.75 per unit. The Partnership is required to distribute all of its available cash from operating surplus, as defined in its partnership agreement. Additional contributions by the general partner to the Partnership upon issuance of new common units are not mandatory.

Note 2: Summary of Significant Accounting Policies

Basis of Consolidation. These consolidated financial statements are for the Partnership and its wholly owned subsidiaries. All material inter-company transactions and balances have been eliminated in consolidation.

Cash and Cash Equivalents. The Partnership considers all highly liquid investments with original maturities of three months or less to be cash equivalents.

Vessels and Equipment. Vessels and equipment are recorded at cost, including capitalized interest where appropriate, and depreciated using the straight-line method over the estimated useful lives of the individual assets as follows: tank vessels—ten to twenty-five years; tugboats—ten to twenty years; and pier and office equipment—five years. For single-hull tank vessels, such useful lives are limited to the remaining period of operation prior to mandatory retirement as required by the Oil Pollution Act of

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K-SEA TRANSPORTATION PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except unit and per unit amounts)

Note 2: Summary of Significant Accounting Policies (Continued)

1990 ("OPA 90"). OPA 90 requires that the 25 (including four chartered-in) single-hull vessels currently operated by the Partnership, representing approximately 24% of total barrel-carrying capacity as of June 30, 2008, be retired or retrofitted to double-hull by December 31, 2014.

Included in vessels and equipment are drydocking expenditures that are capitalized and amortized over three years based on regulatory drydocking requirements. Drydocking of vessels is required both by the United States Coast Guard and by the applicable classification society, which in the Partnership's case is the American Bureau of Shipping. Such drydocking activities include, but are not limited to, the inspection, refurbishment and replacement of steel, engine components, tailshafts, mooring equipment and other parts of the vessel.

Major renewals and betterments of assets are capitalized and depreciated over the remaining useful lives of the assets. Leasehold improvements are capitalized and depreciated over the shorter of their useful lives or the remaining term of the lease. Maintenance and repairs that do not improve or extend the useful lives of the assets are expensed.

The Partnership assesses impairment on long-lived assets used in operations when indicators of impairment are present. An impairment loss would be recognized if the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amounts, and to the extent the carrying value exceeds fair value by appraisal.

When property items are retired, sold or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts with any gain or loss on the dispositions included in income. Assets to be disposed of are reported at the lower of their carrying amounts or fair values, less the estimated costs of disposal.

Fuel Supplies. Fuel used to operate the Partnership's vessels, and on hand at the end of the period, is recorded at cost. Such amounts totaled $8,389 and $2,660 as of June 30, 2008 and 2007, respectively, and are included in prepaid expenses and other current assets in the consolidated balance sheets.

Deferred Financing Costs. Direct costs associated with obtaining long-term financing are deferred and amortized over the terms of the related financings. Deferred financing costs are stated net of accumulated amortization which, at June 30, 2008 and 2007, amounted to $939 and $457, respectively.

Goodwill. Goodwill represents the excess of the purchase price over the fair value of the net assets of the acquired business at the date of the acquisition. The Partnership tests for impairment at least annually using a two-step process. The first step identifies potential impairment by comparing the fair value of a reporting unit with its book value, including goodwill. If the fair value of the reporting unit exceeds the carrying amount, goodwill is not impaired and the second step is not necessary. If the carrying value exceeds the fair value, the second step calculates the possible impairment loss by comparing the implied fair value of goodwill with the carrying amount. If the implied fair value of goodwill is less than the carrying amount, a write-down is recorded.

Intangible Assets. Included in other assets are intangible assets acquired as part of business combinations which are recorded at fair value at their acquisition date and are amortized on a straight-line basis over their estimated useful lives. The Partnership reviews intangible assets to evaluate whether events or changes have occurred that would suggest an impairment of carrying value. An

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K-SEA TRANSPORTATION PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except unit and per unit amounts)

Note 2: Summary of Significant Accounting Policies (Continued)

impairment would be recognized when expected undiscounted future operating cash flows are lower than the carrying value, and to the extent the carrying value exceeds fair value. Intangible assets are stated net of accumulated amortization, which at June 30, 2008 and 2007 amounted to $7,486 and $4,694, respectively.

Revenue Recognition. The Partnership earns revenue under contracts of affreightment, voyage charters, time charters and bareboat charters. For contracts of affreightment and voyage charters, revenue is recognized based upon the relative transit time in each period, with expenses recognized as incurred. Although contracts of affreightment and certain contracts for voyage charters may be effective for a period in excess of one year, revenue is recognized over the transit time of individual voyages, which are generally less than ten days in duration. For time charters and bareboat charters, revenue is recognized ratably over the contract period, with expenses recognized as incurred. Estimated losses on contracts of affreightment and charters are accrued when such losses become evident.

Deferred revenue. Deferred revenue arises in the normal course of business from advance billings under charter agreements. Revenue is recognized ratably over the contract period.

Use of Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the reporting period. The most significant estimates relate to depreciation of the vessels, liabilities incurred from workers' compensation, commercial and other claims, the allowance for doubtful accounts and deferred income taxes. Actual results could differ from these estimates.

Concentrations of Credit Risk. Financial instruments which potentially subject the Partnership to concentrations of credit risk are primarily cash and cash equivalents and trade accounts receivable. The Partnership maintains its cash and cash equivalents on deposit at a financial institution in amounts that, at times, may exceed insurable limits.

With respect to accounts receivable, the Partnership extends credit based upon an evaluation of a customer's financial condition and generally does not require collateral. The Partnership maintains an allowance for doubtful accounts for potential losses, totaling $1,970 and $939 at June 30, 2008 and 2007, respectively, and does not believe it is exposed to concentrations of credit risk that are likely to have a material adverse effect on its financial position, results of operations or cash flows. For the fiscal years ended June 30, 2008, 2007 and 2006, the Partnership's allowance for doubtful amounts was impacted by additional charges of $549, $454, and $232, and write-offs of ($7), $206 and $209, respectively.

Currency Translation. Assets and liabilities related to the Partnership's Canadian subsidiary are translated at the exchange rate prevailing on the balance sheet date, and revenues and expenses are translated at the weighted average exchange rate for the period. Translation gains and losses represent other comprehensive income and are reflected in partners' capital.

Derivative instruments. The Partnership utilizes derivative financial instruments to reduce interest rate risks. The Partnership does not hold or issue derivative financial instruments for trading purposes. Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and

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K-SEA TRANSPORTATION PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except unit and per unit amounts)

Note 2: Summary of Significant Accounting Policies (Continued)

Hedging Activities, ("SFAS No. 133"), as amended, establishes accounting and reporting standards for derivative instruments and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. Changes in the fair value of those instruments are reported in earnings or other comprehensive income depending on the use of the derivative and whether it qualifies for hedge accounting. The accounting for gains and losses associated with changes in the fair value of the derivative and the effect on the consolidated financial statements will depend on its hedge designation and whether the hedge is highly effective in achieving offsetting changes in fair value of cash flows of the asset or liability hedged.

Income Taxes. The Partnership's effective tax rate comprises the New York City Unincorporated Business Tax and foreign taxes on its operating partnership, plus federal, state, local and foreign corporate income taxes on the income of the operating partnership's corporate subsidiaries.

Deferred taxes represent the tax effects of differences between the financial reporting and tax bases of the Partnership's assets and liabilities, as applicable, at enacted tax rates in effect for the years in which the differences are expected to reverse. The recoverability of deferred tax assets is evaluated and a valuation allowance established when it is more likely than not that some portion or all of the deferred tax assets will not be realized.

Unit-Based Compensation. The Partnership has adopted a long-term incentive plan that permits the granting of awards to directors and employees in the form of restricted units and unit options. The Partnership recognizes compensation cost for the restricted units on a straight-line basis over the vesting periods of the awards, which range from three to five years. No unit options have been granted.

Net Income per Unit. Basic net income per unit is determined by dividing net income, after deducting the amount of net income allocated to the general partner interest, by the weighted average number of units outstanding during the period. Diluted net income per unit is calculated in the same manner as basic net income per unit, except that the weighted average number of outstanding units is increased to include the dilutive effect of outstanding unit options or restricted units granted under the Partnership's long-term incentive plan. For diluted net income per unit, the weighted average units outstanding were increased by 105, 84 and 67 for the fiscal years ended June 30, 2008, 2007 and 2006, respectively, due to the dilutive effect of restricted units.

As required by Emerging Issues Task Force Issue No. 03-6, "Participating Securities and the Two-Class Method under FASB Statement No. 128, Earnings per Share" ("EITF 03-6"), the general partner's interest in net income is calculated as if all net income for the year was distributed according to the terms of the partnership agreement. The partnership agreement does not provide for the distribution of net income; rather, it provides for the distribution of available cash, which is a contractually defined term that generally means all cash on hand at the end of each quarter after provision for certain cash requirements. Unlike available cash, net income is affected by non-cash items, such as depreciation and amortization.

As described in note 1 above, the general partner's incentive distribution rights entitle it to receive an increasing percentage of distributions when the quarterly cash distribution exceeds $0.55 per unit. Under EITF 03-6, the impact of these increasing percentages is reflected in the calculation of the general partner's interest in quarterly net income when such net income exceeds $0.55 per unit.

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K-SEA TRANSPORTATION PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except unit and per unit amounts)

Note 2: Summary of Significant Accounting Policies (Continued)

Distributions per Unit. Distributions to limited partners were $2.92, $2.60 and $2.32 per unit for the years ended June 30, 2008, 2007 and 2006, respectively.

Note 3: Acquisitions

The Smith Maritime Group

On August 14, 2007, the Partnership, through certain wholly owned subsidiaries, completed the acquisition of all of the equity interests in Smith Maritime, Ltd., Go Big Chartering, LLC and Sirius Maritime, LLC (collectively, the "Smith Maritime Group"). This transaction is part of the Partnership's business strategy to expand its fleet through strategic and accretive acquisitions. The Smith Maritime Group provides marine transportation and logistics services to major oil companies, oil traders and refiners in Hawaii and along the West Coast of the United States. The aggregate purchase price was $203,690. As further described in note 5 below, the Partnership financed the cash portion of the purchase through additional borrowings under its revolving credit agreement and a bridge loan.

Under the purchase method of accounting, the Partnership has included the Smith Maritime Group's results of operations from August 14, 2007, the acquisition date, through June 30, 2008. The aggregate recorded purchase price of $203,690 consisted of $168,881 of cash, including $1,496 of direct expenses, $23,511 of assumed debt, and $11,298 representing 250,000 common units valued at their average market value during the five-day period surrounding the announcement of the definitive agreement. The Partnership allocated the purchase price to the tangible assets, intangible assets, and liabilities acquired based on their fair values. The purchased identifiable intangible assets are being amortized on a straight-line basis over their respective estimated useful lives. The excess of the purchase price over the fair value of the acquired net assets has been recorded as goodwill, which is not amortized but which will be reviewed annually for impairment. Such purchase price was in excess of the net assets acquired because the Partnership believes that the cash flows generated from the acquired business will be accretive. The Partnership's allocation of the purchase price is as follows. This allocation, due to the finalization of obtaining information relating to the acquisition, has been adjusted at June 30, 2008 from previously reported amounts to reflect a decrease in goodwill of $403 to adjust certain prepaid expenses and other current assets.


Current assets		$	8,229
Vessels and equipment, net			158,660
Intangible assets			20,115
Goodwill			37,915
Other assets			9

			224,928
Liabilities and capital lease obligations			21,238

	Total purchase price	$	203,690

The identifiable intangible assets purchased in the acquisition include customer relationships and covenants not to compete, valued at $17,400 which will be amortized over 20 years and $100 which will be amortized over 3 years, respectively. Amortization expense for the customer relationships and the covenant not to compete for the year ended June 30, 2008 were $725 and $28, respectively. The annual

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K-SEA TRANSPORTATION PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except unit and per unit amounts)

Note 3: Acquisitions (Continued)

amortization expense for the identifiable intangibles is $903. A substantial portion of the goodwill is expected to be deductible for tax purposes.

The acquisition also included an option to purchase a 50% interest in a tank barge, at less than fair market value, which resulted in recognition of an intangible asset of $2,615 at the acquisition date. Upon exercise of the option in October 2007, the Partnership obtained a 50% interest in a joint venture newly-formed to own and charter the tank barge, which joint venture is considered a variable interest entity and is consolidated in the accompanying financial statements. As a result, the consolidated balance sheet reflects $4,519 for the non-controlling interest in this joint venture at June 30, 2008. Other income (expense) includes an allocation of $337 for the non-controlling interest's portion of the joint venture's net income. The joint venture has a term loan, which matures on October 1, 2012, that is collateralized by the related tank barge. Borrowings outstanding on this term loan at June 30, 2008 were $2,830.

Pro Forma Financial Information

The unaudited pro forma financial information for the fiscal years ended June 30, 2008 and 2007 combines the historical results of the Partnership with the historical results of the Smith Maritime Group for the period preceding the August 14, 2007 acquisition. The unaudited financial information in the table below summarizes the combined results of operations of the Partnership and the Smith Maritime Group, on a pro forma basis, as though the acquisition had been completed as of the beginning of each period presented. This pro forma financial data is presented for information purposes only and is not necessarily indicative of the results of operations that would have been achieved had the acquisition actually taken place at those dates.

	For the Year Ended June 30,

	2008		2007
	(unaudited)
Revenues	$	332,618	$	283,546
Net income	$	27,636	$	28,103
Basic net income per limited partner unit	$	1.99	$	2.01
Fully diluted net income per limited partner unit	$	1.97	$	2.00

Sea Coast Transportation

On October 18, 2005, the Partnership completed the acquisition, through a wholly owned subsidiary, of all of the membership interests in Sea Coast Transportation LLC (formerly Sea Coast Towing, Inc.) ("Sea Coast") from Marine Resources Group, Inc. ("MRG"). Also on October 18, 2005, Sea Coast acquired four tugboats from MRG. This transaction is part of the Partnership's business strategy to expand its fleet through strategic and accretive acquisitions. Sea Coast is a provider of marine transportation and logistics services to major oil companies, oil traders and refiners along the West Coast of the United States and Alaska. The aggregate purchase price for Sea Coast and the four tugboats comprised $77,000 in cash and 125,000 common units representing limited partner interests in the Partnership. The Partnership financed the cash portion of the purchase price through additional borrowings under its credit agreement.

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K-SEA TRANSPORTATION PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except unit and per unit amounts)

Note 3: Acquisitions (Continued)

Under the purchase method of accounting, the Partnership has included Sea Coast's results of operations from October 18, 2005, the date of acquisition. The aggregate recorded purchase price was $82,382, comprising $77,000 of cash, $4,376 representing 125,000 common units, and $1,006 of direct expenses. The Partnership allocated the purchase price to the tangible assets, intangible assets, and liabilities acquired based on their fair values. The purchased identifiable intangible assets are being amortized on a straight-line basis over their respective estimated useful lives. The excess of the purchase price over the fair value of the acquired net assets has been recorded as goodwill, which is not amortized but which will be reviewed annually for impairment. The amount of goodwill that is deductible for tax purposes was $14,693. The total purchase price has been allocated as follows:


Working capital	$	550
Vessels and equipment, net		55,931
Intangible assets		10,150
Goodwill		16,579
Other assets		711

		83,921
Capital lease obligation		1,539

Total purchase price	$	82,382

The identifiable intangible assets purchased in the Sea Coast acquisition included those in the table below. Amortization expense for the customer relationships and the covenant not to compete for the year ended June 30, 2006 were $647 and $75, respectively; the annual amortization expense is $970 and $112, respectively.

		Gross Value		Weighted- average Useful Life

Customer relationships		$	9,700	10 years
Covenant not to compete			450	4 years

	Total	$	10,150	9.7 years

The expected future amortization expense related to these intangible assets is as follows:

Year ending June 30,

2009		$	1,082
2010			1,008
2011			970
2012			970
2013 and thereafter			3,233

	Total	$	7,263

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K-SEA TRANSPORTATION PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except unit and per unit amounts)

Note 3: Acquisitions (Continued)

Pro Forma Financial Information

The unaudited financial information in the table below summarizes the combined results of operations of the Partnership and Sea Coast, on a pro forma basis, as though the acquisition had been completed as of the beginning of the period presented. This pro forma financial data is presented for information purposes only and is not necessarily indicative of the results of operations that would have been achieved had the acquisition actually taken place at that date. The unaudited pro forma financial information combines the historical results of the Partnership with the historical results of Sea Coast for the fiscal 2006 period preceding the October 18, 2005 acquisition.

	For the Year Ended June 30, 2006

	(unaudited)
Revenues	$	201,338
Net income	$	7,996
Basic net income per limited partner unit	$	0.81
Fully diluted net income per limited partner unit	$	0.81

Note 4: Vessels and Equipment and Construction in Progress

At June 30, 2008 and 2007, vessels and equipment and construction in progress comprised the following:

	2008			2007

Vessels	$	739,153		$	475,441
Pier and office equipment		5,967			5,967

		745,120			481,408
Less accumulated depreciation and amortization		(136,911	)		(122,828	)

Vessels and equipment, net	$	608,209		$	358,580

Construction in progress	$	40,370		$	13,285

Depreciation and amortization of vessels and equipment for the fiscal years ended June 30, 2008, 2007 and 2006 was $45,519, $31,411 and $25,274, respectively. Such depreciation and amortization includes amortization of drydocking expenditures for the fiscal years ended June 30, 2008, 2007 and 2006 of $13,679, $9,826 and $7,391, respectively.

On June 5, 2008, the Partnership completed the acquisition of eight tugboats and ancillary equipment from Roehrig Maritime LLC and its affiliates. The purchase price was $41,541 in cash and was financed using available cash plus borrowings under a bridge loan agreement as described in note 5.

As described in note 3, on August 14, 2007 the Partnership acquired the Smith Maritime Group, including $158,660 of vessels, pier and office equipment.

During fiscal 2008, the Partnership took delivery of the following newbuild vessels: in June 2008, an 80,000-barrel tank barge, the DBL 77; in March 2008, a 28,000-barrel tank barge, the DBL 25; in

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K-SEA TRANSPORTATION PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except unit and per unit amounts)

Note 4: Vessels and Equipment and Construction in Progress (Continued)

December 2007, a 28,000-barrel tank barge, the DBL 24; and in September 2007, a 28,000-barrel tank barge, the DBL 23. Additionally, the Partnership acquired two additional tugboats and two tank barges during the year. These tank barges and tugboats cost, in the aggregate, $51,888. The Partnership has also entered into agreements with shipyards for the construction of additional new tank barges, as follows:

Vessels		Expected Delivery

Two 80,000-barrel tank barges		1^st – 2^nd Quarter fiscal 2009
One 185,000-barrel articulated tug-barge unit		2^nd Quarter fiscal 2010
One 100,000-barrel tank barge		2^nd Quarter fiscal 2010
Four 50,000-barrel tank barges		3^rd Quarter fiscal 2010 – 2^nd Quarter fiscal 2011

Construction in progress at June 30, 2008 comprises expenditures for each of the tank barges described above.

In June 2007, the partnership took delivery of a 28,000-barrel tank barge, the DBL 22. In March 2007, the partnership took delivery of a 100,000-barrel tank barge, the DBL 104. In January 2007 and August 2006, the partnership took delivery of two 28,000-barrel tank barges, the DBL 27 and the DBL 26, respectively. Additionally, the Partnership acquired five tugboats during fiscal year 2007. These tank barges and tugboats cost, in the aggregate, $40,124.

On March 15, 2006 and May 11, 2006, the Partnership took delivery of two new 28,000-barrel tank barges, the DBL 28 and DBL 29, respectively. On December 30, 2005, the Partnership took delivery of a new 100,000-barrel tank barge, the DBL 103. The total cost, after addition of certain special equipment and integration with existing tugboats, plus capitalized interest, was approximately $23,421. As described in note 3, on October 18, 2005 the Partnership acquired Sea Coast, including $55,931 of vessels, pier and office equipment. On October 20, 2005, the Partnership acquired an 85,000-barrel integrated tug-barge unit for $13,105, including transaction costs.

Barge Incident

On November 11, 2005, one of the Partnership's tank barges, the DBL 152, struck submerged debris in the U.S. Gulf of Mexico, causing significant damage which resulted in the barge eventually capsizing. The barge was declared a constructive total loss, and the Partnership has received the total $11,000 insured value from its hull and machinery insurers. The excess of this insurance recovery over the net book value of the barge, totaling $415, is included as a net gain on disposal of vessels in the consolidated statements of operations for the year ended June 30, 2006.

Note 5: Financing

Credit Agreement

The Partnership maintains a revolving credit agreement with a group of banks, with KeyBank National Association as administrative agent and lead arranger, to provide financing for its operations. On August 14, 2007, the Partnership amended and restated its revolving credit agreement to provide

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K-SEA TRANSPORTATION PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except unit and per unit amounts)

Note 5: Financing (Continued)

for (1) an increase in availability to $175,000 under the primary revolving facility, with an increase in the term to seven years, (2) an additional $45,000 364-day senior secured revolving credit facility, (3) amendments to certain financial covenants and (4) a reduction in interest rate margins. Under certain conditions, the Partnership has the right to increase the primary revolving facility by up to $75,000, to a maximum total facility amount of $250,000. On November 7, 2007, the Partnership exercised this right and increased the facility by $25,000 to $200,000. The primary revolving facility is, and the 364-day facility was, collateralized by a first perfected security interest in vessels and certain equipment and machinery related to such vessels having a total fair market value of approximately $275,000. The revolving facility bears interest at the London Interbank Offered Rate, or LIBOR (2.46% at June 30, 2008), plus a margin ranging from 0.7% to 1.5% depending on the Partnership's ratio of total funded debt to EBITDA (as defined in the agreement). The Partnership also incurs commitment fees, payable quarterly, on the unused amount of the facility at a rate ranging from 0.15% to 0.30% based also upon the ratio of Total Funded Debt to EBITDA. On August 14, 2007, the Partnership borrowed $67,000 under the primary revolving facility and $45,000 under the 364-day facility to fund a portion of the purchase price of the Smith Maritime Group (see note 3).

Also on August 14, 2007, the Partnership entered into a bridge loan facility for up to $60,000 with an affiliate of KeyBank National Association in connection with the Smith Maritime Group acquisition. While outstanding, the bridge loan facility bore interest at an annual rate of LIBOR plus 1.5%, and was to mature on November 12, 2007. During an event of default, the bridge loan facility provided for interest at an annual rate of LIBOR plus 7.5%.

Both the $45,000 364-day senior secured facility and the $60,000 bridge loan were repaid on September 26, 2007 upon closing of an offering of common units by the Partnership. See "—Common Unit Offerings" below. As of June 30, 2008, the Partnership had $162,350 outstanding on the revolving facility.

The Partnership initially entered into this credit agreement on March 24, 2005. The five-year $80,000 credit agreement replaced the Partnership's existing $47,000 revolving credit agreement, which was repaid and terminated. On October 18, 2005, to partially finance the acquisition of Sea Coast (see note 3), the Partnership amended the credit agreement to increase the available borrowings to $120,000, of which $77,000 was drawn down to pay the cash portion of the purchase price. On November 29, 2005, to fund the redemption of its Title XI bonds (see "Title XI Bonds" below), the Partnership further amended the credit agreement to increase the maximum borrowings to $155,000. On April 3, 2006, the Partnership used the net proceeds from the issuance of $80,000 in new term loans to repay outstanding borrowings under the credit agreement, and further amended it to reduce the available borrowings, to release certain vessels from the collateral pool, and to reduce certain covenant requirements. During fiscal 2007, the Partnership further amended the credit agreement to add additional bank participants, increase the available borrowings to $125,000, amend certain financial covenants and reduce interest rates.

The Partnership also maintains a separate $5,000 revolver with a commercial bank to support its daily cash management activities. Advances under this facility bear interest at 30-day LIBOR plus a margin of 1.40%; amounts outstanding at June 30, 2008 totaled $3,721.

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K-SEA TRANSPORTATION PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except unit and per unit amounts)

Note 5: Financing (Continued)

On November 30, 2007, the Partnership entered into agreements with a financial institution to swap the LIBOR-based, variable rate interest payments on $104,850 of its credit agreement borrowings for fixed rates, for a term of three years. The fixed rates to be paid by the Partnership average 4.01% plus the applicable margin. The fair value of the swap contract of ($1,156) as of June 30, 2008 is included in other liabilities in the consolidated balance sheet.

Term Loans and Capital Lease Obligation

Term loans and capital lease obligations outstanding at June 30, 2008 and 2007 were as follows. Descriptions of these borrowings are included below:

		2008		2007

Term loans due:
	March 24, 2008	$	—	$	9,821
	October 5, 2008		4,265		—
	May 1, 2012		3,418		—
	October 1, 2012		2,830		—
	December 31, 2012		9,102		9,889
	January 1, 2013		13,243		13,360
	April 30, 2013		15,321		16,607
	May 1, 2013		71,916		75,923
	June 1, 2014		18,869		20,321
	June 1, 2015		16,497		—
	July 1, 2015		27,465		—
	December 1, 2016		10,381		—
	February 28, 2018		5,370		—
	April 1, 2018		4,275		—
	May 1, 2018		46,858		—
	June 1, 2018		4,300		—
	August 1, 2018		17,990		—
Capital lease obligations and other			1,035		1,295

			273,135		147,216
	Less current portion		16,754		9,270

		$	256,381	$	137,946

On June 5, 2008, the Partnership closed the last of eleven fixed-rate term loans aggregating $72,147, which were entered into between April 30, 2008 and June 5, 2008. These loans were arranged with a financial institution, which assigned all but two to other financial institutions. The loans have a term of ten years, maturing between April 1, 2018 and June 1, 2018, except one loan for $16,497 which has a term of seven years and matures on June 1, 2015. These loans bear a weighted average interest rate of 6.35% and are repayable in an aggregate fixed monthly payment of $624. Final balloon payments of principal total $10,664 on June 1, 2015 and $24,836 between April 1, 2018 and June 1, 2018. The loans are collateralized by eleven tank barges and tugboats. The proceeds of these loans were used to repay borrowings under the Partnership's credit agreement, except for $15,000 which was used to repay an advance on such loans which was borrowed on March 21, 2008 concurrent with repayment of a separate term loan which came due and was repaid on March 24, 2008. These term loan agreements contain customary events of default, including a cross default to the Partnership's

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K-SEA TRANSPORTATION PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except unit and per unit amounts)

Note 5: Financing (Continued)

credit agreement, and also the fixed charge coverage ratio requirement that is included in the credit agreement. Borrowings outstanding on these loans totaled $71,930 at June 30, 2008.

Also on June 5, 2008, in connection with the acquisition of eight tugboats and ancillary equipment described in note 4 above, the Partnership entered into a bridge loan agreement with a financial institution, pursuant and subject to which the lender agreed to extend a bridge loan in the original principal amount of $31,730. The bridge loan was to mature on October 5, 2008; the Partnership has since refinanced $27,465 of the bridge loan with term loans and repaid the balance on July 13, 2008 using its revolving credit agreement. The term loans all have terms of seven years. Two of the loans totaling $19,860 bear a weighted average interest rate of 6.52% and are repayable in an aggregate fixed monthly amount of $182, with final balloon payments of principal totaling $12,141 due at maturity on July 1, 2015. A third term loan bears interest at LIBOR plus 2.0%, is repayable in fixed principal amounts ranging from $31 to $42 monthly, plus interest, and matures on July 1, 2015 at which time a final balloon payment of principal of $4,605 is due. These term loans are collateralized by, in the aggregate, six tugboats. Borrowings outstanding on these term loans totaled $27,465 at June 30, 2008.

On June 4, 2008, the Partnership entered into a credit agreement (the "ATB Agreement") with a financial institution pursuant to which the lender agreed to provide financing during the construction period, and thereafter, for a 185,000-barrel articulated tug-barge unit in an amount equal to 80% of the acquisition costs of the unit, up to a maximum of $57,600. Obligations under the ATB Agreement are collateralized during the construction period by an assignment of the Partnership's rights under the construction contract with the related shipyard and, after delivery, by a first preferred mortgage interest in the tug-barge unit. Interest is payable quarterly at the applicable LIBOR rate plus a margin ranging from 1.05% to 1.85% based upon the Partnership's ratio of Total Funded Debt to EBITDA, as defined in the agreement. At the delivery date of the unit, which is expected during the fourth quarter of calendar 2009, the aggregate of the advances taken during the construction period will be converted to a term loan repayable in twenty-eight quarterly payments covering 37.5% of the term loan, which are expected to approximate $771 each, plus interest at LIBOR plus the applicable margin. The twenty eighth and final payment will also include a balloon payment of 62.5% of the acquisition cost, estimated at $36,000. The ATB Agreement contains the same financial covenants as are contained in the Partnership's credit agreement described above, as well as customary events of default. Outstanding borrowings were $10,381 at June 30, 2008 under the agreement. On June 13, 2008, the Partnership also entered into an agreement with the Bank to swap the LIBOR-based, variable rate interest payments on the outstanding balance of the ATB agreement to a fixed rate of 5.08% over the same term, resulting in a total fixed interest rate of 5.08% plus the applicable margin. The fair value of the swap contract of ($881) as of June 30, 2008 is included in other liabilities in the consolidated balance sheet.

On February 22, 2008, the Partnership closed a new ten-year, $5,425 term loan to finance the purchase of a tugboat. The loan bears interest at 6.15%, and is repayable in monthly installments of $46 with a final payment at maturity of $2,417. The loan is collateralized by the related tugboat. The principal balance of the loan was $5,370 at June 30, 2008.

On August 14, 2007, in connection with the acquisition of the Smith Maritime Group, the Partnership assumed two term loans totaling $23,511. The first, in the amount of $19,464, bears interest at LIBOR plus 1.25% and is repayable in equal monthly installments of $147, plus interest, through August 2018. The second, in the amount of $4,047, bears interest at LIBOR plus 1.0% and is repayable in monthly installments ranging from $59 to $81, plus interest, through May 2012. These loans are

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K-SEA TRANSPORTATION PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except unit and per unit amounts)

Note 5: Financing (Continued)

collateralized by three tank barges. The Partnership also agreed with the lender to assume the two existing interest rate swaps relating to these two loans. The LIBOR-based, variable rate interest payments on these loans have been swapped for fixed payments at an average rate of 5.44%, plus a margin, over the same terms as the loans. Borrowings outstanding on the term loans were $21,408 at June 30, 2008. The fair value of the swap contract of ($1,219) as of June 30, 2008 is included in other liabilities in the consolidated balance sheet.

On April 3, 2006, the Partnership entered into an agreement with a lending institution to borrow $80,000, for which it pledged six tugboats and six tank barges as collateral. The proceeds of these loans were used to repay indebtedness under the Partnership's credit agreement. Borrowings are represented by six notes which have been assigned to other lending institutions. These loans bear interest at a rate equal to LIBOR plus 1.40%, and are repayable in 84 monthly installments with the remaining principal payable at maturity on May 1, 2013. The agreement contains certain prepayment premiums. Borrowings outstanding on these loans totaled $71,916 as of June 30, 2008. Also on April 3, 2006, the Partnership entered into an agreement with the lending institution to swap the one-month, LIBOR based, variable interest payments on the $80,000 of loans for a fixed payment at a rate of 5.2275%, over the same terms as the loans. This swap results in a fixed interest rate on the Notes of 6.6275% for their seven-year term. The fair value of the swap contract of ($3,451) and $446 as of June 30, 2008 and 2007, respectively, is included in other liabilities and other assets in the consolidated balance sheet.

On December 19, 2005, one of the Partnership's subsidiaries entered into a seven year Canadian dollar term loan to refinance purchase of an integrated tug-barge unit. The proceeds of US $13,000 were used to repay borrowings under the credit agreement which had been used to finance purchase of the unit. The loan bears interest at a fixed rate of 6.59%, is repayable in 60 monthly installments of CDN $136 and 23 monthly installments of CDN $216 with the remaining principal amount of CDN $7,688 payable at maturity, and is collateralized by the related tug-barge unit and one other tank barge. Borrowings outstanding on this loan total US $13,243 as of June 30, 2008.

In May 2006, the Partnership entered into an agreement to borrow up to $23,000 to partially finance construction of two 28,000-barrel and one 100,000-barrel tank barges. The loan bears interest at 30-day LIBOR plus 1.40%, and is repayable in monthly principal payments of $121, plus accrued interest, over seven years, with the remaining principal amount of $10,281 payable at maturity on June 1, 2014. The loan is collateralized by the related tank barges and two other tank vessels. Borrowings outstanding on this loan total $18,869 at June 30, 2008.

In June 2005, the Partnership entered into an agreement to borrow up to $18,000 to finance the purchase of an 80,000-barrel double-hull tank barge and construction of two 28,000-barrel double-hull tank barges. The loan bears interest at 30-day LIBOR plus 1.71%, and is repayable in monthly principal installments of $107 with the remaining principal amount of $9,000 payable at maturity. The loan is collateralized by the related tank barges. Borrowings outstanding on this loan were $15,321 at June 30, 2008.

In March 2005, the Partnership entered into an agreement to borrow up to $11,000 to partially finance construction of a 100,000-barrel tank barge. The loan bears interest at 30-day LIBOR plus

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K-SEA TRANSPORTATION PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except unit and per unit amounts)

Note 5: Financing (Continued)

1.05%, and is repayable in monthly principal installments of $66 with the remaining principal amount of $5,500 payable at maturity. The loan is collateralized by the related tank barge. Borrowings outstanding on this loan totaled $9,102 at June 30, 2008.

Title XI Bonds

On June 7, 2002, the Partnership's predecessor issued bonds aggregating $40,441, in four series, through a private placement for the purpose of providing long-term financing for the construction of four new double-hull tank vessels. The bonds were guaranteed by the Maritime Administration of the U.S. Department of Transportation ("MARAD") pursuant to Title XI of the Merchant Marine Act of 1936 (the "Title XI bonds"). On November 29, 2005, the Partnership redeemed the outstanding $36,787 principal balance of Title XI bonds, paid $828 of accrued interest, and made a make-whole payment of $3,953 as required under the Trust Indenture. The Partnership funded the redemption using funds from its credit agreement. After writing off $2,702 in unamortized deferred financing costs relating to the Title XI bonds, and after costs and expenses relating to the transaction, the Partnership recorded a loss on reduction of debt of $6,898. Retirement of the Title XI bonds improved the Partnership's borrowing flexibility, and eliminated certain restrictive covenants, collateral requirements, and working capital constraints.

Restrictive Covenants

The agreements governing the credit agreement and the term loans contain restrictive covenants that, among others, (a) prohibit distributions under defined events of default, (b) restrict investments and sales of assets, and (c) require the Partnership to adhere to certain financial covenants, including defined ratios of fixed charge coverage and funded debt to EBITDA, as defined in the agreement.

Interest

Interest expense, net of amounts capitalized, and interest income, was as follows:

	For the Years Ended June 30,

	2008			2007			2006
Interest costs incurred	$	22,955		$	14,878		$	10,670
Less interest capitalized		1,592			738			471

Interest expense		21,363			14,140			10,199
Interest income		(88	)		(43	)		(81	)

Interest expense, net	$	21,275		$	14,097		$	10,118

The weighted average interest rate on the term loans was 5.9% and 6.6% at June 30, 2008 and 2007, respectively, which debt is subject to prepayment fees. Interest payable totaled $1,739 and $1,238 as of June 30, 2008 and 2007, respectively, and is included in accrued expenses and other current liabilities in the consolidated balance sheets. At June 30, 2008 and 2007, accounts payable included book overdrafts of $5,445 and $2,022, respectively, representing outstanding checks.

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K-SEA TRANSPORTATION PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except unit and per unit amounts)

Note 5: Financing (Continued)

Maturities of Long-Term Debt

As of June 30, 2008, maturities of long-term debt for each of the next five years were as follows:


2009	$	16,754
2010		18,845
2011		21,122
2012		22,411
2013		89,838

Common Unit Offerings

On September 26, 2007, the Partnership closed a public offering of 3,500,000 common units representing limited partner interests. The price to the public was $39.50 per unit. The net proceeds of $131,918 from the offering, after payment of underwriting discounts and commissions and expenses, were used to repay borrowings under the credit agreement, including the $45,000 364-day facility, and also the $60,000 bridge loan facility described above. In addition, as described in note 3, the Partnership issued 250,000 common units to the sellers in the Smith Maritime Group acquisition, valued at $11,298, in a transaction not involving a public offering.

On October 14, 2005, the Partnership closed a public offering of 950,000 common units. Net proceeds of $33,060 from the offering, after payment of underwriting discounts and commissions but before payment of expenses associated with the offering, were used to repay borrowings under the Partnership's credit agreement. In addition, as described in note 3, the Partnership issued 125,000 common units to the sellers, valued at $4,376, in a transaction not involving a public offering.

On June 1, 2005, the Partnership issued and sold 500,000 common units in a private placement for proceeds of $16,000, before expenses associated with the offering. The proceeds were used to repay indebtedness incurred under the Partnership's credit agreement in connection with its December 2004 vessel acquisition.

Note 6: Income Taxes

The components of the provision for income taxes for the fiscal years ended June 30, 2008, 2007 and 2006 are as follows:

		2008			2007		2006

Current:
	Federal	$	—		$	102	$	—
	State and local		36			24		—
	Foreign		15			330		312

			51			456		312

Deferred:
	Federal		380			152		59
	State and local		310			218		79
	Foreign		(212	)		25		34

			478			395		172

Provision for income taxes		$	529		$	851	$	484

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K-SEA TRANSPORTATION PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except unit and per unit amounts)

Note 6: Income Taxes (Continued)

A reconciliation of income tax expense, as computed using the federal statutory income tax rate of 34%, to the Partnership provision for income taxes for the fiscal years ended June 30, 2008, 2007 and 2006 is as follows:

		2008			2007			2006

Tax at federal statutory rate of 34%		$	8,906		$	5,668		$	2,171
Entities not subject to federal income taxes			(8,517	)		(5,393	)		(1,885	)
State and local income taxes, net of federal benefit			312			241			79
Foreign taxes, net of federal benefit			(187	)		340			318
Valuation allowance			—			—			(201	)
Other			15			(5	)		2

	Total	$	529		$	851		$	484

Significant components of deferred income tax liabilities and assets as of June 30, 2008 and 2007 are as follows:

			2008		2007

Deferred tax liabilities:
	Book basis of vessels and equipment in excess of tax basis		$	5,343	$	4,461

		Total deferred tax liabilities	$	5,343	$	4,461

Deferred tax assets:
	Allowance for doubtful accounts		$	104	$	58
	Accrued expenses			997		898
	Net operating loss carry-forwards			1,357		679
	Other			136		35

		Total deferred tax assets	$	2,594	$	1,670

The Partnership had temporary differences at June 30, 2008 primarily related to the excess of the book basis of vessels and equipment over the related tax basis in the amount of $168,903. This amount will result in taxable income, in the years these differences reverse, that will be included in the overall allocation of taxable income to the unitholders of the Partnership.

At June 30, 2008, the Partnership's corporate subsidiaries had federal net operating losses of $997 which begin to expire in 2024, state and local net operating losses of $4,910 which begin to expire in 2024, and foreign net operating losses of $3,355 which begin to expire in 2026.

Note 7: Commitments and Contingencies

The Partnership leases its New York office and pier facilities from an affiliate of an employee under an agreement which extends through April 2009. Terms of the agreement provide for annual rental payments of $400 annually through April 2009. Rent expense was $400 for the fiscal years ended June 30, 2008, 2007 and 2006. In addition, a subsidiary of the Partnership leases office and pier facilities and a water treatment facility in Virginia under an agreement with a third party that extends through January 2010. The Virginia lease agreement requires annual rental payments of $250 through January 8, 2010. The subsidiary receives $84 from sublease of a portion of the Virginia property which extends to December 31, 2009. The subsidiary has an option to buy the Virginia premises for an aggregate purchase price of $4,200. Rent expense, net of the sublease, was $166 for the fiscal years

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K-SEA TRANSPORTATION PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except unit and per unit amounts)

Note 7: Commitments and Contingencies (Continued)

ended June 30, 2008, 2007 and 2006. The Partnership and subsidiary are also responsible for real estate taxes, insurance and all other costs associated with occupying these properties. Effective July 1, 2006, the Partnership also leases office space in New Jersey under an agreement with a third party that extends through December 2013. The New Jersey lease requires annual rental payments of $392 through December 2009, $408 through December 2010 and $423 through December 2013. Rent expense was $260 and $220 for the fiscal years ended June 30, 2008 and 2007, respectively.

In connection with the acquisition of Sea Coast Transportation LLC, the Partnership assumed agreements with the port authority in Seattle, Washington covering the lease of terminal facilities and docking rights for its vessels. The lease expires in October 2008 with a renewal option for one additional five-year term. The lease requires monthly payments of $26 with escalation each year based on the consumer price index. Rent expense for the years ended June 30, 2008, 2007 and 2006 was $239, $265 and $208, respectively. Additionally, the Partnership leases one tugboat and three barges under non-cancelable operating leases which expire in October 2008 through February 2011. The future minimum lease payments for the one tug and three barge operating leases as of June 30, 2008 are as follows:

Year ending June 30,

2009		$	1,841
2010			383
2011			192
2012			—
2013 and thereafter			—

	Total	$	2,416

Charter expenses were $2,724, $2,995 and $2,092 for the tug and barge operating leases for the years ended June 30, 2008, 2007 and 2006, respectively.

Included in total revenues are time charter and bareboat charter revenues of $157,209, $105,621 and $60,582 for the fiscal years ended June 30, 2008, 2007 and 2006, respectively. Such revenues include $514 , $513 and $513 for the fiscal years ended June 30, 2008, 2007 and 2006, respectively, related to vessels chartered to an affiliate of an employee. The Partnership also utilizes such affiliate for tank cleaning services at a cost of $1,601, $1,894 and $1,609 for the years ended June 30, 2008, 2007 and 2006, respectively. The Partnership's time charters and bareboat charters extend over various periods which expire between 2008 and 2014.

At June 30, 2008, minimum contractually agreed future revenue under time and bareboat charters was as follows:

Year ending June 30,

2009		$	167,972
2010			76,976
2011			43,438
2012			19,218
2013 and thereafter			28,587

	Total	$	336,191

The Partnership has entered into employment agreements with certain of its executive officers. Each of the employment agreements had an initial term of one year, which is automatically extended

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K-SEA TRANSPORTATION PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except unit and per unit amounts)

Note 7: Commitments and Contingencies (Continued)

for successive one-year terms unless either party gives 30-days written notice prior to the end of the term that such party desires not to renew the employment agreement. These executive officers currently receive aggregate base annual salaries of $960. In addition, each employee is eligible to receive an annual bonus award based upon the performance of the Partnership and individual performance. If the employee's employment is terminated without cause or if the employee resigns for good reason, the employee will be entitled to severance in an amount equal to the greater of (a) the product of 1.3125 (1.75 multiplied by 0.75) multiplied by the employee's base salary at the time of termination or resignation and (b) the product of 1.75 multiplied by the remaining term of the employee's non-competition provisions multiplied by the employee's base salary at the time of termination or resignation.

The European Union is currently working toward a new directive for the insurance industry, called "Solvency 2", that is expected to become law within three to four years and require increases in the level of free, or unallocated, reserves required to be maintained by insurance entities, including protection and indemnity clubs that provide coverage for the maritime industry. The West of England Ship Owners Insurance Services Ltd. ("WOE"), a mutual insurance association based in Luxembourg, provides the Partnership's protection and indemnity insurance coverage and would be impacted by the new directive. In anticipation of these new regulatory requirements, the WOE has assessed its members an additional capital call which it believes will contribute to achievement of the projected required free reserve increases. The Partnership's capital call of $1,119 was paid during calendar 2007. A further request for capital may be made in the future; however, the amount of such further assessment, if any, cannot be reasonably estimated at this time. As a shipowner member of the WOE, the Partnership has an interest in the WOE's free reserves, and therefore has recorded the additional $1,119 capital call as an investment, at cost, subject to periodic review for impairment. This amount is included in other assets in the June 30, 2008 balance sheet.

As discussed in Note 4, in November 2005 one of the Partnership's tank barges, the DBL 152, struck submerged debris in the U.S. Gulf of Mexico, causing significant damage which resulted in the barge eventually capsizing. At the time of the incident, the barge was carrying approximately 120,000 barrels of No. 6 fuel oil, a heavy oil product. In January 2006, submerged oil recovery operations were suspended and a monitoring program, which sought to determine if any recoverable oil could be found on the ocean floor, was begun. In February 2007, the Coast Guard agreed to end the cleanup and response phase, including the Partnership's obligation to conduct any further monitoring of the area around the spill site. The Partnership's incident response effort is complete. The Partnership is not aware of any further recovery, cleanup or other costs. However, if any such costs are incurred, they are expected to be paid by the Partnership's insurers.

The Partnership's insurers responded to the pollution-related costs and environmental damages resulting from the incident, paying approximately $65,000 less $60 in total deductibles. In December 2007, a court made a final determination of liability in this case, resulting in a financial recovery by the Partnership's insurers, and also by the Partnership. As a result of the ruling, the Partnership was awarded a reimbursement of certain expenses totaling $2,073, which is included in other expense (income) in the Partnership's consolidated statements of operations. The Partnership received payment in January 2008.

The Partnership is the subject of various claims and lawsuits in the ordinary course of business for monetary relief arising principally from personal injuries, collisions and other casualties. Although the outcome of any individual claim or action cannot be predicted with certainty, the Partnership believes that any adverse outcome, individually or in the aggregate, would be substantially mitigated by

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K-SEA TRANSPORTATION PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except unit and per unit amounts)

Note 7: Commitments and Contingencies (Continued)

applicable insurance or indemnification from previous owners of the Partnership's assets, and would not have a material adverse effect on the Partnership's financial position, results of operations or cash flows. The Partnership is also subject to deductibles with respect to its insurance coverage that range from $25 to $100 per incident and provides on a current basis for estimated payments thereunder. Insurance claims receivable outstanding totaled $8,801 and $959 at June 30, 2008 and 2007, respectively, and is included in prepaid expenses and other current assets. Insurance claims payable at June 30, 2008 and 2007 totaled $7,594 and $1,468, respectively, and is included in accrued expenses and other current liabilities.

As discussed in Note 4, the Partnership has agreements with shipyards for the construction of one new articulated tug-barge unit and seven additional new tank barges.

Note 8: Long-term Incentive Plan

In January 2004, K-Sea General Partner GP LLC, the general partner of the Partnership's general partner, adopted the K-Sea Transportation Partners L.P. Long-term Incentive Plan (the "Plan") for directors and employees of K-Sea General Partner GP LLC and its affiliates. The Plan currently permits the grant of awards covering an aggregate of 440,000 common units in the form of restricted units and unit options and is administered by the Compensation Committee of the Board of Directors of K-Sea General Partner GP LLC. The Board of Directors of K-Sea General Partner GP LLC, in its discretion, may terminate the Plan at any time with respect to any restricted units for which a grant has not yet been made, and also reserves the right to alter or amend the Plan from time to time, including increasing the number of common units with respect to which awards may be granted subject to unitholder approval as required by the New York Stock Exchange. No change in any outstanding grant may be made, however, which would materially impair the rights of the participant without the consent of such participant. Subject to certain exceptions, restricted units are subject to forfeiture if employment is terminated prior to vesting. As the restricted units vest, K-Sea General Partner GP LLC has the option to either acquire common units in the open market for delivery to the recipient or distribute newly issued common units from the Partnership. In all cases, K-Sea General Partner GP LLC is reimbursed by the Partnership for such expenditures.

The Partnership follows the provisions of FAS 123R, which states "equity instruments awarded to employees is to be estimated at fair value at the grant date." There is only a service condition ("vesting period") in respect to the awards, they are not conditional upon any performance or market conditions. The Partnership estimated forfeitures over the vesting period to be zero. Therefore, the fair value estimate is based solely upon the unit price at the grant dates.

Unit compensation expense amounted to $1,411, $1,007 and $652, for the years ended June 30, 2008, 2007 and 2006, respectively. The total fair value of units vested during the years June 30, 2008, 2007 and 2006 were $725, $731, and $390, respectively. As of June 30, 2008, there was $2,962 of unamortized compensation cost related to non-vested restricted units, which is expected to be recognized over a remaining weighted-average vesting period of 3.1 years. A summary of the status of the Partnership's restricted unit awards as of June 30, 2008 and 2007, and of changes in restricted units outstanding under the Partnership's long-term incentive plan during the year ended June 30, 2008, is as follows:

			Weighted- average grant price

Restricted unit awards outstanding at June 30, 2007	76,872		$	32.01
Units granted	48,912		$	43.02
Units vested and issued	(22,900	)	$	31.67

Restricted unit awards outstanding at June 30, 2008	102,884		$	37.32

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K-SEA TRANSPORTATION PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except unit and per unit amounts)

Note 9: Retirement Plans

Effective June 29, 2006, the Partnership's money purchase pension plan was terminated and all the assets were merged into the Partnership's 401(k) Savings Plan (the "Plan"). Also effective June 29, 2006, the Sea Coast defined contribution plan was terminated and all the assets were merged into the Plan. The Plan is a defined contribution plan that qualifies under Section 401(k) of the Internal Revenue Code. The Plan covers all eligible employees. The Plan provides that eligible employees may make contributions, subject to Internal Revenue Code limitations, and the Partnership will match the first two percent of employee compensation contributed, subject to a maximum amount. In addition, the plan allows for an annual discretionary employer contribution up to five percent of an employee's annual compensation. Employer contribution expense under the Plan totaled $3,743 and $2,981 for the years ended June 30, 2008 and 2007, respectively. The Plan expenses for the fiscal year ended June 30, 2006, which excluded the money purchase pension plan and the Sea Coast defined contribution plan, totaled $499.

Under the terms of the money purchase pension plan, the Partnership contributed five percent of each eligible employee's annual compensation, as defined in the plan document. For the money purchase plan, expenses totaled $1,127 for the fiscal year ended June 30, 2006.

In connection with the purchase of Sea Coast, the Partnership acquired an additional defined contribution plan that qualified under Section 401(k) of the Internal Revenue Code. The plan covered all eligible employees and provided that eligible employees may make contributions, subject to Internal Revenue Code limitations, and the Partnership would match the first 25% of employee compensation contributed, up to a maximum of 4%. In addition, the plan allowed for an annual discretionary employer contribution up to 4% of an employee's annual compensation. Employer contribution expenses under this plan totaled $372 from the acquisition date through June 30, 2006.

Accrued expenses for all retirement plans totaled $2,881 and $2,173 as of June 30, 2008 and 2007, respectively, and are included in accrued expenses and other current liabilities in the consolidated balance sheets. Additionally, accrued expenses for payroll-related costs totaled $3,969 and $2,989 as of June 30, 2008 and 2007, respectively, which are also included in accrued expenses and other current liabilities in the consolidated balance sheets.

Note 10: Major Customers

Three customers accounted for 16%, 12% and 11% of consolidated total revenues for the fiscal year ended June 30, 2008. Two customers accounted for 19% and 17% of consolidated total revenues for the fiscal year ended June 30, 2007 and two customers accounted for 20% and 15% of consolidated total revenues for the fiscal year ended June 30, 2006.

There were no customers that accounted for 10% or more of consolidated accounts receivable at June 30, 2008 and 2007.

Note 11: Fair Value of Financial Instruments

As of June 30, 2008, the fair value of long-term debt was approximately $445,851 based on the borrowing rates currently available to the Partnership for bank loans with similar terms and average maturities. The fair value of the Partnership's other financial instruments approximated their cost bases as such instruments are short-term in nature or were recently negotiated.

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K-SEA TRANSPORTATION PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except unit and per unit amounts)

Note 12: New Accounting Pronouncements

In February 2006, the FASB issued FASB Statement No. 155, "Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and 140" ("FAS 155"). FAS 155 amends FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" and FASB Statement No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". The Partnership adopted FAS 155 as of July 1, 2007, and such adoption did not have any impact on its financial position, results of operations or cash flows.

In June 2006, the FASB issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with FASB Statement No. 109, "Accounting for Income Taxes". FIN 48 prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Partnership adopted FIN 48 as of July 1, 2007, and such adoption did not have any impact on its financial position, results of operations or cash flows.

At the date of the adoption of FIN 48, there were no unrecognized tax benefits and consequently no related interest and penalties. The significant jurisdictions in which the Partnership files tax returns and is subject to tax include New York City, Venezuela and Puerto Rico. The significant jurisdictions in which the Partnership's corporate subsidiaries file tax returns and are subject to tax include the United States and Canada. The tax returns filed in the United States and state jurisdictions are subject to examination for the years 2004 through 2007 and in foreign jurisdictions for the years 2005 through 2007. The Partnership has adopted a policy to record tax related interest and penalties under interest expense and general and administrative expenses, respectively.

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K-SEA TRANSPORTATION PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except unit and per unit amounts)

Note 12: New Accounting Pronouncements (Continued)

method of applying the purchase method in a number of significant aspects. FAS 141(R) is effective on a prospective basis for all business combinations for which the acquisition date is on or after the beginning of the first fiscal year subsequent to December 15, 2008, with the exception of the accounting for valuation allowances on deferred taxes and acquired tax contingencies. FAS 141(R) amends FAS 109 such that adjustments made to valuation allowances on deferred taxes and acquired tax contingencies associated with acquisitions that closed prior to the effective date of FAS 141(R) would also apply the provisions of FAS 141(R). The Partnership is currently analyzing the impact, if any, of this standard.

In December 2007, the FASB issued FASB Statement No. 160, "Non-controlling Interests in Consolidated Financial Statements, an Amendment of ARB 51" ("FAS 160"). FAS 160 amends ARB 51 to establish new standards that will govern the accounting for and reporting of (1) non-controlling interest in partially owned consolidated subsidiaries and (2) the loss of control of subsidiaries. FAS 160 is effective on a prospective basis for all fiscal years, and interim periods within those fiscal years beginning, on or after December 15, 2008, except for the presentation and disclosure requirements, which will be applied retrospectively. The Partnership is currently analyzing the impact, if any, of this standard.

In March 2008, the FASB issued FASB Statement No. 161, "Disclosure about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133" ("FAS 161"). FAS 161 requires qualitative disclosure about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. FAS 161 is effective for fiscal years beginning after November 15, 2008. The Partnership is currently analyzing the impact, if any, of this standard.

In April 2008, the FASB issued FSP No. FAS 142-3, Determination of the Useful Life of Intangible Assets (FSP FAS 142-3). FSP 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 142, Goodwill and Other Intangible Assets. FSP FAS 142-3 allows an entity to use its own historical experience in renewing or extending similar arrangements, adjusted for entity-specific factors, in developing assumptions about renewal or extension used to determine the useful life of a recognized intangible asset. As a result, the determination of intangible asset useful lives is now consistent with the method used to determine the period of expected cash flows used to measure the fair value of the intangible assets, as described in other accounting principles. The guidance for determining the useful life of a recognized intangible asset is to be applied prospectively to intangible assets acquired after the effective date. Disclosure requirements are to be applied prospectively to all intangible assets recognized as of, and subsequent to, the effective date. The provisions of FSP FAS 142-3 are effective as of the beginning of the Partnership's fiscal year 2010. The Partnership is currently analyzing the impact, if any, of this standard.

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K-SEA TRANSPORTATION PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(dollars in thousands, except unit and per unit amounts)

Note 12: New Accounting Pronouncements (Continued)

reporting. This statement will go into effect 60 days after the Securities and Exchange Commission approves related auditing rules and is not expected to have a material effect on the Partnership's consolidated financial statements.

Note 13: Quarterly Results of Operations (Unaudited)

The following summarizes certain quarterly results of operations for each of the fiscal years ended June 30, 2008 and 2007:

		Three Months Ended

		September 30		December 31		March 31		June 30
		(in thousands, except per unit amounts)
Fiscal 2008
Total revenues		$	71,761	$	83,676	$	80,749	$	90,094
Operating income		$	12,049	$	12,423	$	9,329	$	11,844
Net income		$	6,006	$	8,976	$	4,325	$	6,361
General partners' interest in net income		$	149	$	314	$	63	$	93
Limited partners' interest in net income		$	5,857	$	8,662	$	4,262	$	6,268
Net income per limited partner unit:
	Basic	$	0.57	$	0.63	$	0.31	$	0.46
	Diluted	$	0.56	$	0.63	$	0.31	$	0.45

		Three Months Ended

		September 30		December 31		March 31		June 30
		(in thousands, except per unit amounts)
Fiscal 2007
Total revenues		$	54,910	$	56,031	$	55,630	$	60,003
Operating income		$	7,517	$	7,758	$	7,601	$	7,829
Net income		$	4,086	$	3,946	$	3,996	$	3,792
General partners' interest in net income		$	82	$	79	$	80	$	75
Limited partners' interest in net income		$	4,004	$	3,867	$	3,916	$	3,717
Net income per limited partner unit:
	Basic	$	0.40	$	0.39	$	0.39	$	0.37
	Diluted	$	0.40	$	0.39	$	0.39	$	0.37

Note 14: Subsequent Event

On August 20, 2008, the Partnership completed a public offering of 2,000,000 common units representing limited partner interests. The price to the public was $25.80 per unit. The net proceeds of $50,000 from the offering, after payment of underwriting discounts and commissions, were used to repay borrowings under the Partnership's credit agreements and to make construction progress payments in connection with the Partnership's vessel new-building program.

F-31

Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	K-SEA TRANSPORTATION PARTNERS L.P.
	By: K-SEA GENERAL PARTNER L.P., its General Partner.
	By: K-SEA GENERAL PARTNER GP LLC, its General Partner
September 15, 2008	By:	/s/ TIMOTHY J. CASEY Timothy J. Casey President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated:

Name	Title	Date


/s/ TIMOTHY J. CASEY Timothy J. Casey	President and Chief Executive Officer and Director (Principal Executive Officer)	September 15, 2008
/s/ JOHN J. NICOLA John J. Nicola	Chief Financial Officer (Principal Financial and Accounting Officer)	September 15, 2008
/s/ JAMES J. DOWLING James J. Dowling	Chairman of the Board and Director	September 15, 2008
/s/ ANTHONY S. ABBATE Anthony S. Abbate	Director	September 15, 2008
/s/ BARRY J. ALPERIN Barry J. Alperin	Director	September 15, 2008
/s/ BRIAN P. FRIEDMAN Brian P. Friedman	Director	September 15, 2008
/s/ FRANK SALERNO Frank Salerno	Director	September 15, 2008

EX-21.1 2 a2187896zex-21_1.htm EXHIBIT 21.1
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Exhibit 21.1

List of Subsidiaries

Name of Subsidiary		Jurisdiction of Organization

K-Sea OLP GP LLC		Delaware
K-Sea Operating Partnership L.P.		Delaware
K-Sea Transportation Inc.		Delaware
Norfolk Environmental Services, Inc.		Delaware
Inversiones Kara Sea SRL		Venezuela
K-Sea Acquisition2, LLC		Delaware
K-Sea Transportation LLC		Delaware
K-Sea Canada Holdings, Inc.		Delaware
K-Sea Canada Corp.		Canada
K-Sea Hawaii Inc.		Delaware
Smith Maritime LLC		Delaware

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Exhibit 21.1

List of Subsidiaries
EX-23.1 3 a2187896zex-23_1.htm EXHIBIT 23.1
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Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (Nos. 333-127957 and 333-142433) and Form S-8 (No. 333-117251) of K-Sea Transportation Partners L.P. of our report dated September 10, 2008 relating to the consolidated financial statements and the effectiveness of internal control over financial reporting, which appears in this Form 10-K.

/s/ PricewaterhouseCoopers LLP
Florham Park, New Jersey
September 10, 2008

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Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
EX-31.1 4 a2187896zex-31_1.htm EXHIBIT 31.1
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Exhibit 31.1

Certification Pursuant to
Rules 13a-14 and 15d-14 Under the Securities Exchange Act of 1934

I, Timothy J. Casey, certify that:

1.

I have reviewed this annual report on Form 10-K of K-Sea Transportation Partners L.P.;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a): Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b): Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c): Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d): Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a): All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b): Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: September 15, 2008



		/s/ TIMOTHY J. CASEY Timothy J. Casey President and Chief Executive Officer

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Exhibit 31.1

Certification Pursuant to Rules 13a-14 and 15d-14 Under the Securities Exchange Act of 1934
EX-31.2 5 a2187896zex-31_2.htm EXHIBIT 31.2
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Exhibit 31.2

Certification Pursuant to
Rules 13a-14 and 15d-14 Under the Securities Exchange Act of 1934

I, John J. Nicola, certify that:

1.

I have reviewed this annual report on Form 10-K of K-Sea Transportation Partners L.P.;

2.

3.

4.

(a): Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b): Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c): Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d): Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.

(a): All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b): Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: September 15, 2008



		/s/ JOHN J. NICOLA John J. Nicola Chief Financial Officer

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Exhibit 31.2

Certification Pursuant to Rules 13a-14 and 15d-14 Under the Securities Exchange Act of 1934
EX-32.1 6 a2187896zex-32_1.htm EXHIBIT 32.1
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Exhibit 32.1

Certification Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), I, Timothy J. Casey, President and Chief Executive Officer of K-Sea General Partner GP LLC, as general partner of K-Sea General Partner L.P., the general partner of K-Sea Transportation Partners L.P. (the "Partnership"), hereby certify, to the best of my knowledge, that:

(1): The Partnership's Annual Report on Form 10-K for the fiscal year ended June 30, 2008 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2): The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Partnership.


Dated: September 15, 2008	/s/ TIMOTHY J. CASEY
	Name:	Timothy J. Casey
	Title:	President and Chief Executive Officer

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Exhibit 32.1

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)
EX-32.2 7 a2187896zex-32_2.htm EXHIBIT 32.2
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Exhibit 32.2

Certification Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), I, John J. Nicola, Chief Financial Officer of K-Sea General Partner GP LLC, as general partner of K-Sea General Partner L.P., the general partner of K-Sea Transportation Partners L.P. (the "Partnership"), hereby certify, to the best of my knowledge, that:

(1): The Partnership's Annual Report on Form 10-K for the fiscal year ended June 30, 2008 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2): The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Partnership.


Dated: September 15, 2008	/s/ JOHN J. NICOLA
	Name:	John J. Nicola
	Title:	Chief Financial Officer

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Exhibit 32.2

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)
EX-99.5 8 a2187896zex-99_5.htm EXHIBIT 99.5

Exhibit 99.5

EXECUTION VERSION

CREDIT FACILITY AGREEMENT
PROVIDING FOR A
US$57,600,000
SECURED TERM LOAN CREDIT FACILITY

TO BE MADE AVAILABLE TO
K-SEA OPERATING PARTNERSHIP L.P.,
as Borrower

DNB NOR BANK ASA,
as Mandated Lead Arranger, Bookrunner, Administrative Agent
and Security Trustee,

and the Banks and Financial Institutions
identified on Schedule 1,
as Lenders

June 4, 2008

TABLE OF CONTENTS

		Page

SECTION 1.	DEFINED TERMS	1

1.1	Specific Definitions	1
1.2	Computation of Time Periods; Other Definitional Provisions	19
1.3	Accounting Terms	20
1.4	Certain Matters Regarding Materiality	20
1.5	Forms of Documents	20

SECTION 2.	REPRESENTATIONS AND WARRANTIES	20

2.1	Representations and Warranties	20

SECTION 3.	THE LOAN	27

3.1	Purpose	27
3.2	Making of the Advances	27
3.3	Drawdown Notice	28
3.4	Effect of Drawdown Notice	28
3.5	Several Obligations	28
3.6	Pro Rata Treatment	28
3.7	Receipt of Funds	28

SECTION 4.	CONDITIONS PRECEDENT	29

4.1	Conditions Precedent to the Initial Advance	29
4.2	Conditions Precedent to the Delivery Advance	31
4.3	Further Conditions Precedent	33
4.4	Breakfunding Costs	34
4.5	Satisfaction after Drawdown	34

SECTION 5.	REPAYMENT AND PREPAYMENT	34

5.1	Repayment	34
5.2	Voluntary Prepayment	34
5.3	Mandatory Prepayment	34
5.4	Interest and Costs; Application of Prepayments; No Reborrowing	35

SECTION 6.	INTEREST AND RATE	35

6.1	Applicable Rate	35
6.2	Default Rate	36
6.3	Interest Periods	36
6.4	Interest Payments	36
6.5	Non-availability of Funds	36

TABLE OF CONTENTS

(continued)

		Page

SECTION 7.	PAYMENTS	37

7.1	Place of Payments, No Set Off	37
7.2	Tax Credits	38
7.3	Computations; Banking Days	38
7.4	Mitigation Obligations; Replacement of Lenders	39

SECTION 8.	EVENTS OF DEFAULT	40

8.1	Events of Default	40
8.2	Indemnification	43
8.3	Application of Moneys	44

SECTION 9.	COVENANTS	44

9.1	Affirmative Covenants	44
9.2	Negative Covenants	50
9.3	Financial Covenants	53
9.4	Asset Maintenance	53

SECTION 10.	ASSIGNMENTS	53

10.1	Assignments	53
10.2	Participations	54
10.3	Security Interest	55
10.4	Promissory Notes	55
10.5	Loan Register	55

SECTION 11.	ILLEGALITY, INCREASED COSTS, ETC	55

11.1	Illegality	55
11.2	Increased Costs	55
11.3	Lender’s Certificate	56
11.4	Compensation for Losses	56

SECTION 12.	CURRENCY INDEMNITY	57

12.1	Currency Conversion	57
12.2	Change in Exchange Rate	57
12.3	Additional Debt Due	57
12.4	Rate of Exchange	57

SECTION 13.	FEES AND EXPENSES	57

13.1	Fees	57
13.2	Expenses	57
13.3	Right of Setoff	58

TABLE OF CONTENTS

(continued)

		Page

SECTION 14.	ADMINISTRATIVE AGENT AND SECURITY TRUSTEE	58

14.1	Appointment of Administrative Agent	58
14.2	Appointment of Security Trustee	59
14.3	Distribution of Payments	59
14.4	Holder of Interest in Note	59
14.5	No Duty to Examine, Etc	59
14.6	Administrative Agent and Security Trustee as Lender	59
14.7	Acts of the Agents	59
14.8	Certain Amendments	60
14.9	Assumption re Event of Default	61
14.10	Limitations of Liability	61
14.11	Indemnification of the Agents	61
14.12	Consultation with Counsel	62
14.13	Resignation	62
14.14	Representations of Lenders	62
14.15	Notification of Event of Default	62
14.16	No Agency or Trusteeship if DnB NOR only Lender	62

SECTION 15.	INDEMNIFICATION	63

15.1	Indemnification	63

SECTION 16.	MISCELLANEOUS	63

16.1	Time of Essence	63
16.2	Prior Agreements, Merger	64
16.3	USA Patriot Act Notice; OFAC and Bank Secrecy Act	64
16.4	Further Assurances	64
16.5	Remedies Cumulative and Not Exclusive; No Waiver	64
16.6	Successors and Assigns	65
16.7	Waiver; Amendment	65
16.8	Amendments	65
16.9	Invalidity	65
16.10	Notices	65
16.11	Counterparts; Electronic Delivery	66
16.12	References	66
16.13	Headings	66

SECTION 17.	APPLICABLE LAW, JURISDICTION AND WAIVERS	67

17.1	Governing Law	67
17.2	Submission to Jurisdiction	67
17.3	WAIVER OF IMMUNITY	67
17.4	WAIVER OF JURY TRIAL	67

iii

SCHEDULE

1		The Lenders and the Commitments

EXHIBITS

A		Form of Note
B1		Form of Parent Guaranty
B2		Form of Shipowner Guaranty
C		Form of Mortgage
D		Form of Earnings Assignment
E1		Form of Pre-Delivery Insurances Assignment
E2		Form of Insurances Assignment
F		Form of Building Contract Assignment
G		Form of Assignment and Assumption Agreement
H		Form of Compliance Certificate
I		Form of Drawdown Notice
J		Form of Interest Notice
K		Form of Officer’s Certificate

CREDIT FACILITY AGREEMENT

THIS CREDIT FACILITY AGREEMENT is made as of June 4, 2008, by and among (1) K-SEA OPERATING PARTNERSHIP L.P., a limited partnership organized and existing under the laws of the State of Delaware (the “Borrower”), (2) the banks and financial institutions listed on Schedule 1, as lenders (together with any bank or financial institution which becomes a Lender pursuant to Section 10, the “Lenders”), and (3) DNB NOR BANK ASA, a banking company organized and existing under the laws of the Kingdom of Norway (“DnB NOR”), as mandated lead arranger (in such capacity, the “Mandated Lead Arranger”), as bookrunner (in such capacity, the “Bookrunner”), as administrative agent for the Lenders (in such capacity, the “Administrative Agent”) and as security trustee for the Lenders (in such capacity, the “Security Trustee”).

W I T N E S S E T H T H A T :

WHEREAS, the Borrower wishes to partially finance the pre-delivery and post-delivery acquisition costs of a 185,000 barrel articulated tug and barge unit currently under construction or to be constructed by Manitowoc Marine Group, LLC and to be delivered upon completion to the Borrower’s wholly-owned direct subsidiary, K-Sea Transportation LLC, a limited liability company organized and existing under the laws of the State of Delaware (the “Shipowner Guarantor”);

WHEREAS, at the request of the Borrower, DnB NOR has agreed to serve as the Mandated Lead Arranger, Bookrunner, Administrative Agent and Security Trustee under the terms of this Agreement and the Lenders have agreed to provide to the Borrower a secured term loan credit facility in the amount of 80% of the Acquisition Costs (as defined below) of the 185,000 barrel articulated tug and barge unit, subject to a maximum aggregate amount of Fifty Seven Million Six Hundred Thousand United States Dollars ($57,600,000);

WHEREAS, each of the Shipowner Guarantor and K-Sea Transportation Partners L.P., a limited partnership organized and existing under the laws of the State of Delaware (the “Parent Guarantor”), has agreed to guarantee the obligations of the Borrower with respect to, inter alia, this Agreement;

NOW, THEREFORE, in consideration of the premises set forth above, the covenants and agreements hereinafter set forth, and other good and valuable consideration, the receipt and adequacy of which the parties hereby acknowledge, the parties hereto agree as set forth below:

SECTION 1. DEFINED TERMS.

1.1 Specific Definitions. In this Agreement the words and expressions specified below shall, except where the context otherwise requires, have the meanings attributed to them below:

“Acceptable Accounting Firm”

means PricewaterhouseCoopers LLP, or such other recognized international accounting firm as shall be

	approved by the Administrative Agent, such approval not to be unreasonably withheld;

“Acquisition Costs”	means any and all costs, expenses and payments made by or on behalf of either of the Borrower or the Shipowner Guarantor in connection with the construction and acquisition by the Shipowner Guarantor of the Vessel, or arising under or related to the Building Contract, such costs, expenses or payments shall include, but not be limited to payments made to the Builder under the Building Contract, naval engineer or architect fees, outfitting of the Vessel or any related parts or spares in connection therewith, any owner supplied equipment, the costs of transporting and delivering the Vessel to the Charterer and capitalized interest costs;

“Administrative Agent”	shall have the meaning ascribed thereto in the preamble;

“Advance(s)”	means any amount advanced to the Borrower with respect to the Facility or (as the context may require) the aggregate amount of all such Advances for the time being outstanding;

“Affiliate”	means with respect to any Person, any other Person directly or indirectly controlled by or under common control with such Person. For the purposes of this definition, “control” (including, with correlative meanings, the terms “controlled by” and “under common control with”) as applied to any Person means the possession directly or indirectly of the power to direct or cause the direction of the management and policies of that Person whether through ownership of voting securities or by contract or otherwise;

“Affiliate Vessel”	means any vessel (other than the Vessels) owned by the Parent Guarantor or a Subsidiary thereof;

“Agreement”	means this Credit Facility Agreement, as the same shall be amended, modified or supplemented from time to time;

“Annex VI”	means Regulations for the Prevention of Air Pollution from Ships to the International Convention for the Prevention of Pollution from Ships 1973 (as modified in 1978 and 1997);

“Applicable Margin”	means that rate per annum to be determined from time to time according to the Borrower’s Total Debt to EBITDA

Ratio, as follows:

	Total Debt to EBITDA Ratio		Applicable Margin

	< 2.00		1.05% per annum

	= > 2.00 and < 2.50		1.20% per annum

	= > 2.50 and < 3.00		1.45% per annum

	= > 3.00		1.85% per annum

	such determination to be made in accordance with Section 6.1; provided, however, that the Applicable Margin shall not be less than 1.85% for the 12 months following the execution of this Agreement;

“Applicable Rate”	means any rate of interest applicable to the Facility from time to time pursuant to Section 6.1;

“Approved Ship Broker”	means Marcon International, Inc. or other ship brokers selected by the Borrower and approved by the Administrative Agent and the Majority Lenders in their reasonable discretion;

“Assignment and Assumption Agreement(s)”	means the Assignment and Assumption Agreement(s) executed pursuant to Section 10 substantially in the form set out in Exhibit G;

“Assignment Notices”	means: (a) the notice with respect to the Building Contract Assignment substantially in the form set out in Exhibit 1 thereto; (b) the notices with respect to the Earnings Assignment substantially in the form set out in Exhibit 1 thereto; (c) the notices with respect to the Pre-Delivery Insurances Assignment substantially in the form set out in Exhibit 3 thereto; and (d) the notices with respect to the Insurances Assignment substantially in the form set out in Exhibit 3 thereto

“Assignments”	means the Building Contract Assignment, the Earnings Assignment, the Pre-Delivery Insurances Assignment and the Insurances Assignment;

“Banking Day(s)”	means day(s) on which banks are open for the transaction

	of business in New York, New York;

“Barge”	means that certain double skin oil tank barge vessel under construction by the Builder and designated as Hull No.770 and, upon delivery, to be registered in the name of the Shipowner Guarantor under U.S. flag;

“Bookrunner”	shall have the meaning ascribed thereto in the preamble;

“Borrower”	shall have the meaning ascribed thereto in the preamble;

“Building Contract Assignment”	means the assignment in respect of the Building Contract to be executed by the Shipowner Guarantor in favor of the Security Trustee pursuant to Section 4.1(c) substantially in the form set out in Exhibit F;

“Building Contract”	means that certain shipbuilding agreement for the construction of the Vessels dated as of October 30, 2007 by and between the Builder and the Shipowner Guarantor;

“Builder”	means Manitowoc Marine Group, LLC, a limited liability company organized and existing under the laws of the State of Nevada;

“Capital Expenditures”	means any expenditure or liability that is properly charged to a capital account or otherwise capitalized on Borrower’s consolidated balance sheet in accordance with GAAP;

“Capital Lease Obligations”	means, with respect to any Person, the obligations of such Person to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real or personal property, or a combination thereof, which obligations are required to be classified and accounted for as capital leases on a balance sheet of such Person under GAAP, and the amount of such obligations shall be the capitalized amount thereof determined in accordance with GAAP;

“Capital Stock”	means, as to any Person, all shares, interests, partnership interests, limited liability company membership interests, participations, rights in or other equivalents (however designated) of such Person’s equity (however designated) and any rights, warrants or options exchangeable for or convertible into such shares, interests, participations, rights or other equity;

“Change of Control”	means: (a) the acquisition of ownership, directly or indirectly, beneficially or of record, by any Person or

	group (within the meaning of the Exchange Act and the rules of the Securities and Exchange Commission thereunder as in effect on the date hereof), of ownership interests representing more than 50% of the general partnership interest in the Parent Guarantor or more than 50% of the aggregate ordinary voting power represented by the issued and outstanding ownership interests of the Borrower; or (b) for a period of twelve (12) consecutive calendar months, a majority of the board of Borrower or the Parent Guarantor shall no longer be composed of individuals (i) who were members of said board on the first day of such period, (ii) whose election or nomination to said board was approved by individuals referred to in clause (i) above constituting at the time of such election or nomination at least a majority of said board, or (iii) whose election or nomination to said board was approved by individuals referred to in clauses (i) and (ii) above constituting at the time of such election or nomination at least a majority of said board;

“Charter”	means the charter party agreement relating to the Vessels to be entered into between the Shipowner Guarantor, as owner, and Charterer, as charterer;

“Charterer”	means Tesoro Corporation, or its affiliate Goldstar Maritime Company, each a corporation organized and existing under the laws of the State of Delaware;

“Classification Society”	shall mean the American Bureau of Shipping or such other member of the International Association of Classification Societies acceptable to the Majority Lenders with which the Vessels are entered and which conducts periodic physical surveys and/or inspections of the Vessels;

“Code”	means the United States Internal Revenue Code of 1986, as amended from time to time;

“Collateral”	means, all property or other assets, real or personal, tangible or intangible, whether now owned or hereafter acquired in which any Creditor has been granted a security interest pursuant to a Transaction Document;

“Commitment(s)”	means in relation to a Lender, the portion of the Facility set out opposite its name in Schedule 1 or, as the case may be, in any relevant Assignment and Assumption Agreement;

“Compliance Certificate”	means a certificate certifying: (a) the compliance by the Borrower with all of its covenants contained herein and showing the calculations of those covenants contained in Sections 9.3 and 9.4 hereof in reasonable detail; and (b) the Borrower’s current Total Debt to EBITDA Ratio and the corresponding Applicable Margin; delivered by the chief financial officer of the Borrower to the Administrative Agent from time to time pursuant to Section 9.1(d) in the form set out in Exhibit H, or in such other form as the Administrative Agent may agree;

“Consent and Agreement”	means the consent and agreement relating to this Agreement to be executed by the Parent Guarantor and the Shipowner Guarantor in the form attached hereto;

“Constitutional Documents”	means, as to any Person which is: (a) a corporation, the certificate or articles of incorporation and by-laws of such Person; (b) a limited liability company, the certificate of formation and the limited liability company agreement of such Person; (c) a partnership, the certificate of partnership and partnership agreement of such Person; or (d) any other form of entity or organization, the organizational documents of such Person analogous to the foregoing;

“Creditor(s)”	means each of the Administrative Agent, the Security Trustee and the Lenders or any one of them;

“Default”	means an event which with the giving of notice or lapse of time, or both, would constitute an Event of Default;

“Default Rate”	means a rate per annum equal to the sum of (i) the Applicable Rate plus (ii) two percent (2%);

“Delivery Advance”	means the Advance to be made to the Borrower in respect of the delivery of the Vessels by the Builder to the Shipowner Guarantor pursuant to the Building Contract;

“Delivery Date”	means the date on which the Vessels are delivered by the Builder to the Shipowner Guarantor pursuant to the Building Contract;

“DOC”	means a document of compliance issued to an Operator in accordance with Rule 13 of the ISM Code;

“Dollars” and the sign “$”	means the legal currency, at any relevant time hereunder, of the United States of America and, in relation to all payments hereunder, in same day funds settled through the

	New York Clearing House Interbank Payments System (or such other Dollar funds as may be determined by the Administrative Agent to be customary for the settlement in New York City of banking transactions of the type herein involved);

“Drawdown Date(s)”	means the dates, each being a Banking Day, upon which the Borrower has requested that an Advance be made available to the Borrower, and such Advance is made, as provided in Section 3;

“Drawdown Notice”	shall have the meaning ascribed thereto in Section 3.4;

“Earnings Assignment(s)”	means the assignment in respect of the earnings of each of the Vessels from any and all sources, including, without limitation, the Charter, to be executed by the Shipowner Guarantor in favor of the Security Trustee pursuant to Section 4.2(b) substantially in the form set out in Exhibit D;

“EBITDA”	means, with respect to any fiscal period of the Parent Guarantor and its consolidated Affiliates, including, without limitation, the Borrower, on a consolidated basis, the sum of: (a) the net income (or net loss) of the Borrower (determined in accordance with GAAP) for such fiscal period, without giving effect to any extraordinary pre-tax gains or losses; plus (b) to the extent that any of the items referred to in any of clauses (i) through (iii) below were deducted in calculating the net income referred to in (a) above: (i) Interest Expense of Borrower for such fiscal period; (ii) federal and state income tax expenses of the Borrower for such fiscal period; (iii) the amount of all depreciation and amortization for such fiscal period; minus (c) to the extent added in calculating such net income, gains from sales, exchanges and other dispositions of assets not in the ordinary course of business.

“Environmental Affiliate(s)”	means any Person, the liability of which for Environmental Claims any Security Party or Subsidiary of any Security Party may have assumed by contract or operation of law;

“Environmental Approval(s)”	shall have the meaning ascribed thereto in Section 2.1(q);

“Environmental Claim(s)”	shall have the meaning ascribed thereto in Section 2.1(q);

“Environmental Law(s)”	shall have the meaning ascribed thereto in Section 2.1(q);

“ERISA”	means the Employee Retirement Income Security Act of 1974, as amended from time to time;

“ERISA Affiliate”	means a trade or business (whether or not incorporated) that, together with any Security Party, is treated as a single employer under Section 414(b) or (c) of the Code or, solely for purposes of Section 302 of ERISA and Section 412 of the Code, is treated as a single employer under Section 414 of the Code;

“ERISA Funding Event”	means (i) any failure by any Plan to satisfy the minimum funding standards (for purposes of Section 412 of the Code or Section 302 of ERISA), whether or not waived; (ii) the filing pursuant to Section 412 of the Code or Section 303 of ERISA of an application for a waiver of the minimum funding standard with respect to any Plan; (iii) the failure by any Security Party or ERISA Affiliate to make any required contribution to a Multiemployer Plan that could reasonably be expected to result in a Material Adverse Effect; (iv) the receipt by any Security Party or ERISA Affiliate from a plan administrator of a determination that any Plan is in “at risk” status (within the meaning of Section 430(i) of the Code); (v) the incurrence by any Security Party or ERISA Affiliate of any liability with respect to the withdrawal or partial withdrawal from any Plan or Multiemployer Plan; or (vi) the receipt by any Security Party or ERISA Affiliate from a plan administrator of a determination that a Multiemployer Plan is in endangered status within the meaning of Section 432 of the Code or Section 305 of ERISA;

“ERISA Termination Event”	means (i) the imposition of any Lien in favor of the PBGC on any asset of any Security Party or any ERISA Affiliate thereof; (ii) the receipt by the any Security Party or ERISA Affiliate from the PBGC or a plan administrator of any notice relating to the PBGC’s intention to terminate any Plan or to appoint a trustee to administer any Plan under Section 4042 of ERISA; (iii) the receipt by the Borrower or any Subsidiary or ERISA Affiliate of any notice that a Multiemployer Plan is in critical status within the meaning of Section 432 of the Code or Section 305 of ERISA;

	(iv) the filing of a notice of intent to terminate a Plan under Section 4041 of ERISA; or (v) the occurrence of any event or condition described in Section 4042(a)(1) or 4042(a)(3) of ERISA with respect to any Plan or the receipt by any Security Party or ERISA Affiliate of notice from a plan actuary or plan administrator of the occurrence of any event or condition described in Section 4042(a)(2) or 4042(a)(4) of ERISA with respect to any Plan;

“Event(s) of Default”	means any of the events set out in Section 8.1;

“Exchange Act”	shall mean the Securities and Exchange Act of 1934, as amended;

“Excluded Taxes”	means, with respect to any Creditor or any other recipient of any payment to be made by or on account of any obligation of the Borrower hereunder, (a) income or franchise taxes imposed on (or measured by) its net income by the United States of America, or by the jurisdiction under the laws of which such recipient is organized or in which its principal office is located or, in the case of any Lender, in which its applicable lending office is located, (b) any branch profits taxes imposed by the United States of America or any similar tax imposed by any other jurisdiction in which such Creditor or such other recipient is located, and (c) in the case of a Foreign Lender (other than an assignee pursuant to a request by the Borrower under Section 7.4 hereof), any withholding tax that is imposed on amounts payable to such Foreign Lender at the time such Foreign Lender becomes a party to this Agreement or is attributable to such Foreign Lender’s failure or inability to comply with Section 7.1 hereof, except to the extent that such Foreign Lender’s assignor (if any) was entitled, at the time of assignment, to receive additional amounts from the Borrower with respect to such withholding tax pursuant to Section 7.1 hereof;

“Facility”	means the term loan credit facility to be made available by the Lenders to the Borrower in multiple Advances pursuant to Section 3 in an amount of 80% of the Acquisition Costs, subject to a maximum aggregate principal amount of Fifty Seven Million Six Hundred Thousand Dollars ($57,600,000), or the balance thereof from time to time outstanding;

“Facility Swap”	means any Interest Rate Agreement by and between any Security Party and any Creditor with respect to the

	Facility;

“Fair Market Value”	means, in respect of each of the Vessels, a charter-free appraisal on an “as is”, “willing seller, willing buyer” basis of the Vessel(s) from an Approved Ship Broker, no such appraisal to be dated more than thirty (30) days prior to the date on which such appraisal is required pursuant to this Agreement;

“Fee Letter”	means the letter dated June , 2008 and entered into by the Borrower and DnB NOR in respect of the fees referred to therein;

“Final Payment”	means an amount as may be necessary to repay the outstanding aggregate principal amount of the Facility in full together with accrued but unpaid interest and any other amounts owing by the Borrower to any Creditor pursuant to a Transaction Document;

“Final Payment Date”	means the date that is 83 months after the Delivery Date;

“Fixed Charge Coverage Ratio”	means, at any date of determination, the ratio of (a) EBITDA less Maintenance CAPEX divided by (b) Fixed Charges, in each case for the four fiscal quarter period ending on such date or, if such date is not the last day of a fiscal quarter, for the immediately preceding four fiscal quarter period; provided that, for any such determination, EBITDA shall be adjusted to include, for the relevant four fiscal quarter period, pro forma EBITDA in an amount reasonably acceptable to the Administrative Agent respecting any vessel or business acquisition for which debt service is incurred and included in Fixed Charges;

“Fixed Charges”	means the sum, for any period for the Parent Guarantor and its consolidated Affiliates, including, without limitation, the Borrower and the Parent Guarantor, on a consolidated basis, of the following: (a) Interest Expense, plus (b) the current portion of Capital Lease Obligations, plus (c) Scheduled Principal Payments, plus (d) cash income taxes;

“Foreign Lender”	means any Lender that is organized under the laws of a jurisdiction other than the United States of America, any State thereof or the District of Columbia;

“Foreign Plan”	means an “employee benefit plan” (as defined in Section 3(3) of ERISA) that is excluded from coverage

	under ERISA by Section 4(b)(4) thereof and is maintained or contributed to by a Security Party or for which a Security Party has any liability;

“GAAP”	shall have the meaning ascribed thereto in Section 1.3;

“Guarantee”	means, with respect to any Person (the “guarantor”), any obligation, contingent or otherwise, of the guarantor guaranteeing or having the economic effect of guaranteeing any Indebtedness or other obligation of any other Person (the “primary obligor”) in any manner, whether directly or indirectly, and including any obligation of the guarantor, direct or indirect, (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or other obligation or to purchase (or to advance or supply funds for the purchase of) any security for the payment thereof, (b) to purchase or lease property, securities or services for the purpose of assuring the owner of such Indebtedness or other obligation of the payment thereof, (c) to maintain working capital, equity capital or any other financial statement condition or liquidity of the primary obligor so as to enable the primary obligor to pay such Indebtedness or other obligation, or (d) as an account party in respect of any letter of credit or letter of guaranty issued to support such Indebtedness or obligation; provided that the term Guarantee shall not include any endorsement for collection or deposit in the ordinary course of business;

“IAPPC”	means a valid international air pollution prevention certificate for a vessel issued under Annex VI;

“Indebtedness”	means, with respect to any Person, without duplication: (a) all obligations of such Person for borrowed money or with respect to deposits or advances of any kind; (b) all obligations of such Person evidenced by bonds, debentures, notes or similar instruments; (c) all obligations of such Person upon which interest charges are customarily paid; (d) all obligations of such Person under conditional sale or other title retention agreements relating to property acquired by such Person; (e) all obligations of such Person in respect of the deferred purchase price of property or services (excluding current accounts payable incurred in the ordinary course of business); (f) all Indebtedness of others secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien on property owned

	or acquired by such Person, whether or not the Indebtedness secured thereby has been assumed; (g) all Guarantees by such Person of Indebtedness of others, (h) all Capital Lease Obligations of such Person; (i) all operating lease obligations of such Person; (j) all obligations, contingent or otherwise, of such Person as an account party in respect of letters of credit and letters of guaranty; and (k) all obligations, contingent or otherwise, of such Person in respect of bankers’ acceptances; provided, however, that “Indebtedness” shall not include (x) Secured Nonrecourse Obligations and (y) nonrecourse obligations incurred in connection with leveraged lease transactions as determined in accordance with GAAP;

“Indemnitee”	shall have the meaning ascribed thereto in Section 15.1;

“Initial Advance”	means the first Advance to be made under the Facility;

“Initial Payment Date”	means the date which is 3 months after the Delivery Date;

“Insurances Assignment”	means the assignment in respect of the insurances of each of the Vessels to be executed by the Shipowner Guarantor in favor of the Security Trustee pursuant to Section 4.2(b) substantially in the form of Exhibit E2;

“Interest Expense”	means, for any period, the sum, for the Parent Guarantor and its consolidated Affiliates, including, without limitation, the Borrower and the Shipowner Guarantor, on a consolidated basis, the following: (a) all interest in respect of Indebtedness (including the interest component of any payments in respect of Capital Lease Obligations) accrued or capitalized during such period (whether or not actually paid during such period) plus (b) the net amount payable (or minus the net amount receivable) under Interest Rate Agreements relating to interest during such period (whether or not actually paid or received during such period);

“Interest Notice”	means a notice from the Borrower to the Administrative Agent specifying the duration of any relevant Interest Period substantially in the form of Exhibit J;

“Interest Period(s)”	means period(s) of one (1), three (3) or six (6) months as selected by the Borrower or as otherwise agreed among the Lenders and the Borrower;

“Interest Rate Agreement(s)”	means any interest rate protection agreement, interest rate

	future agreement, interest rate option agreement, interest rate swap agreement, interest rate cap agreement, interest rate collar agreement, interest rate hedge agreement, currency swap agreement, freight forward agreement or other similar agreement or arrangement designed to protect against fluctuations in interest rates or currency exchange rates;

“ISM Code”	means the International Safety Management Code for the Safe Operating of Ships and for Pollution Prevention constituted pursuant to Resolution A.741(18) of the International Maritime Organization and incorporated into the Safety of Life at Sea Convention and includes any amendments or extensions thereto and any regulation issued pursuant thereto;

“ISPS Code”	means the International Ship and Port Facility Security Code adopted by the International Maritime Organization (as the same may be amended from time to time);

“ISSC”	means a valid and current International Ship Security Certificate issued under the ISPS Code;

“Lender(s)”	shall have the meaning ascribed thereto in the preamble;

“LIBOR”	means, subject to Section 6.5, the rate for deposits of Dollars for a period equivalent to the relevant Interest Period at or about 11:00 a.m. (London time) on the second London Banking Day before the first day of such period as set by the British Bankers’ Association; provided that if on such date no such rate is available from the British Bankers’ Association for the relevant Interest Period, LIBOR for such period shall be the arithmetic mean of the rates respectively quoted by three (3) Reference Banks (including, without limitation, DnB NOR) to the Administrative Agent as the offered rate for deposits of Dollars in an amount approximately equal to the amount in relation to which LIBOR is to be determined for a period equivalent to the relevant Interest Period to prime banks in the London Interbank Market at or about 11:00 a.m. (London time) on the second Banking Day before the first day of such period;

“Lien”	means, with respect to any asset, any interest in property securing an obligation owed to, or a claim by, any person other than the owner of the property, whether such interest shall be based on common law, maritime law, statute,

	contract or conveyance and including, but not limited to, the security interest lien arising from any pledge, mortgage, chattel mortgage, charge, encumbrance, conditional sale or trust receipt, or from a charter, consignment or bailment for security purposes and any tax lien, mechanic’s lien, materialman’s lien, workman’s lien, repairman’s lien, any financing statement or other similar charge, encumbrance or security interest;

“Maintenance CAPEX”	means all Capital Expenditures made for the purpose of maintaining (and not increasing) the operating capacity of each of the Vessels and each Affiliate Vessel during the twelve (12) calendar months immediately preceding any date of determination thereof;

“Majority Lenders”	means, at any time, Lenders holding an aggregate of more than 66 2/3% of the total Commitments;

“Mandated Lead Arranger”	shall have the meaning ascribed thereto in the preamble;

“Material Adverse Effect”	shall mean a material adverse effect on (a) the ability of the Borrower to repay the Facility or perform any of its obligations under any Transaction Document to which it is a party, (b) the ability of any Security Party to perform its obligations under any Transaction Document to which it is a party or (c) the business, property, assets, liabilities, operations or condition (financial or otherwise) of the Security Parties taken as a whole;

“Material Indebtedness”	means Indebtedness (other than the Facility), or outstanding obligations in respect of one or more Interest Rate Agreements, of any one or more of the Parent Guarantor, the Borrower and its Subsidiaries in an aggregate principal amount exceeding $5,000,000; provided that for purposes of determining Material Indebtedness, the “principal amount” of the obligations of the Parent Guarantor, the Borrower or any Subsidiary in respect of any Interest Rate Agreement at any time shall be the maximum aggregate amount (giving effect to any netting agreements) that the Parent Guarantor, the Borrower or such Subsidiary would be required to pay if such Interest Rate Agreement were terminated at such time;

“Material Subsidiaries”	means any Subsidiary of the Parent Guarantor that has (a) net assets greater than $15,000,000 at the end of any fiscal quarter of the Parent Guarantor or (b) net revenue greater

	than $15,000,000 for the most recent four consecutive fiscal quarters of the Parent Guarantor, in each case as determined starting with the fiscal quarter that ended on December 31, 2007;

“Materials of Environmental Concern”	shall have the meaning ascribed thereto in Section 2.1(o);

“Mortgage”	means, with respect to the Vessels, the first preferred United States fleet mortgage, to be executed by the Shipowner Guarantor in favor of the Security Trustee pursuant to Section 4.2(b), substantially in the form set out in Exhibit C;

“MTSA”	means the Maritime and Transportation Security Act, 2002, as amended, inter alia, by Public Law 107-295;

“Multiemployer Plan”	means, at any time, a “multiemployer plan” as defined in Section 4001(a)(3) of ERISA to which any Security Party or ERISA Affiliate has any liability or obligation to contribute or has within any of the six preceding plan years had any liability or obligation to contribute;

“Non-Excluded Taxes”	means Taxes other than Excluded Taxes;

“Note”	means the promissory note to be executed by the Borrower to the order of the Security Trustee pursuant to Section 4.1(c), to evidence the Facility substantially in the form set out Exhibit A;

“Obligations”	means the obligations of any Security Party under or in connection with any Transaction Document, including but not limited to, the obligations to repay the Facility when due;

“Operator”	means, in respect of each of the Vessels, the Person who is concerned with the operation of the Vessels and falls within the definition of “Company” set out in Rule 1.1.2 of the ISM Code;

“Parent Guarantor”	shall have the meaning ascribed thereto in the preamble;

“Parent Guaranty”	means the guaranty to be executed by the Parent Guarantor in respect of the obligations of the Borrower under and in connection with this Agreement and the Note in favor of the Security Trustee pursuant to Section 4.l(c), substantially in the form of Exhibit B1;

“Payment Dates”	means each of the Initial Payment Date, the dates falling at three month intervals thereafter and the Final Payment Date, which shall be the last Payment Date;

“PBGC”	means the Pension Benefit Guaranty Corporation or any successor entity thereto;

“Permitted Acquisition”	means the purchase, holding or acquisition of (including pursuant to any merger) any capital stock or other securities (including any option, warrant or other right to acquire any of the foregoing) of any other Person, or the purchase or acquisition of (in one transaction or a series of transactions (including pursuant to any merger)) any assets of any other Person constituting a business unit; provided that (a) at the time thereof and immediately after giving effect thereto no Default shall have occurred and be continuing, and (b) such Person or business unit, as the case may be, is in substantially the same business as Borrower;

“Permitted Lien(s)”	means any Lien described under Section 9.2(a) hereof;

“Person”	means: (i) any individual, sole proprietorship, corporation, partnership (general or limited), limited liability company, business trust, bank, trust company, syndicate, foundation, joint venture, association, joint stock company, trust, enterprise, or other unincorporated organization, whether or not a legal entity; or (ii) any government, intergovernmental body or agency, or any department, political subdivision or instrumentality of any government, intergovernmental body or agency;

“Plan”	means any employee benefit plan (other than a Multiemployer Plan) subject to the provisions of Title IV of ERISA or Section 412 of the Code or Section 302 of ERISA, and in respect to which any Security Party or ERISA Affiliate is (or, if such plan were terminated, would under Section 4069 of ERISA be deemed to be) an “employer” as defined in Section 3(5) of ERISA;

“Pre-Delivery Advance”	means any Advance other than the Delivery Advance;

“Pre-Delivery Insurances Assignment”	means the assignment in respect of the builder’s risk insurances of each of the Vessels to be executed by the Shipowner Guarantor in favor of the Security Trustee pursuant to Section 4.1(c) substantially in the form of

	Exhibit E1;

“Reference Banks”	means DnB NOR and such other commercial banks rated at least AA- or higher as selected by the Administrative Agent;

“Required Percentage”	shall have the meaning set forth for such term in Section 9.4;

“Scheduled Principal Payments”	means, with respect to any Person as of any date, all scheduled payments of principal on Indebtedness paid by such Person during the twelve (12) calendar month period immediately preceding such date;

“Secured Nonrecourse Obligations”	means (a) secured obligations of Borrower taken on a consolidated basis where recourse of the payee of such obligations is expressly limited to an assigned lease or loan receivable and the property related thereto, or (b) liabilities of Borrower taken on a consolidated basis to any manufacturer of leased equipment where such liabilities are payable solely out of revenues derived from the leasing or sale of such equipment; excluding, however, nonrecourse obligations incurred in connection with leveraged lease transactions as determined in accordance with GAAP;

“Security Document(s)”	means the Parent Guaranty, the Shipowner Guaranty, the Mortgage, the Assignments and any other documents that may be executed as security for the Facility and the Borrower’s obligations in connection therewith;

“Security Party(ies)”	means the Borrower, the Parent Guarantor and the Shipowner Guarantor or any of them;

“Security Trustee”	shall have the meaning ascribed thereto in the preamble;

“Shipowner Guarantor”	shall have the meaning ascribed thereto in the preamble;

“Shipowner Guaranty”	means the guaranty to be executed by the Shipowner Guarantor in respect of the obligations of the Borrower under and in connection with this Agreement and the Note in favor of the Security Trustee pursuant to Section 4.1(c) substantially in the form of Exhibit B2;

“SMC”	means the safety management certificate issued in respect of each of the Vessels in accordance with Rule 13 of the ISM code;

“Subordinated Indebtedness”	means all Indebtedness which is subordinated to the Obligations by its terms or pursuant to a subordination agreement, in each case, reasonably acceptable to the Administrative Agent;

“Subsidiary(ies)”	means, with respect to any Person (the “Parent”) at any date, any other Person the accounts of which would be consolidated with those of the Parent in the Parent’s consolidated financial statements if such financial statements were prepared in accordance with GAAP as of such date, as well as any other Person (a) of which securities or other ownership interests representing more than 50% of the equity or more than 50% of the ordinary voting power or, in the case of a partnership, more than 50% of the general partnership interests are, as of such date, owned, Controlled or held by the Parent, or (b) the financial statements of which shall be (or should be) consolidated with the financial statements of such Person in accordance with GAAP.

“Tax Returns”	means all returns, reports, information statements and similar documents (including any additional or supporting schedules, attachments, exhibits, and other material attached thereto and including any amendments thereof) required by law to be filed with any taxing authority with respect to the liability of any Security Party or any Subsidiary thereof for any Tax which such taxing authority is responsible for determining, assessing or collecting;

“Taxes”	means any present or future taxes, levies, duties, charges, fees, deductions or withholdings imposed, levied, collected or assessed by any taxing authority;

“Total Debt”	means, as of any date, all Indebtedness of the Parent Guarantor and its consolidated Affiliates, including, without limitation, Borrower, on a consolidated basis, of the kinds and types (without duplication) described in clauses (a), (b), (c), (d), (e), (f), (g), (h), (j) (excluding obligations in respect of letters of credit issued as credit support of obligations for borrowed money of Borrower or the Parent Guarantor included in the determination of Total Debt) and (k) of the definition of Indebtedness.

“Total Debt to EBITDA Ratio”	means, at any date of determination, the ratio of Total Debt divided by EBITDA for the four fiscal quarter period ending on such date or, if such date is not the last day of a

	fiscal quarter, for the immediately preceding four fiscal quarter period; provided that, for any such determination, EBITDA shall be adjusted (a) to include, for the relevant four fiscal quarter period, pro forma EBITDA in an amount reasonably acceptable to the Administrative Agent respecting any vessel or business acquisition for which debt is incurred and included in Total Debt and (b) to exclude, for the relevant four fiscal quarter period, pro forma EBITDA in an amount reasonably acceptable to the Administrative Agent respecting any vessel or business disposition.

“Total Loss”	shall have the meaning ascribed thereto in the Mortgage;

“Transaction Document(s)”	means this Agreement, the Note, any Facility Swap, the Security Documents or any one of them;

“Tug”	means that certain 131’ x 44’ dual mode ATB tug boat under construction by the Builder and designated as Hull No. 820 and, upon delivery, to be registered in the name of the Shipowner Guarantor under U.S. flag;

“Vessel(s)”	means each of the Barge and the Tug; and

“Withdrawal Liability(ies)”	means liability to a Multiemployer Plan as a result of a complete or partial withdrawal from such Multiemployer Plan, as such terms are defined in Part 1 of Subtitle E of Title IV of ERISA.

1.2 Computation of Time Periods; Other Definitional Provisions. In this Agreement and the other Transaction Documents, in the computation of periods of time from a specified date to a later specified date, the word “from” means “from and including” and the words “to” and “until” each mean “to but excluding”; words importing either gender include the other gender; references to “writing” include printing, typing, lithography and other means of reproducing words in a tangible visible form; the words “including,” “includes” and “include” shall be deemed to be followed by the words “without limitation”; references to articles, sections (or subdivisions of sections), exhibits, annexes or schedules are to this Agreement or such other Transaction Document, as applicable; references to agreements and other contractual instruments (including this Agreement and the other Transaction Documents) shall be deemed to include all subsequent amendments, amendments and restatements, supplements, extensions, replacements and other modifications to such instruments (without, however, limiting any prohibition on any such amendments, extensions and other modifications by the terms of this Agreement or any other Transaction Document); references to any matter that is “approved” or requires “approval” of a party shall mean approval given in the sole and absolute discretion of such party unless otherwise specified.

1.3 Accounting Terms. Unless otherwise specified herein, all accounting terms used in this Agreement and in the other Transaction Documents shall be interpreted, and all financial statements and certificates and reports as to financial matters required to be delivered to the Administrative Agent or to the Lenders under this Agreement shall be prepared, in accordance with generally accepted accounting principles for the United States (“GAAP”).

1.4 Certain Matters Regarding Materiality. To the extent that any representation, warranty, covenant or other undertaking of any Security Party in this Agreement is qualified by reference to those which are not reasonably expected to result in a “Material Adverse Effect” or language of similar import, no inference shall be drawn therefrom that any Creditor has knowledge or approves of any noncompliance by any Security Party with any governmental rule.

1.5 Forms of Documents. Except as otherwise expressly provided in this Agreement, references to documents or certificates “substantially in the form” of Exhibits to another document shall mean that such documents or certificates are duly completed in the form of the related Exhibits with substantive changes subject to the provisions of Section 14.8 of this Agreement, as the case may be, or the correlative provisions of the other Transaction Documents.

SECTION 2. REPRESENTATIONS AND WARRANTIES.

2.1 Representations and Warranties. In order to induce the Creditors to enter into this Agreement and to induce the Lenders to make the Facility available, the Borrower hereby represents and warrants to the Creditors (which representations and warranties shall survive the execution and delivery of this Agreement and the Note and the drawdown of the Facility hereunder) that:

(a) Due Organization and Power. each Security Party is duly formed and validly existing in good standing under the laws of its jurisdiction of incorporation or formation and is duly qualified to do business as a foreign entity in each jurisdiction wherein the nature of the business transacted thereby makes such qualification necessary, except where failure to so qualify would not have a Material Adverse Effect, has full power and authority and, to the best of its knowledge after due investigation, all material governmental licenses, authorizations, consents and approvals required to carry on its business as now being conducted and to own its properties and has full power and authority to enter into and perform its obligations under the Transaction Documents to which it is a party, and has complied with all statutory, regulatory and other requirements relative to such business, property and instruments to which it is a party, or to which its property is subject, other than those agreements for which non-compliance, either singly or in the aggregate, could not reasonably be expected to have a Material Adverse Effect;

(b) Authorization and Consents. all necessary action has been taken to authorize, and all consents and authorities (other than consents and authorities required from time to time in respect of the operation of the Tug or the Barge in the ordinary course of business the failure of which to obtain would not alone or

in the aggregate be reasonably likely to result in a Material Adverse Effect) have been obtained and remain in full force and effect to permit, each Security Party to enter into and perform its obligations under the Transaction Documents to which it is a party and, in the case of the Borrower, to borrow, service and repay the Facility and, as of the date of this Agreement, no further consents or authorities are necessary for the service and repayment of the Facility or any part thereof;

(c) Binding Obligations. each of the Transaction Documents constitute or will, when executed and delivered, constitute the legal, valid and binding obligations of each Security Party as is a party thereto enforceable against each such Security Party in accordance with their respective terms, except to the extent that such enforcement may be limited by equitable principles, principles of public policy or applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting generally the enforcement of creditors’ rights;

(d) No Violation. the execution and delivery of, and the performance of the provisions of, the Transaction Documents to which it is to be a party by each Security Party do not contravene any applicable law or regulation existing at the date hereof the violation of which is reasonably likely to have a Material Adverse Effect or any contractual restriction binding on such Security Party or the Constitutional Documents of such Security Party and the proceeds of the Facility shall be used by the Borrower exclusively for the financing of the Vessels;

(e) Filings; Stamp Taxes. other than the recording of the Mortgage with the appropriate authorities for the United States of America and the filing of UCC Financing Statements in the State of New York and the State of Delaware in respect of the Assignments, and the payment and filing or recording fees consequent thereto, it is not necessary for the legality, validity, enforceability or admissibility into evidence of any Transaction Document that any of them or any document relating thereto be registered, filed recorded or enrolled with any court or authority in any relevant jurisdiction or that any stamp, registration or similar Taxes be paid on or in relation to this Agreement or any other Transaction Document;

(f) Approvals; Consents. all consents, licenses, approvals and authorizations currently required, as of the date of this Agreement or any Drawdown Date, whether by statute or otherwise, in connection with the entry into and performance by each Security Party, and the validity and enforceability against each Security Party, of this Agreement and the other Transaction Documents have been obtained and are in full force and effect other than consents, licenses, approvals and authorizations required from time to time in respect of the operation of the Tug or the Barge in the ordinary course of business the failure of which to obtain would not alone or in the aggregate be reasonably likely to result in a Material Adverse Effect;

(g) Litigation. no action, suit or proceeding is pending or threatened in writing against any Security Party or any Subsidiary thereof before any court,

board of arbitration or administrative agency which reasonably could or might result in any Material Adverse Effect;

(h) No Default. no Security Party or Subsidiary thereof is in default under any agreement by which it is bound, or is in default in respect of any financial commitment or obligation, in each case, which could or might result in any Material Adverse Effect;

(i) The Vessels. upon the date of the making of the Delivery Advance and at all times thereafter, each of the Vessels shall:

(i) be in the sole and absolute ownership of the Shipowner Guarantor and duly registered in the Shipowner Guarantor’s name under the United States flag, unencumbered, save and except for the Mortgage recorded against it and other Permitted Liens;

(ii) be classed in the highest classification and rating for vessels of the same age and type with the Classification Society without any material outstanding recommendations;

(iii) shall be operationally seaworthy and in every way fit for its intended service; and

(iv) be insured in accordance with the provisions of the Mortgage recorded against it and the requirements thereof in respect of such insurances shall have been complied with;

(v) be in compliance with all relevant laws, regulations and requirements (including Environmental Laws), statutory or otherwise, as are applicable to (A) vessels documented under the United States flag and (B) vessels engaged in a trade similar to that performed or to be performed by each of the Vessels, except in each case where the failure to so comply is not reasonably likely to have a Material Adverse Effect;

(j) Insurance. each Security Party and each Subsidiary thereof has insured its properties and assets against such risks and in such amounts as are customary for companies engaged in similar businesses; for the avoidance of doubt no Security Party shall be required to maintain mortgagee’s interest insurance in respect of the transactions contemplated by this Agreement nor shall any Security Party be obligated to make any reimbursement with respect to such mortgagee’s interest insurance;

(k) Financial Information. all financial statements, information and other data furnished by the Borrower or any Security Party to the Administrative Agent are complete and correct, such financial statements have been prepared in accordance with GAAP and accurately and fairly present the financial condition of the parties covered thereby as of the respective dates thereof and the results of

the operations thereof for the period or respective periods covered by such financial statements, and since the date of such financial statements, information or data most recently delivered to the Administrative Agent there has been no Material Adverse Effect as to the Parent Guarantor and its consolidated Subsidiaries and no such party has any contingent obligations, liabilities for taxes or other outstanding financial obligations which are material in the aggregate except as disclosed in such statements, information and data;

(l) Tax Returns. each Security Party has filed or caused to be filed all material Tax Returns required by law to have been filed by it and has paid or caused to be paid all Taxes payable by it which have become due, except (i) Taxes not yet delinquent, (ii) Taxes the nonpayment of which could not reasonably be expected to have a Material Adverse Effect and (iii) Taxes being contested in good faith by appropriate proceedings and for which adequate reserves have been set aside on its books;

(m) ERISA. (i) provided that none of the funds used by the Lenders to acquire or maintain their respective interests in the Facility will constitute “plan assets” (as described in United States Department of Labor Regulations Section 2510.3-101, 29 C.F.R. Section 2510.3-101, as amended and as modified in application by Section 3(42) of ERISA, or applicable successor regulation) of an “employee benefit plan” (as defined in Section 3(3) of ERISA) subject to Part 4 of Title I of ERISA or of a “plan” (as defined in Section 4975(e)(1) of the Code) subject to Section 4975 of the Code, the execution and delivery of this Agreement and the consummation of the transactions hereunder will not involve any prohibited transaction for purposes of Section 406 of ERISA or Section 4975 of the Code; (ii) there are no Foreign Plans; (iii) no ERISA Termination Event has occurred; and (iv) no ERISA Funding Event exists or has occurred;

(n) Chief Executive Office. the chief executive office of each Security Party is located in East Brunswick, New Jersey;

(o) Foreign Trade Control Regulations. to the best of the Borrower’s knowledge, neither the use of proceeds hereunder as contemplated hereby nor any Security Party’s conduct of its business will violate any of the provisions of the Foreign Assets Control Regulations of the United States of America (Title 31, Code of Federal Regulations, Chapter V, Part 500, as amended), any of the provisions of the Cuban Assets Control Regulations of the United States of America (Title 31, Code of Federal Regulations, Chapter V, Part 515, as amended), any of the provisions of the Libyan Assets Control Regulations of the United States of America (Title 31, Code of Federal Regulations, Chapter V, Part 550, as amended), any of the provisions of the Iranian Transaction Regulations of the United States of America (Title 31, Code of Federal Regulations, Chapter V, Part 560, as amended), any of the provisions of the Iraqi Sanctions Regulations (Title 31, Code of Federal Regulations, Chapter V, Part 575, as amended), any of the provisions of the Federal Republic of Yugoslavia (Serbia and Montenegro) and Bosnia Serb-controlled areas of the

Republic of Bosnia and Herzegovina Assets Control Regulations (Title 31, Code of Federal Regulations, Chapter V, Part 585 as amended) or any of the provisions of the Regulations of the United States of America Governing Transactions in Foreign Shipping of Merchandise (Title 31, Code of Federal Regulations, Chapter V, Part 505, as amended);

(p) Equity Ownership. the Shipowner Guarantor is a wholly-owned direct Subsidiary of the Borrower; the Parent Guarantor owns 100% of the limited partnership interests in the Borrower and 100% of the ownership interests in K-Sea OLP GP, LLC which is the sole general partner of the Borrower; except as may be otherwise disclosed in writing from time to time by the Borrower to the Administrative Agent, K-Sea General Partner L.P. is the sole general partner of the Parent Guarantor and K-Sea General Partner GP LLC is the sole general partner of K-Sea General Partner L.P.;

(q) Environmental Matters and Claims. (a) except as such will not reasonably be expected to result in a Material Adverse Effect (i) each Security Party, each of its Subsidiaries and their Affiliates shall, when required to operate their business as then being conducted, be in compliance with all applicable United States federal and state, local, foreign and international laws, regulations, conventions and agreements relating to pollution prevention or protection of human health or the environment (including, without limitation, ambient air, surface water, ground water, navigable waters, waters of the contiguous zone, ocean waters and international waters), including, without limitation, laws, regulations, conventions and agreements relating to (1) emissions, discharges, releases or threatened releases of chemicals, pollutants, contaminants, wastes, toxic substances, hazardous materials, oil, hazardous substances, petroleum and petroleum products and by-products (“Materials of Environmental Concern”), or (2) the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Materials of Environmental Concern (“Environmental Laws”); (ii) each Security Party, each of its Subsidiaries and their Affiliates shall, when required, have all permits, licenses, approvals, rulings, variances, exemptions, clearances, consents or other authorizations required under applicable Environmental Laws (“Environmental Approvals”) and shall, when required, be in compliance with all Environmental Approvals required to operate their business as then being conducted; (iii) as of the date of this Agreement or any Drawdown Date, none of the Security Parties, any Subsidiary thereof nor any Affiliate thereof has received any notice of any claim, action, cause of action, investigation or demand by any Person, alleging potential liability for, or a requirement to incur, material investigator costs, cleanup costs, response and/or remedial costs (whether incurred by a governmental entity or otherwise), natural resources damages, property damages, personal injuries, attorneys’ fees and expenses, or fines or penalties, in each case arising out of, based on or resulting from (1) the presence, or release or threat of release into the environment, of any Materials of Environmental Concern at any location, whether or not owned by such Person, or (2) circumstances forming the basis of any violation, or alleged violation, of any Environmental Law or Environmental Approval

(“Environmental Claim”) (other than Environmental Claims that have been fully and finally adjudicated or otherwise determined and all fines, penalties and other costs, if any, payable by the Security Parties in respect thereof have been paid in full or which are fully covered by insurance (including permitted deductibles)); and (iv) there are no existing circumstances that may prevent or interfere with such full compliance in the future; and (b) except as heretofore disclosed in writing to the Administrative Agent there is no Environmental Claim pending or threatened against any Security Party, any Subsidiary thereof or any Affiliate thereof and there are no past or present actions, activities, circumstances, conditions, events or incidents, including, without limitation, the release, emission, discharge or disposal of any Materials of Environmental Concern, that could form the basis of any Environmental Claim against such Persons the adverse disposition of which reasonably may be expected to result in a Material Adverse Effect;

(r) Compliance with ISM Code, ISPS Code, MTSA and Annex VI. each of the Vessels complies and the Operator complies with the requirements of the ISM Code, the ISPS Code, the MTSA and, to the extent required under the laws and regulations of the United States and each other jurisdiction in which a Vessel operates or is expected to operate, Annex VI including (but not limited to) the maintenance and renewal of valid certificates pursuant thereto;

(s) No Threatened Withdrawal of DOC, ISSC, SMC or IAPPC. there is no actual or, to the best of the Borrower’s knowledge, threatened withdrawal of the Operator’s DOC or either of the Vessels’ ISSC, SMC or, to the extent required under the laws and regulations of the United States and each other jurisdiction in which a Vessel operates or is expected to operate, IAPPC or other certification or documentation related to the ISM Code, the ISPS Code, the MTSA and, to the extent required under the laws and regulations of the United States and each other jurisdiction in which a Vessel operates or is expected to operate, Annex VI or otherwise required for the operation of such vessels in respect of either of the Vessels;

(t) Liens. there are no Liens of any kind on the Collateral except for Permitted Liens;

(u) Use of Proceeds. the Borrower requires the Facility for use in connection with the financing of the Acquisition Costs by the Borrower and the Shipowner Guarantor and the Borrower’s and the Shipowner Guarantor’s use of the Facility does not contravene any law, official requirement or other regulatory measure or procedure implemented to combat “money laundering” (as defined in Article 1 of the Directive (91/308/EEC) of the Council of the European Communities) and comparable United States Federal and state laws;

(v) Investment Company. no Security Party is required to be registered as an “investment company” (as defined in the Investment Company Act of 1940, as amended)

(w) Margin Stock. none of the proceeds of the Facility shall be used to purchase or carry margin stock within the meanings of Regulations T, U or X of the Board of Governors of the Federal Reserve System; no Security Party is engaged in the business of extending credit for the purpose of purchasing or carrying margin stock within the meaning of Regulations T, U or X of the Board of Governors of the Federal Reserve System;

(x) No Proceedings to Dissolve. there are no proceedings or actions pending or contemplated by any Security Party, or contemplated by any third party, to dissolve or terminate any Security Party;

(y) Solvency. in the case of the Parent Guarantor and its Subsidiaries collectively, (i) the sum of its assets, at a fair valuation, does and/or will exceed its liabilities, including, to the extent they are reportable as such in accordance with GAAP, contingent liabilities, (ii) the present fair market salable value of its assets is not and/or shall not be less than the amount that will be required to pay its probable liability on its then existing debts, including, to the extent they are reportable as such in accordance with GAAP, contingent liabilities, as they mature, (iii) it does not and shall not have unreasonably small working capital (including the availability of borrowing capacity) with which to continue its business and (iv) it has not incurred, does not intend to incur and does not believe it will incur, debts beyond its ability to pay such debts as they mature;

(z) Jurisdiction; Governing Law. (i) the Borrower’s irrevocable submission under this Agreement to the jurisdiction of the courts of the State of New York and the United States District Court for the Southern District of New York, the Borrower’s agreement that this Agreement be governed by New York law, and the Borrower’s agreement not to claim any immunity to which it or its assets may be entitled are legal, valid and binding under the laws of its jurisdiction of organization and (ii) any judgment obtained in the courts of the State of New York and the United States District Court for the Southern District of New York will be recognized and enforceable by the courts of its jurisdiction of organization, subject to any statutory or other conditions of such jurisdiction;

(aa) Compliance with Laws. each Security Party is and/or shall be in compliance with all applicable laws except where the failure to comply would not alone or in the aggregate reasonably be expected to result in a Material Adverse Effect;

(bb) Citizenship. each of the Shipowner Guarantor and the Borrower is a citizen of the United States within the meaning of 46 U.S.C. §50501 and the regulations promulgated thereunder for purposes of engaging in the coastwise trade and in foreign commerce of the United States;

(cc) No Other Name. other than as previously disclosed in writing to the Administrative Agent, the Borrower has not changed its name nor has done

business in any name other than that set forth in the introductory paragraph of this Agreement;

(dd) Title. the Borrower will ensure that the Shipowner Guarantor has and at all times will defend and continue to have good and marketable title to all of the Collateral, free and clear of all Liens subject only to Permitted Liens; and, upon delivery of the Vessels, the Vessels will be documented in the name of the Shipowner Guarantor with the United States Coast Guard National Vessel Documentation Center in Falling Waters, West Virginia;

(ee) Subsidiaries. the Parent Guarantor legally and beneficially owns, directly or indirectly, the majority or all of the issued and outstanding Capital Stock of the Borrower and the Borrower legally and beneficially owns directly all of the Capital Stock of the Shipowner Guarantor; all such Capital Stock of the Borrower and the Shipowner Guarantor is free and clear of any Liens, claims, pledges or other encumbrances whatsoever; and

(ff) Survival. all representations, covenants and warranties made herein and in any certificate or other document delivered pursuant hereto or in connection herewith shall survive the making of the Facility and the issuance of the Note.

SECTION 3. THE LOAN.

3.1 Purpose. The Lenders shall make the Facility available to the Borrower for the purpose of partially financing the Acquisition Costs of the Vessels.

3.2 Making of the Advances. Each of the Lenders, relying upon each of the representations and warranties set out in Section 2, hereby severally and not jointly agrees with the Borrower that, subject to and upon the terms of this Agreement, it will, not later than 11:00 A.M. (New York time) on the Drawdown Date of each Advance (except as provided in Section 3.7), make its portion of the relevant Advance (in an amount not exceed its Commitment ratably with the other Lenders according to their respective Commitments), in Federal or other funds immediately available in New York City, to the Borrower through the Administrative Agent at its address set forth in Section 16.10 or to such account of the Administrative Agent most recently designated by it for such purpose by notice to the Lenders. Unless the Administrative Agent determines that any applicable condition specified in Section 4 has not been satisfied, the Administrative Agent will make the funds so received from the Lenders available to the Borrower at the aforesaid address, subject to the receipt of the funds by the Administrative Agent as provided in the immediately preceding sentence, not later than 12:00 P.M. (New York City time) on the date of such Advance, and in any event as soon as practicable after receipt. It is understood that the Facility will be made available in multiple Advances after the date hereof according to the payment schedules in the Building Contract. The amount of any Advance shall not exceed 80% of (a) the actual payment due under the Building Contract (on the basis of invoices received from the Builder for construction installments) and (b) other Acquisition Costs, which the Borrower shall evidence to the satisfaction of the Administrative Agent. No Advance

shall be made after the Delivery Advance. The aggregate amount of all Advances shall not exceed Fifty Seven Million Six Hundred Thousand Dollars ($57,600,000).

3.3 Drawdown Notice. The Borrower shall, at least three (3) Banking Days before a Drawdown Date, serve a notice (a “Drawdown Notice”), substantially in the form of Exhibit I, on the Administrative Agent which notice shall: (a) be in writing addressed to the Administrative Agent; (b) be effective on receipt by the Administrative Agent; (c) specify the amount of the Advance to be drawn; (d) specify the Banking Day on which such Advance is to be drawn and, subject to the terms of Section 6.3 hereof, specify the Interest Period; (e) specify the disbursement instructions; and (f) be irrevocable.

3.4 Effect of Drawdown Notice. The Drawdown Notice shall be deemed to constitute a warranty by the Borrower (a) that the representations and warranties stated in Section 2 (updated mutatis mutandis) are true and correct on and as of the date of the Drawdown Notice and will be true and correct on and as of the Drawdown Date as if made on such date, and (b) that no Event of Default or Default has occurred and is continuing.

3.5 Several Obligations. The failure of any Lender to make its pro rata portion of the Facility on the Drawdown Date shall not relieve any other Lender of its obligation to make its pro rata portion of the Facility on the Drawdown Date, and neither the Administrative Agent, the Security Trustee nor any other Lender shall be responsible for the failure of any Lender to make its pro rata portion of the Facility.

3.6 Pro Rata Treatment. The borrowing from the Lenders hereunder shall be made from the Lenders, each payment of fees and expenses under Section 13 shall be made for account of the Lenders, each payment or prepayment of principal of the Facility by the Borrower shall be made for account of the Lenders pro rata in accordance with the respective unpaid principal amounts of the Facility held by the Lenders; and each payment of interest on the Facility by the Borrower shall be made for the account of the Lenders pro rata in accordance with the amounts of interest due and payable to the respective Lenders.

3.7 Receipt of Funds. Unless the Administrative Agent shall have received notice from a Lender prior to the Drawdown Date that such Lender shall not make available to the Administrative Agent such Lender’s share of the Facility, the Administrative Agent may assume that such Lender has made such share available to the Administrative Agent on the Drawdown Date in accordance with this Section 3.7 and the Administrative Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent that such Lender shall not have so made such share available to the Administrative Agent, such Lender and the Borrower (but without duplication) severally agree to repay to the Administrative Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date such amount is made available to the Borrower until the date such amount is repaid to the Administrative Agent, at (i) in the case of the Borrower, a rate per annum equal to the Applicable Rate and (ii) in the case of such Lender, the LIBOR Rate for overnight or weekend deposits. If such Lender shall repay to the Administrative Agent such corresponding amount, such amount so repaid shall constitute such Lender’s share of the Facility for purposes of this Agreement as of the Drawdown Date. Nothing in this Section 3.7 shall be deemed to relieve any Lender of its obligation to make its share of the Facility to the

extent provided in this Agreement. In the event that the Borrower is required to repay any portion of the Facility to the Administrative Agent pursuant to this Section 3.7 as between the Borrower and the defaulting Lender, the liability for any breakfunding costs as described in Section 4.4 shall be borne by the defaulting Lender. If the defaulting Lender has not paid any such breakage costs upon demand by the Administrative Agent therefor, the Borrower shall pay such breakage costs upon demand by the Administrative Agent and the Borrower shall be entitled to recover any such payment for breakfunding costs made by the Borrower from the defaulting Lender.

SECTION 4. CONDITIONS PRECEDENT.

4.1 Conditions Precedent to the Initial Advance. The obligation of the Lenders to make the Initial Advance available to the Borrower under this Agreement shall be expressly subject to the following conditions precedent:

(a) Corporate Authority. the Administrative Agent shall have received a certificate substantially in the form attached hereto as Exhibit K from an officer of each Security Party which certificate shall certify and, in the case of items (i) through (iii) below, attach true and complete copies of the following:

(i) the Constitutional Documents of such Security Party;

(ii) the resolutions of the board of directors and equity holders (or as otherwise required by such Security Party’s Constitutional Documents or by applicable law) evidencing approval of the Transaction Documents to which it is a party and authorizing an appropriate officer or officers or attorney-in-fact or attorneys-in-fact to execute the same on its behalf, or other evidence of such approvals and authorizations;

(iii) all documents evidencing any other necessary action (including actions by such parties thereto other than the Security Parties as may be required by the Administrative Agent), approvals or consents with respect to the Transaction Documents;

(iv) the names, titles and signatures of each of the officers and directors of such Security Party;

(v) with respect to the Borrower and the Shipowner Guarantor only, the record ownership of all of such Security Party’s issued and outstanding Capital Stock; and

(vi) that the representations and warranties (updated mutatis mutandis) with respect to solvency set forth in this Agreement or in any other Transaction Document to which it is a party are true and correct as if made on and as of such date;

(b) Good Standing Certificates. the Administrative Agent shall have received certificates from the jurisdiction of incorporation or formation, as the case may be, of each Security Party as to the good standing thereof.

(c) Transaction Documents. each Security Party shall have duly executed and delivered the following Transaction Documents to which it is a party:

(i) this Agreement;

(ii) the Note;

(iii) the Parent Guaranty;

(iv) the Shipowner Guaranty;

(v) the Building Contract Assignment and the Assignment Notice with respect thereto; and

(vi) the Pre-Delivery Insurances Assignment and the Assignment Notice with respect thereto.

(d) UCC Financing Statements and Searches. the Administrative Agent shall have received evidence that Uniform Commercial Code Financing Statements have been filed with the State of Delaware and in such other jurisdictions as the Administrative Agent may reasonably require; the Administrative Agent shall have received evidence, including Uniform Commercial Code searches, satisfactory to it that the Collateral is not subject to any Liens other than Permitted Liens;

(e) Liens. the Administrative Agent shall have received evidence satisfactory to it and to its legal advisor that, save for the Liens created by the Building Contract Assignment, there are no Liens of any kind whatsoever on either of the Vessels or on any Collateral except as Permitted Liens;

(f) Building Contract. the Administrative Agent shall have received a true and complete copy, certified by the Borrower to the satisfaction of the Administrative Agent, of the Building Contract;

(g) Charter. the Administrative Agent shall have received a true and complete copy, certified by the Borrower to the satisfaction of the Administrative Agent, of the Charter, which Charter shall be in form and substance satisfactory in all respects to the Administrative Agent;

(h) Environmental Claims. the Administrative Agent shall be satisfied that no Security Party and no Affiliate thereof is subject to any Environmental Claim which could have a Material Adverse Effect;

(i) Fees. the Administrative Agent shall have received payment in full of all fees and expenses due under Section 13 and the Fee Letter;

(j) Know Your Customer Requirements. the Administrative Agent shall have received documentation, and other evidence as is reasonably requested by the Administrative Agent in order for each of the Creditors to carry out and be satisfied with the results of all necessary “know your client” or other checks which is required to carry out in relation to the transactions contemplated by the Transaction Documents, including but not limited to:

(i) certified list of directors, including titles, business and residential addresses and dates of birth;

(ii) requisite United States tax forms; and

(iii) the Administrative Agent’s anti-money laundering questionnaire.

(k) Compliance Certificate. the Administrative Agent shall have received a Compliance Certificate with respect to the most recently ended fiscal quarter;

(l) Legal Opinions. the Administrative Agent shall have received legal opinions addressed to the Administrative Agent from (i) Holland & Knight LLP, counsel to the Security Parties, and (ii) Seward & Kissel LLP, special counsel to the Creditors, in each case in such form as the Administrative Agent may require, as well as such other legal opinions as the Administrative Agent shall have required as to all or any matters under the laws of the United States of America, the State of New York and the State of Delaware covering the representations and conditions which are the subjects of Sections 2 and 4.1.

4.2 Conditions Precedent to the Delivery Advance. The obligation of the Lenders to make the Delivery Advance available to the Borrower under this Agreement shall be expressly and separately subject to the following further conditions precedent on the relevant Drawdown Date:

(a) The Vessels. the Administrative Agent shall have received

(i) evidence satisfactory to it that each of the Vessels is in the sole and absolute ownership of the Shipowner Guarantor and duly registered in the Shipowner Guarantor’s name under the United States flag, unencumbered, save and except for the Mortgage recorded against it and other Permitted Liens;

(ii) evidence satisfactory to it that each of the Vessels is classed in the highest classification and rating for vessels of the same age and type with the Classification Society without any material outstanding recommendations;

(iii) evidence satisfactory to it that each of the Vessels is operationally seaworthy and in every way fit for its intended service;

(iv) evidence satisfactory to it that each of the Vessels is insured in accordance with the provisions of the Mortgage recorded against it and the requirements thereof in respect of such insurances are being complied with; and

(v) evidence satisfactory to it that each of the Vessels is in compliance with all relevant laws, regulations and requirements (including environmental laws, regulations, and requirements), statutory or otherwise, as are applicable to (A) vessels documented under the United States flag and (B) vessels engaged in a trade similar to that performed or to be performed by each of the Vessels, except where the failure to so comply would not have a Material Adverse Effect, which evidence shall include:

(A) a copy of the current certificate of inspection issued by the United Sates Coast Guard for each Vessel, if available, reflecting no outstanding recommendations; and

(B) current Certificates of Financial Responsibility with respect to the Vessels.

(b) Transaction Documents. each Security Party shall have duly executed and delivered the following Transaction Documents to which it is a party:

(i) the Mortgage;

(ii) the Earnings Assignment;

(iii) the Insurances Assignment; and

(iv) the Assignment Notices (other than those previously delivered in connection with the Building Contract Assignment and the Pre-Delivery Insurances Assignment);

(c) Recording of the Mortgage. the Administrative Agent shall have received satisfactory evidence that the Mortgage on the Vessels: (i) has been duly recorded under the laws of the United States; (ii) constitutes a first preferred mortgage lien under the laws of such jurisdiction; and (iii) was recorded prior to delivery of the Vessels to the Charterer pursuant to the Charter;

Commercial Code searches, satisfactory to it that the Collateral is not subject to any Liens other than Permitted Liens;

(e) Vessel Appraisals. the Administrative Agent shall have received appraisals, in form and substance satisfactory to the Administrative Agent, of the Fair Market Value of each of the Vessels showing the Fair Market Value of each of the Vessels to be not less than the Required Percentage of the Facility;

(f) Environmental Claims. the Administrative Agent shall be satisfied that no Security Party and no Affiliate thereof is subject to any Environmental Claim which could reasonably be expected to have a Material Adverse Effect;

(g) ISM Code, ISPS Code, MTSA and Annex VI. the Administrative Agent shall have received a copy of the Operator’s DOC and the SMC, ISSC and, to the extent required under the laws and regulations of the United States and each other jurisdiction in which a Vessel operates or is expected to operate, IAPPC for each of the Vessels, where applicable.

(h) Legal Opinions. the Administrative Agent shall have received legal opinions addressed to the Administrative Agent from (i) Holland & Knight LLP, counsel to the Security Parties, and (ii) Seward & Kissel LLP, special counsel to the Creditors, in each case in such form as the Administrative Agent may require, as well as such other legal opinions as the Administrative Agent shall have required as to all or any matters under the laws of the United States of America, the State of New York and the State of Delaware covering the representations and conditions which are the subjects of Sections 2 and 4.1.

4.3 Further Conditions Precedent. The obligation of the Lenders to make any Advance available to the Borrower under this Agreement shall be expressly and separately subject to the following further conditions precedent on each Drawdown Date:

(a) the Administrative Agent shall have received the Drawdown Notice in accordance with the terms of Section 3.4;

(b) the Administrative Agent shall have received:

(i) copies of the invoices received from the Builder for construction installments due under the Building Contract;

(ii) satisfactory evidence of such other Acquisition Costs to which such Advance relates; and

(iii) satisfactory evidence that the Borrower has paid its portion of the applicable construction installments under the Building Contract.

(c) the representations stated in Section 2 (updated mutatis mutandis to such date) shall be true and correct as if made on and as of that date;

(d) no Event of Default or Default shall have occurred and be continuing;

(e) the Administrative Agent shall be satisfied that no change in any applicable laws, regulations, rules or in the interpretation thereof shall have occurred which make it unlawful for any Security Party to make any payment as required under the terms of the Transaction Documents or any of them; and

(f) there shall have been no Material Adverse Effect since the date hereof.

4.4 Breakfunding Costs. In the event that, on the date specified for the making of the Facility in the Drawdown Notice, the Lenders shall not be obliged under this Agreement to make the Facility available, the Borrower shall indemnify and hold the Lenders fully harmless against any losses which the Lenders (or any thereof) may sustain as a result of borrowing or agreeing to borrow funds to meet the drawdown requirement of the Drawdown Notice and the certificate of the relevant Lender or Lenders shall, absent manifest error, be conclusive and binding on the Borrower as to the extent of any such losses.

4.5 Satisfaction after Drawdown. Without prejudice to any of the other terms and conditions of this Agreement, in the event the Lenders, in their sole discretion, advance the Facility prior to the satisfaction of all or any of the conditions referred to in Sections 4, the Borrower hereby covenants and undertakes to satisfy or procure the satisfaction of such condition or conditions within seven (7) days after the Drawdown Date (or such longer period as the Creditors, in their sole discretion, may agree).

SECTION 5. REPAYMENT AND PREPAYMENT.

5.1 Repayment. Subject to the provisions of Section 5 regarding application of prepayments, the Borrower shall repay the principal of the Facility in twenty eight (28) consecutive installments on the Payment Dates, each such installment being in the amount equal to one-twenty-eighth (1/28th) of Thirty-Seven and One Half percent (37.5%) of the outstanding aggregate principal amount of the Facility as of the date of, and after giving effect to the drawdown of, the Delivery Advance, plus the Final Payment which shall be paid on the Final Payment Date.

5.2 Voluntary Prepayment. The Borrower may prepay, upon two (2) Banking Days written notice, the Facility or any portion thereof without premium or penalty other than breakage costs, if any, pursuant to Section 5.4. Each prepayment shall be in a minimum amount of One Million Dollars ($1,000,000) plus any One Million Dollar ($1,000,000) multiple thereof or the full amount of the Facility.

5.3 Mandatory Prepayment.

(a) Sale of Both Vessels. On (i) the sale of both Vessels or (ii) the earlier of (x) one hundred twenty (120) days after the Total Loss of both Vessels or (y) the date on which the insurance proceeds in respect of such loss are received by the Borrower (or the Parent Guarantor) or the Security Trustee as assignee thereof, the Borrower shall prepay the Facility in full; provided, however, that, at

the written request of the Borrower, any prepayment required to be made pursuant to this Section 5.3(a) may be paid to the Security Trustee to be placed in an interest bearing cash collateral account until the last day of then current Interest Period or, if earlier, a date on which a prepayment could occur without any break funding costs. The Security Trustee shall hold the funds in the cash collateral account for the benefit of the Lenders, but any interest accrued on the account (which shall accrue at LIBOR minus 0.25% per annum) less costs for minimum reserve requirements shall be credited to the Borrower. All moneys (including accrued interest) held in the cash collateral account shall serve as collateral for the prepayment(s) required under this Section 5.3(a) and shall be subject to a security interest in favor of the Security Trustee.

(b) Sale of a Vessel. On (i) the sale of a Vessel or (ii) the earlier of (x) one hundred twenty (120) days after the Total Loss of a Vessel or (y) the date on which the insurance proceeds in respect of such loss are received by the Shipowner Guarantor, the Borrower or the Parent Guarantor or the Security Trustee as assignee thereof, the Borrower shall prepay that portion of the Facility equal to the total outstanding amount of the Facility multiplied by a fraction (1) the numerator of which is equal to the Fair Market Value (as of the most recent appraisal prior to such disposition or loss) of the Vessel which is the subject of such disposition or loss and (2) the denominator of which is equal to the Fair Market Value (as of the most recent appraisal prior to such disposition or loss) of both of the Vessels.

5.4 Interest and Costs; Application of Prepayments; No Reborrowing. Any prepayment of the Facility made hereunder (including, without limitation, those made pursuant to Sections 5 and 9) shall be subject to the condition that on the date of prepayment all accrued interest to the date of such prepayment shall be paid in full with respect to the Facility or portions thereof being prepaid, together with any and all actual costs or expenses incurred by any Lender in connection with any breaking of funding (as certified by such Lender, which certification shall, absent any manifest error, be conclusive and binding on the Borrower). All prepayments of the Facility under Section 5.3 shall be applied towards the installments of the Facility in the inverse order of their due dates for payment. No payments made in prepayment or repayment of the Facility shall be available for reborrowing.

SECTION 6. INTEREST AND RATE.

6.1 Applicable Rate. The Facility shall bear interest at the Applicable Rate which shall be the rate per annum which is equal to the aggregate of (a) LIBOR for the relevant Interest Period plus (b) the Applicable Margin. The Applicable Rate shall be determined by the Administrative Agent two (2) Banking Days prior to the first day of the relevant Interest Period, provided, however, that the Applicable Margin shall be adjusted, if necessary, effective on the Banking Day immediately following the earlier of (i) delivery of or (ii) the due date for delivery of each Compliance Certificate to the Administrative Agent, and if the Applicable Margin is so adjusted during any Interest Period, the Applicable Rate shall be re-calculated to reflect the current Applicable Margin. The Administrative Agent shall promptly notify the Borrower in

writing of the Applicable Rate as and when determined. Each such determination, absent manifest error, shall be conclusive and binding upon the Borrower.

6.2 Default Rate. Any amounts due under this Agreement, not paid when due, whether by acceleration or otherwise, shall bear interest thereafter from the due date thereof until the date of payment at the Default Rate. In addition, following the occurrence of any Event of Default, the Administrative Agent may, and upon instruction of the Majority Lenders shall, deliver a notice to the Borrower advising the Borrower that an Event of Default has occurred. From the date such Event of Default first occurred until such Event of Default is cured to the satisfaction of the Majority Lenders, the Facility shall bear interest at the Default Rate.

6.3 Interest Periods. The Borrower shall give the Administrative Agent an Interest Notice specifying the Interest Period selected at least three (3) Banking Days prior to the end of any then existing Interest Period. If at the end of any then existing Interest Period the Borrower fails to give an Interest Notice the relevant Interest Period shall be three (3) months. The Borrower’s right to select an Interest Period shall be subject to the following restrictions: (a) no selection of an Interest Period shall be effective unless each Lender is satisfied that the necessary funds will be available to such Lender for such period and that no Event of Default or Default shall have occurred and be continuing; and (b) no Interest Period shall extend beyond the Final Payment Date.

6.4 Interest Payments. Accrued interest on the Facility shall be payable on the last day of each Interest Period, except that if the Borrower shall select an Interest Period in excess of three (3) months, accrued interest shall be payable in arrears during such Interest Period on each three (3) month anniversary of the commencement of such Interest Period and upon the end of such Interest Period.

6.5 Non-availability of Funds. If the Administrative Agent shall determine that, by reason of circumstances affecting the London Interbank Market generally, adequate and reasonable means do not or will not exist for ascertaining the Applicable Rate for the Facility for any Interest Period, the Administrative Agent shall give notice of such determination to the Borrower. The Borrower and the Administrative Agent shall then negotiate in good faith in order to agree upon a mutually satisfactory interest rate and/or Interest Period to be substituted for those which would otherwise have applied under this Agreement. If the Borrower and the Administrative Agent are unable to agree upon such a substituted interest rate and/or Interest Period within thirty (30) days of the giving of such determination notice, the Administrative Agent shall set an interest rate and Interest Period to take effect from the expiration of the Interest Period in effect at the date of determination, which rate shall be equal to the Applicable Margin plus the cost to the Lenders (as certified by each Lender) of funding the Facility. In the event the state of affairs referred to in this Section 6.5 shall extend beyond the end of the Interest Period, the foregoing procedure shall continue to apply until circumstances are such that the Applicable Rate may be determined pursuant to Section 6.

SECTION 7. PAYMENTS.

7.1 Place of Payments, No Set Off.

(a) All payments to be made hereunder by the Borrower shall be made to the Administrative Agent, not later than 11 a.m. New York time (any payment received after 11 a.m. New York time shall be deemed to have been paid on the next Banking Day) on the due date of such payment, at its office located at 200 Park Avenue, New York, NY 10166-0396 or to such other office of the Administrative Agent as the Administrative Agent may direct, without set-off or counterclaim and free from, clear of, and without deduction for, any Non-Excluded Taxes, provided, however, that if the Borrower shall at any time be compelled by law to withhold or deduct any Non-Excluded Taxes from any amounts payable to the Creditors hereunder, then the Borrower shall pay such additional amounts in Dollars as may be necessary in order that the net amounts received after withholding or deduction shall equal the amounts which would have been received if such withholding or deduction were not required and, in the event any withholding or deduction is made, whether for Non-Excluded Taxes or otherwise, the Borrower shall promptly send to the Administrative Agent, as soon as practicable after making such payment and withholding, documentary evidence of such withholding or deduction reasonably satisfactory to the Administrative Agent;

(b) Each Foreign Lender shall deliver to the Borrower and the Administrative Agent on or prior to the date on which such Foreign Lender becomes a Lender under this Agreement and from time to time thereafter upon the request of the Borrower or the Administrative Agent, but only if such Foreign Lender is legally entitled to do so, whichever of the following documents applies to such Foreign Lender:

(i) a properly completed and duly signed United States Internal Revenue Service Form W-8BEN (or applicable successor form) that includes such Foreign Lender’s United States federal taxpayer identification number, claiming eligibility for the benefits of an income tax treaty to which the United States is a party;

(ii) a properly completed and duly signed United States Internal Revenue Service Form W-8ECI (or applicable successor form) that includes such Foreign Lender’s United States federal taxpayer identification number;

(iii) in the case of a Foreign Lender claiming the benefits of the exemption for portfolio interest under Section 881(c) of the Code, (A) a certificate in the form of Exhibit L and (B) a properly completed and duly signed United States Internal Revenue Service Form W-8BEN (or applicable successor form); or

(iv) any other form prescribed by applicable law as a basis for claiming exemption from, or a reduction in the rate of, United States federal withholding tax, properly completed and duly signed, together with such supplementary documentation as may be prescribed by

applicable law or regulations to enable the Borrower to determine the withholding or deduction required to be made;

(c) The Administrative Agent shall deliver to the Borrower from time to time upon the request of the Borrower a properly completed and duly signed United States Internal Revenue Service Form W-8IMY (or applicable successor form) together with such supplementary documentation as is prescribed by applicable law or regulations to enable the Borrower to determine the withholding or deduction required to be made;

(d) If the Administrative Agent or a Lender receives a refund of any Tax paid by the Borrower or for which the Borrower paid any additional amounts pursuant to Section 7.1(a) or for which the Borrower paid an indemnity pursuant to Section 11.2 or 15.1, it shall pay over such refund to the Borrower (but only to the extent of such Tax, indemnity, or additional amounts paid by the Borrower, net of all out-of-pocket expenses of the Administrative Agent or such Lender and without interest (other than any interest paid by the relevant taxing authority with respect to such refund), provided, that the Borrower, upon the request of the Administrative Agent or such Lender, shall repay such amount to the Administrative Agent or such Lender if and to the extent that the Administrative Agent or such Lender is required to repay such refund to such taxing authority;

(e) To the extent that the Borrower pays a Non-Excluded Tax on behalf of the Administrative Agent or any Lender pursuant to Section 7.1, 11.2 or 15.1 or pays any additional amount with respect to any Tax pursuant to Section 7.1(a) or pays an indemnity to the Administrative Agent or any Lender with respect to any Tax pursuant to Section 11.2 or 15.1, the Borrower shall, without any further action, be subrogated to the rights and remedies of the Administrative Agent or Lender on whose behalf such Tax was paid (or to or for the benefit of which such additional amount or indemnity was paid) with respect to the transaction or event giving rise to such Tax, and the Administrative Agent or Lender (as the case may be) shall cooperate with Borrower to enable the Borrower to pursue such rights and remedies, if any, to the extent reasonably requested by the Borrower and at the Borrower’s expense.

7.2 Tax Credits. If any Lender obtains the benefit of a credit against the liability thereof for Taxes imposed by any taxing authority for all or part of the Taxes as to which the Borrower has paid additional amounts as aforesaid (and each Lender agrees to use its best efforts to obtain the benefit of any such credit which may be available to it, provided it has knowledge that such credit is in fact available to it), then such Lender shall pay to the Borrower an amount equal to the amount of the credit so obtained.

7.3 Computations; Banking Days.

(a) All computations of interest and fees shall be made by the Creditors on the basis of a 360-day year, in each case for the actual number of days (including the first day but excluding the last day) occurring in the period for

which interest or fees are payable. Each determination by a Creditor of an interest rate or fee hereunder shall be conclusive and binding for all purposes, absent manifest error.

(b) Whenever any payment under this Agreement or under the Note shall be stated to be due on a day other than a Banking Day, such payment shall be due and payable on the next succeeding Banking Day unless the next succeeding Banking Day falls in the following calendar month, in which case it shall be payable on the immediately preceding Banking Day.

7.4 Mitigation Obligations; Replacement of Lenders.

(a) If any Lender requests compensation under Section 11.2 hereof, or if the Borrower is required to pay any additional amount to any Lender or any taxing authority for account of any Lender pursuant to Section 7.1 hereof, then such Lender shall use reasonable efforts to designate a different lending office for funding or booking its loans hereunder or to assign its rights and obligations hereunder to another of its offices, branches or Affiliates, if, in the judgment of such Lender, such designation or assignment (i) would eliminate or reduce amounts payable pursuant to Section 7.1 or 11.2 hereof, as the case may be, in the future, and (ii) would not subject such Lender to any unreimbursed cost or expense and would not otherwise be disadvantageous to such Lender. The Borrower hereby agrees to pay all reasonable costs and expenses incurred by any Lender in connection with any such designation or assignment.

(b) If any Lender requests compensation under Section 11.2 hereof, or if the Borrower is required to pay any additional amount to any Lender or any taxing authority for account of any Lender pursuant to Section 7.1 hereof, or if any Lender defaults in its obligation to fund Advances hereunder, then the Borrower may, at its sole expense and effort, upon notice to such Lender and the Administrative Agent, require such Lender to assign and delegate, without recourse (in accordance with and subject to the restrictions contained in Section 10.1 hereof), all its interests, rights and obligations under this Agreement to an assignee that shall assume such obligations (which assignee may be another Lender, if a Lender accepts such assignment); provided that (i) the Borrower shall have received the prior written consent of the Administrative Agent, which consent shall not unreasonably be withheld, (ii) such Lender shall have received payment of an amount equal to the outstanding principal of its interest in the Facility, accrued interest thereon, accrued fees and all other amounts payable to it hereunder, from the assignee (to the extent of such outstanding principal and accrued interest and fees) or the Borrower (in the case of all other amounts), and (iii) in the case of any such assignment resulting from a claim for compensation under Section 11.2 hereof or payments required to be made pursuant to Section 7.1 hereof, such assignment will result in a reduction in such compensation or payments. A Lender shall not be required to make any such assignment and delegation if, prior thereto, as a result of a waiver by such Lender or otherwise,

the circumstances entitling the Borrower to require such assignment and delegation cease to apply.

SECTION 8. EVENTS OF DEFAULT.

8.1 Events of Default. The occurrence of any of the following events shall be an Event of Default:

(a) Non-Payment of Principal. any payment of principal is not paid when due; or

(b) Non-Payment of Interest or Other Amounts. any interest or any other amount becoming payable to a Creditor under this Agreement or under any other Transaction Document is not paid on the due date or date of demand (as the case may be), and such default continues unremedied for a period of three (3) Banking Days; or

(c) Representations. any representation, warranty or other statement made by any Security Party or in any Transaction Document or in any other instrument, document or other agreement delivered in connection with any Transaction Document proves to have been untrue or misleading in any material respect as at the date as of which made or confirmed; or

(d) Mortgage. an event of default shall have occurred and be continuing under the Mortgage; or

(e) Covenants. any Security Party: (i) defaults in the due and punctual observance or performance of Sections 9.1(b) (except Section 9.1(b)(iv)), 9.1(f), 9.1(p), 9.1(r), 9.3(a), 9.3(b) or 9.4; or (ii) defaults in the due and punctual observance or performance of any other term, covenant or agreement contained in any Transaction Document or in any other instrument, document or other agreement delivered in connection with any Transaction Document and such default continues unremedied or unchanged, as the case may be, for a period of thirty (30) days after notice thereof from the Administrative Agent to the Borrower; or

(f) Indebtedness. any Security Party shall fail to make any payment (whether of principal or interest and regardless of amount) in respect of any Material Indebtedness, when and as the same shall become due and payable and after any applicable grace and/or notice period as a result of which such Material Indebtedness is accelerated by the holder thereof; or

(g) Cross-Default. any event or condition occurs that results in any Material Indebtedness becoming due prior to its scheduled maturity or that enables or permits (after giving effect to any applicable grace period and/or notice period) the holder or holders of any Material Indebtedness or any trustee or agent on its or their behalf to cause any Material Indebtedness to become due, or to

require the prepayment, repurchase, redemption or defeasance thereof, prior to its scheduled maturity and such holder or holders in each case shall have so caused or required; provided that this subsection (g) shall not apply to secured Indebtedness that becomes due as a result of the voluntary sale, transfer or total loss of the property or assets securing such Indebtedness; or

(h) Involuntary Proceeding. an involuntary proceeding shall be commenced or an involuntary petition shall be filed seeking (i) liquidation, reorganization or other relief in respect of any Security Party or its debts, or of a substantial part of its assets, under any Federal, state or foreign bankruptcy, insolvency, receivership or similar law now or hereafter in effect or (ii) the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for any Security Party or for a substantial part of its assets, and, in any such case, such proceeding or petition shall continue undismissed for sixty (60) days or an order or decree approving or ordering any of the foregoing shall be entered; or

(i) Bankruptcy. any Security Party shall (i) voluntarily commence any proceeding or file any petition seeking liquidation, reorganization or other relief under any Federal, state or foreign bankruptcy, insolvency, receivership or similar law now or hereafter in effect, (ii) consent to the institution of, or fail to contest in a timely and appropriate manner, any proceeding or petition described in clause (h) of this Section 8.1, (iii) apply for or consent to the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for the Borrower or any Subsidiary or for a substantial part of its assets, (iv) file an answer admitting the material allegations of a petition filed against it in any such proceeding, (v) make a general assignment for the benefit of creditors or (vi) take any action for the purpose of effecting any of the foregoing; or

(j) Termination of Operations; Sale of Assets. except as expressly permitted under this Agreement, any Security Party ceases its operations or sells or otherwise disposes of all or substantially all of its assets or all or substantially all of the assets of any Security Party are seized or otherwise appropriated; or

(k) Judgments. (i) any judgment or order is made the effect whereof would be to render invalid any Transaction Document or any material provision thereof, or any Security Party asserts that any such agreement or provision thereof is invalid; or (ii) one or more judgments (excluding only the covered amounts of insured claims, exclusive of deductibles and excess liability beyond coverage limits and provided that underwriters have not raised defenses to coverage) for the payment of money in an aggregate amount in excess of $1,000,000.00 shall be rendered against any Security Party or any combination thereof and the same shall remain undischarged for a period of thirty (30) consecutive days during which execution shall not be effectively stayed, or any action shall be legally taken by a judgment creditor to attach or levy upon any assets of such Security Party to enforce any such judgment and either (A) enforcement proceedings shall have been commenced by any creditor upon any such judgment or order, or (B) there

shall be a period of ten (10) consecutive days after entry thereof during which a stay of enforcement of any such judgment or order, by reason of a pending appeal, or otherwise, shall not be in effect; provided that any such judgment or order shall not give rise to an Event of Default under this subsection (k) if and for so long as and to the extent of (x) the amount of such judgment or order is covered by a valid and binding policy of insurance between the defendant and the insurer covering full payment thereof, and (y) such insurer has been notified, and has not disputed the claim for payment, of the amount of such judgment or order; or

(l) Inability to Pay Debts. any Security Party is unable to pay or admits its inability to pay its debts as they fall due or a moratorium shall be declared in respect of any material indebtedness of any Security Party thereof; or

(m) Change in Financial Position. any change in the financial position of any Security Party which, in the reasonable opinion of the Majority Lenders, shall have a Material Adverse Effect; or

(n) Change of Control. a Change of Control shall occur with respect to the Parent Guarantor or the Parent Guarantor shall cease to own directly or indirectly, a majority of aggregate voting power represented by the issued and outstanding ownership interests of the Borrower or the Shipowner Guarantor; or

(o) ERISA Event. (i) an ERISA Termination Event described in clause (i), (ii) or (iv) of the definition thereof shall occur or (ii) an ERISA Funding Event, or an ERISA Termination Event described in clause (iii) or (v) of the definition thereof, shall occur or exist that, in the reasonable opinion of the Majority Lenders, when taken together with all other ERISA Funding Events and such ERISA Termination Events that exist or have occurred and are continuing, could reasonably be expected to have a Material Adverse Effect; or

(p) Environmental Proceedings. except for specific matters disclosed in writing to the Creditors prior to the date of this Agreement, any indictment occurring after the date of this Agreement, of any Security Party under any Environmental Law, or commencement of criminal proceedings, which is reasonably likely to result in a Material Adverse Effect, against any Security Party under any Environmental Law, pursuant to which indictment, statute or proceeding the penalties or remedies sought or available include forfeiture of any of the property of such Security Party and such proceedings shall continue for more than 30 days; provided, however, that the Creditors agree that an Event of Default shall not be deemed to have occurred prior to the date on which Borrower receives notice thereof from the Administrative Agent; or

(q) Amendment of Constitutional Documents. any Constitutional Document of any Security Party shall be amended, revoked or rescinded in any material way without the prior written consent of the Creditors; or

(r) Forfeiture of Vessel. a proceeding shall have been commenced on behalf of the United States to effect the forfeiture of a Vessel or any notice shall have been issued on behalf of the United States of the seizure of a Vessel; or

(s) Loss of Tax Status. the Parent Guarantor shall at any time fail to maintain its status as an exempt partnership under section 7704(c) of the Code; or

(t) Building Contract. (i) the Building Contract is rescinded, cancelled or otherwise terminated for any reason; or (ii) the Vessels are not delivered to the Borrower by August 1, 2010; or

(u) Invalidity. any material provision of any Transaction Document after delivery thereof shall for any reason cease to be valid binding on or enforceable against any Security Party which is a party thereto, or any Security Party shall so state in writing except if such invalidity or unenforceability is solely due to the gross negligence or willful misconduct of any Creditor.

Upon and during the continuance of any Event of Default, the Lenders’ obligation to make the Facility available shall cease and the Administrative Agent on the instructions of the Majority Lenders may, by notice to the Borrower, declare the entire unpaid balance of the then outstanding Facility, accrued interest and any other sums payable by the Borrower hereunder or under the Note due and payable, whereupon the same shall forthwith be due and payable without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived; provided that upon the happening of an event specified in subsections (h), (i) or (l) of this Section 8.1 with respect to the Borrower, the Note shall be immediately due and payable without declaration or other notice to the Borrower. In such event, the Lenders may proceed to protect and enforce their rights by action at law, suit in equity or in admiralty or other appropriate proceeding, whether for specific performance of any covenant contained in any Transaction Document, or in aid of the exercise of any power granted herein or therein, or the Lenders may proceed to enforce the payment of the Note or to enforce any other legal or equitable right of the Lenders, or proceed to take any action authorized or permitted under the terms of any Transaction Document or by applicable law for the collection of all sums due, or so declared due, on the Note, including, without limitation, the right to appropriate and hold or apply (directly, by way of set-off or otherwise) to the payment of the obligations of the Borrower to the Lenders hereunder and/or under the Note (whether or not then due) all moneys and other amounts of the Borrower then or thereafter in possession of any Lender, the balance of any deposit account (demand or time, mature or unmatured) of the Borrower then or thereafter with any Lender and every other claim of the Borrower then or thereafter against any of the Lenders.

8.2 Indemnification. The Borrower agrees to, and shall, indemnify and hold each of the Creditors harmless against any loss, as well as against any reasonable costs or expenses (including reasonable legal fees and expenses), which any of the Creditors sustains or incurs as a consequence of any default in payment of the principal amount of the Facility, interest accrued thereon or any other amount payable under this Agreement or any other Transaction Document including, but not limited to, all actual losses incurred in liquidating or re-employing fixed deposits made by third parties or funds acquired to effect or maintain the Facility or any portion

thereof. Any Creditors’ certification in reasonable detail of such costs and expenses shall, absent any manifest error, be conclusive and binding on the Borrower.

8.3 Application of Moneys. Except as otherwise provided in any other Transaction Document, all moneys received by any Creditor under or pursuant to this Agreement or any of the other Transaction Documents after the occurrence of any Event of Default (unless cured to the satisfaction of the Majority Lenders) shall be applied by the Administrative Agent in the following manner:

(a) first, in or towards the payment or reimbursement of any expenses or liabilities incurred by the Administrative Agent, the Security Trustee or the Lenders in connection with the ascertainment, protection or enforcement of its rights and remedies hereunder, under the Note and under any of the Security Documents,

(b) secondly, in or towards payment of any interest owing in respect of the Facility,

(d) fourthly, in or towards payment of all other sums which may be owing to the Administrative Agent, the Security Trustee or the Lenders under this Agreement, under the Note, under the Fee Letter or under any of the Security Documents,

(e) fifthly, in or towards payments of any amounts then owed under any Facility Swap, and

(f) sixthly, the surplus (if any) shall be paid to the Borrower or to whosoever else may be entitled thereto.

SECTION 9. COVENANTS.

9.1 Affirmative Covenants. The Borrower hereby covenants and undertakes with the Lenders that, from the date hereof and so long as any principal, interest or other moneys are owing in respect of any Transaction Document, the Borrower shall:

(a) Performance of Agreements. duly perform and observe, and procure the observance and performance by all other parties thereto (other than the Creditors) of, the terms of each Transaction Document;

(b) Notice of Default, etc. promptly upon obtaining knowledge thereof, inform the Administrative Agent of the occurrence of (i) any Event of Default or any Default, (ii) any litigation or governmental proceeding pending or threatened against any Security Party or against any of such Security Party’s Subsidiaries or Affiliates which could reasonably be expected to have a Material Adverse Effect, (iii) the withdrawal of either of the Vessel’s rating by its Classification Society, (iv) the issuance by its Classification Society of any material recommendation or

notation affecting class and (v) any other event or condition which is reasonably likely to have a Material Adverse Effect;

(c) Obtain Consents. without prejudice to Section 2.1 and this Section 9.1, obtain every consent and do all other acts and things which may from time to time be necessary or advisable for the continued due performance of any Security Party’s respective obligations under any Transaction Document;

(d) Financial Information. deliver to each Lender or, in lieu thereof, notify each Lender of the electronic availability (through the Securities and Exchange Commission) of:

(i) as soon as available but not later than one hundred (120) days after the end of each fiscal year of the Parent Guarantor, complete copies of the consolidated financial reports of the Parent Guarantor and its Subsidiaries (together with a Compliance Certificate), all in reasonable detail, which shall include at least the consolidated balance sheet of the Parent Guarantor and its Subsidiaries as of the end of such year and the related consolidated statements of income and sources and uses of funds for such year, which shall be audited reports prepared by an Acceptable Accounting Firm;

(ii) as soon as available but not later than forty-five (45) days after the end of each of the first three quarters of each fiscal year of the Parent Guarantor, a quarterly interim consolidated balance sheet of the Parent Guarantor and its Subsidiaries and the related consolidated profit and loss statements and sources and uses of funds (together with a Compliance Certificate), all in reasonable detail, unaudited, but certified to be true and complete by the chief financial officer of the Parent Guarantor;

(iii) promptly after the same becomes publicly available (but in any event no later than the delivery of the next required Compliance Certificate), copies of all registration statements and reports on Forms 10-K, 10-Q and 8-K (or their equivalents), proxy statements and other filings which the Parent Guarantor or any Subsidiary shall have filed with the Securities and Exchange Commission or any similar governmental authority or with any national securities exchange, as the case maybe;

(iv) promptly upon the mailing thereof to the shareholders of the Parent Guarantor, copies of all financial statements, reports, proxy statements and other communications provided to the Parent Guarantor’s shareholders;

(v) such other statements (including, without limitation, monthly consolidated statements of operating revenues and expenses), lists of assets and accounts, budgets, forecasts, reports and other financial

information with respect to its business as the Administrative Agent may from time to time reasonably request, certified to be true and complete by the chief financial officer of the Parent Guarantor;

(e) Vessel Valuations. (i) the Borrower shall obtain and deliver to the Administrative Agent an appraisal of the Fair Market Value of each of the Vessels from an Approved Ship Broker as of the Delivery Date and thereafter the Borrower shall obtain and deliver to the Administrative Agent a desktop appraisal of the Fair Market Value of each of the Vessels from an Approved Ship Broker annually on the anniversary of the Delivery Date; all such appraisals are to be at the Borrower’s cost. In the event the Borrower fails or refuses to obtain the appraisals requested pursuant to this Section 9.1(e) within thirty (30) days of an Administrative Agent’s request therefor, the Administrative Agent shall be authorized to obtain such appraisals, at the Borrower’s cost, from an Approved Ship Broker, which appraisals shall be deemed the equivalent of appraisals duly obtained by the Borrower pursuant to this Section 9.1(e), but the Administrative Agent’s actions in doing so shall not excuse any default of the Borrower under this Section 9.1(e); and

(ii) permit the Administrative Agent to conduct, and the Borrower and the Shipowner Guarantor shall cooperate in the conduct of, a visual appraisal of any or all of the Vessels at Borrower’s expense, once over every twelve (12) month period of this Agreement in the absence of an Event of Default and at any time during the continuance of an Event of Default. Any such visual appraisal shall be completed in such a way that as to not interfere with the commercial operations of the Vessels. The first twelve-month period will begin on the date of this Agreement; provided that Borrower will allow access to any appraiser selected by the Administrative Agent to attend and appraise a Vessel in drydock at any time on reasonable notice; provided further that each fiscal year, upon the request of the Administrative Agent, the Borrower shall provide the Administrative Agent with a drydock schedule and location of drydock;

(f) Existence. do or cause to be done, and procure that each other Security Party shall do or cause to be done, all things necessary to preserve and keep in full force and effect its legal existence and all licenses, franchises, permits and assets necessary to the conduct of its business;

(g) Books and Records. at all times keep, and cause each Security Party to keep, proper books of record and account on a consolidated basis into which full and correct entries shall be made in accordance with GAAP;

(h) Taxes and Assessments. (i) pay and discharge, and cause each other Security Party to pay and discharge, all material Taxes imposed upon it or upon its income or property prior to the date upon which penalties attach thereto; provided, however, that it shall not be required to pay and discharge, or cause to be paid and discharged, any such Tax so long as (A) such Tax is being contested

in good faith by appropriate proceedings; (B) it shall set aside on its books adequate reserves with respect thereto, determined in accordance with GAAP; and (C) the failure to make payment pending such contest could not reasonably be expected to result in a Material Adverse Effect; provided, further, that if any such Tax lawfully imposed shall remain unpaid after the date upon which a Lien on any Collateral arises or may be imposed as a result of such non-payment, or if any Lien is claimed for any other reason against any of the Collateral, which if foreclosed would in the opinion of the Administrative Agent adversely affect the value of the Creditors’ security interest in any of the Collateral, the Creditors may, after the occurrence and during the continuation of an Event of Default or if in the opinion of Administrative Agent such non-payment or other claim would be reasonably like to result in a Material Adverse Effect, pay and discharge such Taxes and Liens, and the amount so paid by the Creditors shall be payable on demand by the Borrower; and

(ii) shall cause each Security Party to comply with all laws and all acts, rules, regulations and orders of any legislative, administrative or judicial body or official, applicable to the Collateral or to the operation of the business of such Security Party, the failure to comply with which is reasonably likely to result in a Material Adverse Effect;

(i) Inspection. allow, and cause each Security Party to allow, any representative or representatives designated by the Administrative Agent, subject to applicable laws and regulations, to visit and inspect any of the Collateral, and, on request, to examine its books of account, records, reports and other papers (including, without limitation, copies of all internally generated inspection or survey reports) relating to the Collateral and to discuss its affairs, finances and accounts with its officers, all at such reasonable times and as often as the Administrative Agent reasonably requests;

(j) Compliance with Statutes, Agreements, etc. do or cause to be done, and cause each Security Party to do and cause to be done, all things necessary to comply with all material contracts or agreements to which such Person is a party, and all material laws (including, without limitation, all Environmental Laws), and the rules and regulations thereunder, applicable to such Person, including, without limitation, those laws, rules and regulations relating to employee benefit plans and environmental matters, in each case the failure to comply with which is reasonably likely to result in a Material Adverse Effect;

(k) Environmental Matters. (i) promptly upon the occurrence of any of the following conditions, provide to the Administrative Agent a certificate of a chief executive officer or chief financial officer thereof, specifying in detail the nature of such condition and its proposed response or the response of its Environmental Affiliates: (a) the receipt by any other Security Party or the receipt by any Environmental Affiliates of a Security Party of any written communication whatsoever from any governmental or regulatory authority, Classification Society, or other similarly appropriate authority that alleges that such Person is not in

compliance with any applicable Environmental Law or Environmental Approval, if such noncompliance could reasonably be expected to have a Material Adverse Effect, (b) knowledge by any Security Party or any Environmental Affiliates of a Security Party that there exists any Environmental Claim pending or threatened against any such Person, which could reasonably be expected to have a Material Adverse Effect, or (c) any release, emission, discharge or disposal of any material that could form the basis of any Environmental Claim against any Security Party or against any Environmental Affiliates of a Security Party, if such Environmental Claim could reasonably be expected to have a Material Adverse Effect. Upon the written request by the Administrative Agent, it shall submit to the Administrative Agent at reasonable intervals, a report providing an update of the status of any issue or claim identified in any notice or certificate required pursuant to this subsection;

(ii) , except where failure to do so could not reasonably be expected to have a Material Adverse Effect, (A) shall require that any and all subcharterers, managers, employees, contractors, subcontractors, agents, representatives, Affiliates, consultants, occupants and any and all other Persons in each case with respect to either Vessel, (x) comply in all material respects with all applicable Environmental Laws, (y) use, employ, process, emit, generate, store, handle, transport, dispose of and/or arrange for the disposal of any and all Materials of Environmental Concern in, on, or, directly or indirectly, related to or in connection with any of the Vessels or any portion thereof in a manner consistent with prudent industry practice and in compliance in all material respects with all applicable Environmental Laws, and in a manner which does not pose a significant risk to human health, safety (including occupational health and safety) or the environment, and (z) obtain, maintain, and have on board each of the Vessels any required Certificate of Financial Responsibility; and (B), and it shall require that any charterer of any of the Vessels or any other Person that may have custody of any of the Vessels shall, upon the occurrence or discovery of an Environmental Claim with respect to any such Vessel, promptly carry out, using Borrower’s or such other Person’s own funds or proceeds of insurance with respect thereto, such actions as may be necessary to remediate or cure such Environmental Event in compliance in all material respects with all Applicable Laws, to comply in all material respects with all applicable Environmental Laws and to alleviate any significant risk to human health or the environment if the same arises from a condition on or in respect of either of the Vessels, whether existing prior to or during the term of this Agreement or the term of any such the charter. Once Borrower or such other Person commences such actions, Borrower shall, and shall cause such other Person to, thereafter diligently and expeditiously proceed to comply in all material respects in a timely manner with all Environmental Laws and to eliminate any significant risk to human health or the environment arising from such Environmental

Claim and shall, at the request of the Administrative Agent, give periodic progress reports to the Administrative Agent and the Lenders on its compliance efforts and actions; provided, however, that nothing contained herein will relieve or discharge or in any way affect the obligation of Borrower to cure promptly any violations of Applicable Law or to pay and discharge any Liens against any of the Vessels;

(l) ERISA. forthwith upon (i) the occurrence of any ERISA Termination Event or (ii) the occurrence or existence of any ERISA Funding Event, furnish or cause to be furnished to the Lenders written notice thereof;

(m) Vessel Management. cause each of the Vessels to be managed both commercially and technically by the Borrower or a wholly-owned Subsidiary thereof;

(n) ISM Code, ISPS Code, MTSA and Annex VI Matters.

(i) procure that the relevant Operator shall comply with and ensure that their respective Vessel shall comply with the requirements of the ISM Code, the ISPS Code, MTSA and, to the extent required under the laws and regulations of the United States and each other jurisdiction in which a Vessel operates or is expected to operate, Annex VI in accordance with the respective implementation schedules thereof, including (but not limited to) the maintenance and renewal of valid certificates pursuant thereto throughout the Facility Period;

(ii) and shall procure that the relevant Operator shall reasonably promptly inform the Administrative Agent if there is any threatened or actual withdrawal of its DOC, SMC, ISSC or, to the extent such has been issued as required under the laws and regulations of the United States and each other jurisdiction in which a Vessel operates or is expected to operate, IAPPC in respect of the applicable Vessel; and

(iii) upon request of the Administrative Agent, shall procure that the relevant Operator shall reasonably promptly inform the Administrative Agent upon the issue to the relevant Borrower or Operator of a DOC and to the applicable Vessel of an SMC, ISSC or IAPPC;

(o) Brokerage Commissions, etc. indemnify and hold the Creditors harmless from any claim resulting from acts or omissions of the Borrower for any brokerage commission, fee, or compensation from any broker or third party resulting from the transactions contemplated hereby;

(p) Insurance. maintain, and cause each Security Party to maintain, with financially sound and reputable insurance companies insurance on all their respective properties and against all such risks and in at least such amounts as are

usually insured against by companies of established reputation engaged in the same or similar business from time to time; and on the Delivery and at any time thereafter, maintain such insurances as are required pursuant to the Mortgage (notwithstanding the foregoing, the Security Parties shall not be required to maintain Mortgagee’s Interest Insurance);

(q) Maintenance of Properties. (i) maintain, and cause each other Security Party to maintain, all property material to the conduct of its business in good working order and condition, ordinary wear and tear excepted; and (ii) require at all times that any demise charterer or operator of any of the Vessels shall use its due diligence to operate, maintain, repair, insure, man and supply the Vessels or either of them in a careful and proper manner, comply in all material respects with and conform to all governmental laws, rules and regulations and insurance restrictions relating thereto, and operate any such Vessels with competent and duly qualified personnel;

(r) Citizenship. remain: (i) with respect to the Borrower, a limited partnership, and, with respect to the Shipowner Guarantor, a limited liability company, in each case organized under the laws of the State of Delaware or another state within the United States; and (ii) a citizen of the United States within the meaning of 46 U.S.C. §50501 and the regulations promulgated thereunder for purposes of engaging in the coastwise trade and in foreign commerce of the United States; and

(s) Defense of Title. warrant and defend the Shipowner Guarantor’s good and marketable title in and to the Collateral and the Administrative Agent’s and the Security Trustee’s Liens on the Collateral, against all claims and demands whatsoever.

9.2 Negative Covenants. The Borrower hereby covenants and undertakes with the Lenders that, from the date hereof and so long as any principal, interest or other moneys are owing in respect of any Transaction Document, the Borrower shall not, and shall procure that each other Security Party shall not, without the prior written consent of the Administrative Agent (or the Majority Lenders or all of the Lenders if required by Section 14.7):

(a) Liens. create, assume or permit to exist, any Lien whatsoever upon any Collateral except:

(i) prior to the Delivery Date, Liens of or, arising through, the Builder arising under the Building Contract or by applicable law during the construction period of the Vessels;

(ii) Liens for taxes not yet payable for which adequate reserves have been maintained;

(iii) each of the Mortgage, the Assignments and other Liens in favor of a Creditor;

(iv) Liens against either of the Vessels permitted to exist under the terms of the Mortgage;

(v) Liens arising out of time charters (including the Charter), voyage charters or contracts of affreightment with unrelated third parties in respect of a Vessel; provided, however, that any such Lien permitted by this subsection 9.2(a)(v) shall at all times be subordinated in all respects to Liens in favor of the Creditors arising under the Transaction Documents;

(vi) pledges of certificates of deposit or other cash collateral securing any Security Party’s reimbursement obligations in connection with letters of credit now or hereafter issued for the account of such Security Party in connection with the establishment of the financial responsibility of the Security Parties under 33 C.F.R. Part 130 or 46 C.F.R. Part 540, as the case may be, as the same may be amended or replaced;

(vii) pledges or deposits to secure obligations under workmen’s compensation laws or similar legislation, deposits to secure public or statutory obligations, warehousemen’s or other like liens, or deposits to obtain the release of such Liens and deposits to secure surety, appeal or customs bonds on which a Security Party is the principal, as to all of the foregoing, only to the extent arising and continuing in the ordinary course of business; and

(viii) other Liens incidental to the conduct of the business of each such party, the ownership of any such party’s property and assets and which do not in the aggregate materially detract from the value of each such party’s property or assets or materially impair the use thereof in the operation of its business;

(b) Changes in Borrower. and shall not permit any other Security Party to: (i) materially change the nature of its business; (ii) change the form of organization of its business; or (iii) without thirty (30) days’ prior written notice to the Administrative Agent, change its name or jurisdiction of organization;

(c) Changes in Offices. change the location of the chief executive office of any Security Party, the office of the chief place of business any such parties, the office of the Security Parties in which the records relating to the earnings or insurances of either of the Vessels are kept unless the Lenders shall have received sixty (60) days prior written notice of such change;

(d) Sale or Pledge of Equity Interests. sell, assign, transfer, pledge or otherwise convey or dispose of (including by way of spin-off, installment sale or otherwise) any of the equity interests of the Borrower or the Shipowner Guarantor;

(e) Sale of Assets. (i) sell, or otherwise dispose of, any Collateral (including, without limitation, either of the Vessels) unless otherwise in accordance with this Agreement or the other Transaction Documents; or (ii), with respect to any Security Party, sell, or otherwise dispose (in one transaction or in a series of transactions) of all or substantially all assets (including by way of spin-off, installment sale or otherwise); provided, however, that with respect to subsection (ii) hereof, the consent of the Lenders shall not be unreasonably withheld;

(f) Sale of Parent Guarantor’s Material Subsidiaries. sell, or otherwise dispose of the Material Subsidiaries of the Parent Guarantor;

(g) Consolidation and Merger. consolidate with, or merge into, any Person, or merge any Person into it; provided, however, that (i) any Person may merge into the Borrower or the Shipowner Guarantor in a transaction in which the Borrower or the Shipowner Guarantor is the surviving entity, and (ii) any Security Party may merge with or into any other Security Party or any other Subsidiary of the Parent Guarantor, provided the security interests of the Security Trustee in the Collateral are preserved to the reasonable satisfaction of the Majority Lenders;

(h) Change Fiscal Year. change its fiscal year;

(i) Transactions with Affiliates. sell, lease or otherwise transfer, or permit any of its Subsidiaries to sell, lease or otherwise transfer, any property or assets to, or purchase, lease or otherwise acquire any property or assets from, or otherwise engage in any other transactions with, any of its Affiliates, except: (i) in the ordinary course of business at prices and on terms and conditions not less favorable to the Borrower or such Subsidiary than could be obtained on an arm’s-length basis from unrelated third parties; and (ii) transactions between or among the Borrower and its Subsidiaries not involving any other Affiliate;

(j) Limitations on Advances and Distributions. (i) make distributions to any limited or general partner of the Borrower during the continuance of an Event of Default if, following the occurrence of such Event of Default, the Administrative Agent sends a notice to the Borrower asserting or confirming such Event of Default (regardless of whether any notice shall have been required to create such Event of Default in any case); or (ii) make any loans or advances to any Affiliate or related Persons of the Borrower, except the Parent Guarantor and wholly-owned Subsidiaries of the Borrower;

(k) Acquisitions. purchase, hold or acquire (including pursuant to any merger), and shall not permit any of its Subsidiaries to purchase, hold or acquire (including pursuant to any merger), any capital stock or other securities (including any option, warrant or other right to acquire any of the foregoing) of, or make or permit to exist any investment or any other interest in, any other Person, or purchase or otherwise acquire (in one transaction or a series of transactions (including pursuant to any merger)) any assets of any other Person constituting a

business unit, except (a) as permitted by Section 9.2(l) and (b) Permitted Acquisitions by the Borrower or any Subsidiary; provided that the Borrower shall have delivered to the Administrative Agent not less than 5 Banking Days prior to the consummation of any such Permitted Acquisition a certificate of the chief financial officer of the Borrower in form and substance satisfactory to the Administrative Agent evidencing projected pro forma compliance with Sections 9.3 and 9.4 after giving effect to such Permitted Acquisition for the period from the date of such Permitted Acquisition to the Final Payment Date; and

(l) Partnerships, Joint Ventures. become, and shall not permit any of its Subsidiaries to become, a general partner, in any general or limited partnership or joint venture, except with respect to any purchase or other acquisition of any capital stock or other ownership or profit interest, warrants, rights, options, obligations or other securities of any Person, any capital contribution to such Person or any other investment in such Person which individually or in the aggregate with all such other investments during the term hereof shall not exceed $20,000,000.

9.3 Financial Covenants. The Borrower hereby covenants and undertakes with the Lenders that, from the date hereof and so long as any principal, interest or other moneys are owing in respect of any Transaction Document, the Borrower shall:

(a) Fixed Charge Coverage Ratio. procure that the Parent Guarantor maintain at all times a minimum Fixed Charge Coverage Ratio of greater than 1.85:1.00;

(b) Total Debt to EBITDA Ratio. maintain, at the end of each fiscal quarter of the Parent Guarantor, a Total Debt to EBITDA Ratio, for the four fiscal quarters ended as of the end of such quarter, not greater than 4.00:1.00.

9.4 Asset Maintenance. If at any time on or after the Delivery Date the aggregate Fair Market Value of the Vessels is less than one hundred twenty percent (120%) of the Facility, (such percentage being the “Required Percentage”) the Borrower shall, within a period of thirty (30) days following receipt by the Borrower of written notice from the Security Trustee notifying the Borrower of such shortfall and specifying the amount thereof (which amount shall, in the absence of manifest error, be deemed to be conclusive and binding on the Borrower), either (i) deliver to the Security Trustee, upon the Security Trustee’s request, such additional collateral as may be satisfactory to the Lenders in their sole discretion of sufficient value to restore compliance with the Required Percentage or (ii) prepay such amount of the Facility (together with interest thereon and any other monies payable in respect of such prepayment pursuant to Section 5.4) as shall result in the aggregate Fair Market Value of the each of the Vessels being not less than the Required Percentage.

SECTION 10. ASSIGNMENTS.

10.1 Assignments. This Agreement shall be binding upon, and inure to the benefit of, the Borrower and the Creditors and their respective successors and assigns, except

that the Borrower may not assign any of its rights or obligations hereunder. Each Lender shall be entitled to assign its rights and obligations under this Agreement in the Facility to any subsidiary, holding company or other affiliate of such Lender, or, with the consent of the Borrower and the Administrative Agent, such consent not to be unreasonably withheld, to any other commercial bank or financial institution (in a minimum amount of not less than $10,000,000 or an integral multiple of $1,000,000 in excess thereof), provided in each case that such assignment will not result in any increase in the Borrower’s obligations under Section 7.1, 11.2 or 15, and such Lender shall forthwith give at least ten (10) days’ prior written notice of any such assignment to the Borrower and pay the Administrative Agent an assignment fee of $5,000 for each such assignment or participation; provided, however, that any such assignment must be made pursuant to an Assignment and Assumption Agreement and shall become effective only upon acceptance thereof by the Administrative Agent and the recording thereof by the Administrative Agent in the Loan Register pursuant to Section 10.5. At the expense of the applicable Lenders, the Borrower shall take all reasonable actions requested by the Administrative Agent or any Lender to effect such assignment, including, without limitation, the execution of a written consent to any Assignment and Assumption Agreement. The Commitment of the assigning Lender shall in no event not be less than $10,000,000. The maximum number of Lenders shall be four.

10.2 Participations. Any Lender may at any time sell to one or more commercial banks or other financial institutions (each of such commercial banks and other financial institutions being herein called a “Participant”) participating interests in the Facility, its Commitment or other interests of such Lender hereunder; provided, however, that:

(a) no participation contemplated in this Section 10.2 shall relieve such Lender from its Commitment or its other obligations hereunder;

(b) such Lender shall remain solely responsible for the performance of its Commitment and such other obligations applicable to it under this Agreement;

(c) the Borrower and the other Creditors shall continue to deal solely and directly with such Lender and shall be under no obligation to deal directly with any Participant;

(d) no Participant, unless such Participant is an Affiliate of such Lender, shall be entitled to require such Lender to take or refrain from taking any action hereunder, except that such Lender may agree with any Participant that such Lender will not, without such Participant’s consent, approve any amendment or waiver of any provision of this Agreement or any other Transaction Document, or consent to any departure by the Borrower from the terms thereof, if any such amendment, waiver or consent would require the affirmative consent of such Lender pursuant to Section 14.8 hereof; and

(e) no participation contemplated in this Section 10.2 shall result in any increase in the Borrower’s obligations under Sections 7.1, 11.2 or 15.

10.3 Security Interest. Notwithstanding any other provision set forth in this Agreement, any Lender may at any time create a security interest in all or any portion of its rights under this Agreement and the other Transaction Documents.

10.4 Promissory Notes. At the request of the Administrative Agent (acting upon a request from any Lender), the Borrower shall duly execute and deliver (in exchange for the return of the original promissory note executed in connection with this Agreement) to the Administrative Agent for further distribution to the Lenders a promissory note or notes (each a “Lender Note”) in favor of each Lender evidencing the portion of the Facility owing by the Borrower to such Lender hereunder. All Lender Notes shall collectively be deemed the “Note” hereunder.

10.5 Loan Register. The Administrative Agent, acting solely for this purpose as an agent of the Borrower, shall maintain at its offices a copy of each Assignment and Assumption delivered to it and a register for the recordation of the names and addresses of the Lenders and principal amount of the Facility owing to each Lender pursuant to the terms hereof from time to time (the “Loan Register”). The entries in the Loan Register shall be conclusive, and the Borrower, the Parent Guarantor, the Shipowner Guarantor, and the other Creditors may treat each Person whose name is recorded in the Loan Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement, notwithstanding notice to the contrary. The Loan Register shall be available for inspection by the Borrower and any Lender at any reasonable time and from time to time upon reasonable prior notice.

SECTION 11. ILLEGALITY, INCREASED COSTS, ETC.

11.1 Illegality. In the event that by reason of any change in any applicable law, regulation or regulatory requirement or in the interpretation thereof, a Lender has a reasonable basis to conclude that it has become unlawful for any Lender to maintain or give effect to its obligations as contemplated by this Agreement, such Lender shall inform the Administrative Agent and the Borrower to that effect, whereafter the liability of such Lender to make its Commitment available shall forthwith cease and the Borrower shall be required either to repay to such Lender that portion of the Facility advanced by such Lender immediately or, if such Lender so agrees, to repay such portion of the Facility to the Lender on the last day of any then current Interest Period in accordance with and subject to the provisions of Section 11.4. In any such event, but without prejudice to the aforesaid obligations of the Borrower to repay such portion of the Facility, the Borrower and the relevant Lender shall negotiate in good faith with a view to agreeing on terms for making such portion of the Facility available from another jurisdiction or otherwise restructuring such portion of the Facility on a basis which is not unlawful.

11.2 Increased Costs. If any change in applicable law, regulation or regulatory requirement, or in the interpretation or application thereof by any governmental or other authority, shall:

(i) subject any Lender to any Non-Excluded Taxes with respect to its income from the Facility, or any part thereof; or

(ii) change the basis of taxation to any Lender of payments of principal or interest or any other payment due or to become due pursuant to this Agreement (other than a change in the basis of any Excluded Tax); or

(iii) impose, modify or deem applicable any reserve requirements or require the making of any special deposits against or in respect of any assets or liabilities of, deposits with or for the account of, or loans by, a Lender; or

(iv) impose on any Lender any other condition affecting the Facility or any part thereof;

and the result of the foregoing is either to increase the cost to such Lender of making available or maintaining its Commitment or any part thereof or to reduce the amount of any payment received by such Lender, then and in any such case if such increase or reduction in the opinion of such Lender materially affects the interests of such Lender under or in connection with this Agreement:

(A) the Lender shall notify the Administrative Agent and the Borrower of the happening of such event, and

(B) the Borrower agrees forthwith upon demand to pay to such Lender such amount as such Lender certifies to be necessary to compensate such Lender for such additional cost or such reduction; provided, however, that the foregoing provisions shall not be applicable in the event that increased costs to the Lender result from the exercise by the Lender of its right to assign its rights or obligations under Section 10.

11.3 Lender’s Certificate. A certificate or determination notice of any Lender as to any of the matters referred to in this Section 11 shall, absent manifest error, be prima facie evidence thereof. The Administrative Agent and each Lender shall deliver to the Borrower such documents and information as the Borrower may reasonably request to verify the accuracy of any claim for compensation or indemnification by a Lender under this Section 11.

11.4 Compensation for Losses. Where the Facility or any portion thereof is to be repaid by the Borrower pursuant to this Section 11, the Borrower agrees simultaneously with such repayment to pay to the relevant Lender all accrued interest to the date of actual payment on the amount repaid and all other sums then payable by the Borrower to the relevant Lender pursuant to this Agreement, together with such amounts as may be certified by the relevant Lender to be necessary to compensate such Lender for any actual loss, premium or penalties incurred or to be incurred thereby on account of funds borrowed to make, fund or maintain its Commitment or such portion thereof for the remainder (if any) of the then current Interest Period or Interest Periods, if any, but otherwise without penalty or premium.

SECTION 12. CURRENCY INDEMNITY.

12.1 Currency Conversion. If for the purpose of obtaining or enforcing a judgment in any court in any country it becomes necessary to convert into any other currency (the “judgment currency”) an amount due in Dollars under this Agreement or any other Transaction Document then the conversion shall be made, in the discretion of the Administrative Agent, at the rate of exchange prevailing either on the date of default or on the day before the day on which the judgment is given or the order for enforcement is made, as the case may be (the “conversion date”), provided that the Administrative Agent shall not be entitled to recover under this section any amount in the judgment currency which exceeds at the conversion date the amount in Dollars due under this Agreement or any other Transaction Document.

12.2 Change in Exchange Rate. If there is a change in the rate of exchange prevailing between the conversion date and the date of actual payment of the amount due, the Borrower shall pay such additional amounts (if any, but in any event not a lesser amount) as may be necessary to ensure that the amount paid in the judgment currency when converted at the rate of exchange prevailing on the date of payment will produce the amount then due under this Agreement or any other Transaction Document in Dollars; any excess over the amount due received or collected by the Lenders shall be remitted to the Borrower.

12.3 Additional Debt Due. Any amount due from the Borrower under this Section 12 shall be due as a separate debt and shall not be affected by judgment being obtained for any other sums due under or in respect of this Agreement and/or any other Transaction Document.

12.4 Rate of Exchange. The term “rate of exchange” in this Section 12 means the rate at which the Administrative Agent in accordance with its normal practices is able on the relevant date to purchase Dollars with the judgment currency and includes any premium and costs of exchange payable in connection with such purchase.

SECTION 13. FEES AND EXPENSES.

13.1 Fees. The Borrower shall pay, quarterly in arrears, with the final payment to be made on the date of the Delivery Advance, from the date of this Agreement, to the Administrative Agent (for the account of the Lenders), a commitment fee of forty percent (40%) of the Applicable Margin, payable on the undrawn portion of the Facility. The Borrower shall also pay to the Administrative Agent such fees as the parties have agreed pursuant to the Fee Letter.

13.2 Expenses. The Borrower agrees, whether or not the transactions hereby contemplated are consummated, on demand to pay, or reimburse the Administrative Agent and the Security Trustee for its payment of, the reasonable expenses of the Administrative Agent, the Security Trustee and (after the occurrence and during the continuance of an Event of Default) the Lenders incident to said transactions (and in connection with any supplements, amendments, waivers or consents relating thereto requested by the Borrower or incurred in connection with the enforcement or defense of any of the Creditors’ rights or remedies with respect thereto or in the preservation of the Administrative Agent’s, the Security Trustee’s and the Lenders’ priorities

under the documentation executed and delivered in connection therewith) including, without limitation, all reasonable documented costs and expenses of preparation, negotiation, execution and administration of this Agreement and the documents referred to herein, the reasonable fees and disbursements of the Administrative Agent’s or Security Trustee’s counsel in connection therewith, as well as the reasonable documented fees and expenses of any independent appraisers, surveyors, engineers and other consultants retained by the Administrative Agent or the Security Trustee in connection with this transaction, all reasonable costs and expenses, if any, in connection with the enforcement of this Agreement or any other Transaction Document and stamp and other similar taxes, if any, incident to the execution and delivery of the documents (including, without limitation, the Note) herein contemplated and to hold the Creditors free and harmless in connection with any liability arising from the nonpayment of any such stamp or other similar taxes. Such taxes and, if any, interest and penalties related thereto as may become payable after the date hereof shall be paid immediately by the Borrower to the Administrative Agent, the Security Trustee or the Lenders, as the case may be, when liability therefor is no longer contested by such party or parties or reimbursed immediately by the Borrower to such party or parties after payment thereof (if the Administrative Agent, the Security Trustee or the Lenders, at their sole discretion, chooses to make such payment).

13.3 Right of Setoff. In addition to any rights now or hereafter granted under applicable law or otherwise, and not by way of limitation of any such rights, upon the occurrence and during the continuance of an Event of Default, each Creditor is hereby authorized at any time or from time to time, without presentment, demand, protest or other notice of any kind to any Security Party or to any other Person, any such notice being hereby expressly waived, to set off and to appropriate and apply any and all deposits (general or special) and any other Indebtedness at any time held or owing by such Creditor (including, without limitation, by branches and agencies of such Creditor wherever located) to or for the credit or the account of the Borrower or any other Security Party but in any event excluding assets held in trust for any such Person against and on account of the Obligations and liabilities of such Security Party, as applicable, to such Creditor under this Agreement or under any of the other Transaction Documents, including, without limitation, all claims of any nature or description arising out of or connected with this Agreement or any other Transaction Document, irrespective of whether or not such Creditor shall have made any demand hereunder and although said Obligations, liabilities or claims, or any of them, shall be contingent or unmatured.

SECTION 14. ADMINISTRATIVE AGENT AND SECURITY TRUSTEE.

14.1 Appointment of Administrative Agent. Each of the Lenders irrevocably appoints and authorizes the Administrative Agent, which for the purposes of this Section 14 shall be deemed to include the Administrative Agent acting in its capacity as Security Trustee pursuant to Section 14.2 to take such action as agent on its behalf and to exercise such powers under any Transaction Document as is delegated to the Administrative Agent by the terms of such Transaction Document. Neither the Administrative Agent nor any of its directors, officers, employees or agents shall be liable for any action taken or omitted to be taken by it or them under any Transaction Document or in connection therewith, except for its or their own gross negligence or willful misconduct.

14.2 Appointment of Security Trustee. Each of the Lenders (in its capacity as a lender under this Agreement and, to the extent applicable, in its capacity as a swap provider under any Facility Swap) irrevocably appoints the Security Trustee as security trustee on its behalf with regard to (i) the security, powers, rights, titles, benefits and interests (both present and future) constituted by and conferred on the Lenders or any of them or for the benefit thereof under or pursuant to any Transaction Document (including, without limitation, the benefit of all covenants, undertakings, representations, warranties and obligations given, made or undertaken to any Lender in any Transaction Document), (ii) all moneys, property and other assets paid or transferred to or vested in any Lender or any agent of any Lender or received or recovered by any Lender or any agent of any Lender pursuant to, or in connection with, any Transaction Document whether from any Security Party or any other Person and (iii) all money, investments, property and other assets at any time representing or deriving from any of the foregoing, including all interest, income and other sums at any time received or receivable by any Lender or any agent of any Lender in respect of the same (or any part thereof). The Security Trustee hereby accepts such appointment.

14.3 Distribution of Payments. Whenever any payment is received by the Administrative Agent from any Security Party for the account of the Lenders, or any of them, whether of principal or interest on the Note, commissions, fees under Section 13 or otherwise, it shall thereafter cause to be distributed on the same Banking Day if received before 11 a.m. New York time, or on the next Banking Day if received thereafter, like funds relating to such payment ratably to the Lenders according to their respective Commitments, in each case to be applied according to the terms of this Agreement.

14.4 Holder of Interest in Note. The Administrative Agent may treat each Lender as the holder of all of the interest of such Lender in the Note.

14.5 No Duty to Examine, Etc. Neither the Administrative Agent nor the Security Trustee shall be under any duty to examine or pass upon the validity, effectiveness or genuineness of any of any Transaction Document or any instrument, document or communication furnished pursuant to any Transaction Document, and each of the Administrative Agent and the Security Trustee shall be entitled to assume that the same are valid, effective and genuine, have been signed or sent by the proper parties and are what they purport to be.

14.6 Administrative Agent and Security Trustee as Lender. With respect to that portion of the Facility made available by it, each of the Administrative Agent and the Security Trustee shall have the same rights and powers hereunder as any other Lender and may exercise the same as though it were not the Administrative Agent or the Security Trustee, as the case may be, and the term “Lender” or “Lenders” shall include the Administrative Agent or the Security Trustee, as the case may be, in its capacity as a Lender. Both the Administrative Agent and the Security Trustee and their respective affiliates may accept deposits from, lend money to and generally engage in any kind of business with, a Security Party as if it were not the Administrative Agent or the Security Trustee, as the case may be.

14.7 Acts of the Agents. The Administrative Agent and the Security Trustee shall have duties and discretion, and shall act as follows:

(a) Obligations of the Agents. the obligations of the Administrative Agent or the Security Trustee, as the case may be, under each of the Transaction Documents are only those expressly set forth in each such Transaction Document;

(b) No Duty to Investigate. neither Administrative Agent nor the Security Trustee, as the case may be, shall at any time, unless requested to do so by a Lender or Lenders, be under any duty to investigate whether an Event of Default or a Default has occurred or to investigate the performance of any Security Party under or pursuant to any Transaction Document;

(c) Discretion of the Agents. the Administrative Agent and the Security Trustee, as the case may be, shall each be entitled to use its discretion with respect to exercising or refraining from exercising any rights which may be vested in it by, and with respect to taking or refraining from taking any action or actions which it may be able to take under or in respect of, any Transaction Document, unless the Administrative Agent or the Security Trustee, as the case may be, shall have been instructed by the Majority Lenders to exercise such rights or to take or refrain from taking such action; provided, however, that neither the Administrative Agent nor the Security Trustee, as the case may be, shall be required to take any action which exposes the Administrative Agent or the Security Trustee, as the case may be, to personal liability or which is contrary to this Agreement, any other Transaction Document or applicable law;

(d) Instructions of Majority Lenders. the Administrative Agent or the Security Trustee, as the case may be, shall in all cases be fully protected in acting or refraining from acting under any Transaction Document in accordance with the instructions of the Majority Lenders (or when applicable, all the Lenders), and any action taken or failure to act pursuant to such instructions shall be binding on all of the Lenders.

14.8 Certain Amendments. No Transaction Document and no term of any Transaction Document may be amended unless such amendment is approved by the Borrower and the Majority Lenders, provided that no such amendment shall, without the consent of each Lender affected thereby, (i) reduce the interest rate or extend the time of payment of scheduled principal payments or interest or fees on the Facility, or reduce the principal amount of the Facility or any fees hereunder, (ii) increase or decrease the Commitment of any Lender or subject any Lender to any additional obligation (it being understood that a waiver of any Event of Default or any mandatory repayment of Facility shall not constitute a change in the terms of any Commitment of any Lender), (iii) amend, modify or waive any provision of this Section 14.8, (iv) amend the definition of Majority Lenders, (v) consent to the assignment or transfer by the Borrower of any of its rights and obligations under this Agreement, (vi) release any Security Party from any of its obligations under any Transaction Document except as expressly provided in this Agreement or in such Transaction Document or (vii) amend any provision relating to the maintenance of collateral under Section 9.4. All amendments approved by the Majority Lenders under this Section 14.8 must be in writing and signed by the Borrower and each of the Lenders. A change in classification societies from the Classification Society to another member of the International Association of Classification Societies must be approved by the Majority Lenders.

In the event that any Lender is unable to or refuses to sign an amendment approved by the Majority Lenders hereunder, such Lender hereby appoints the Administrative Agent as its Attorney-in-Fact for the purposes of signing such amendment. No provision of this Section 14 or any other provisions relating to the Administrative Agent may be modified without the consent of the Administrative Agent.

14.9 Assumption re Event of Default. Except as otherwise provided in Section 14.14, the Administrative Agent and the Security Trustee, as the case may be, shall each be entitled to assume that no Event of Default or Default has occurred and is continuing, unless the Administrative Agent or the Security Trustee, as the case may be, has been notified by a Security Party of such fact, or has been notified by a Creditor that such Creditor considers that an Event of Default or Default (specifying in detail the nature thereof) has occurred and is continuing. In the event that the Administrative Agent or the Security Trustee, as the case may be, shall have been notified by any Security Party or any other Creditor in the manner set forth in the preceding sentence of any Event of Default or Default, the Administrative Agent or the Security Trustee, as the case may be, shall notify the other Creditors and shall take action and assert such rights under the Transaction Documents as the Majority Lenders shall request in writing.

14.10 Limitations of Liability. No Creditor shall be under any liability or responsibility whatsoever:

(a) to any Security Party or any other Person as a consequence of any failure or delay in performance by, or any breach by, any other Creditor or any other Person of any of its or their obligations under any Transaction Document;

(b) to any other Creditor as a consequence of any failure or delay in performance by, or any breach by, any Security Party of any of its respective obligations under any Transaction Document; or

(c) to any other Creditor for any statements, representations or warranties contained in any Transaction Document or in any document or instrument delivered in connection with the transactions contemplated by the Transaction Documents; or for the validity, effectiveness, enforceability or sufficiency of any Transaction Document or any document or instrument delivered in connection with the transactions contemplated by the Transaction Documents.

14.11 Indemnification of the Agents. The Lenders agree to indemnify each of the Administrative Agent and the Security Trustee (to the extent not reimbursed by the Security Parties or either thereof), pro rata according to the respective amounts of their Commitments, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever (including legal fees and expenses incurred in investigating claims and defending itself against such liabilities) which may be imposed on, incurred by or asserted against, the Administrative Agent or the Security Trustee or both, as the case may be, in any way relating to or arising out of any Transaction Document, any action taken or omitted by the Administrative Agent or the Security Trustee, as the case may be, thereunder or the preparation, administration, amendment or

enforcement of, or waiver of any provision of, any Transaction Document, except that no Lender shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from the Administrative Agent’s or the Security Trustee’s, as the case may be, gross negligence or willful misconduct.

14.12 Consultation with Counsel. The Administrative Agent and the Security Trustee may each consult with legal counsel selected by the Administrative Agent or the Security Trustee, as the case may be, and shall not be liable for any action taken, permitted or omitted by it in good faith in accordance with the advice or opinion of such counsel.

14.13 Resignation. The Administrative Agent or the Security Trustee, as the case may be, may resign at any time by giving sixty (60) days’ written notice thereof to the Lenders and the Borrower. Upon any such resignation, the Majority Lenders shall have the right to appoint a successor Administrative Agent or the Security Trustee, as the case may be. If no successor Administrative Agent or the Security Trustee, as the case may be, shall have been so appointed by the Lenders and shall have accepted such appointment within sixty (60) days after the retiring Administrative Agent’s or the Security Trustee’s, as the case may be, giving notice of resignation, then the retiring Administrative Agent or the Security Trustee, as the case may be, may, on behalf of the Lenders, appoint a successor Administrative Agent or the Security Trustee, as the case may be, which shall be a bank or trust company of recognized standing. The appointment of any successor Administrative Agent or the Security Trustee, as the case may be, shall be subject to the prior written consent of the Borrower, such consent not to be unreasonably withheld. After any retiring Administrative Agent’s or the Security Trustee’s, as the case may be, resignation as Administrative Agent or the Security Trustee, as the case may be, hereunder, the provisions of this Section 14 shall continue in effect for its benefit with respect to any actions taken or omitted by it while acting as Administrative Agent or the Security Trustee, as the case may be.

14.14 Representations of Lenders. Each Lender represents and warrants to each other Creditor that:

(a) in making its decision to enter into this Agreement and to make its Commitment available hereunder, it has independently taken whatever steps it considers necessary to evaluate the financial condition and affairs of the Security Parties, that it has made an independent credit judgment and that it has not relied upon any statement, representation or warranty by any other Creditor; and

(b) so long as any portion of its Commitment remains outstanding, it shall continue to make its own independent evaluation of the financial condition and affairs of the Security Parties.

14.15 Notification of Event of Default. Each Creditor hereby undertakes to promptly notify the other Creditors of the existence of any Event of Default which shall have occurred and be continuing of which such Creditor has actual knowledge.

14.16 No Agency or Trusteeship if DnB NOR only Lender. If at any time DnB NOR is the only Lender, all references to the terms “Administrative Agent” and “Security

Trustee” in this Agreement and each other Transaction Document shall be deemed to be references to DnB NOR as Lender and not as Administrative Agent or Security Trustee.

SECTION 15. INDEMNIFICATION.

15.1 Indemnification. The Borrower and, by its execution and delivery of the Consent and Agreement set forth below, the Parent Guarantor jointly and severally agree to indemnify each Creditor, its respective successors and assigns, and its respective officers, directors, employees, representatives and agents (each an “Indemnitee”) from, and hold each of them harmless against, any and all losses, liabilities, claims, damages, expenses, obligations, penalties, actions, judgments, suits, costs or disbursements of any kind or nature whatsoever (including, without limitation, the reasonable, documented fees and disbursements of counsel for such Indemnitee in connection with any investigative, administrative or judicial proceeding commenced or threatened, whether or not such Indemnitee shall be designated a party thereto) that may at any time (including, without limitation, at any time following the payment of the obligations of the Borrower hereunder) be imposed on, asserted against or incurred by, any Indemnitee as a result of, or arising out of or in any way related to or by reason of, (a) any violation by any Security Party (or any charterer or other operator of any Vessel) of any applicable Environmental Law, (b) any Environmental Claim arising out of the management, use, control, ownership or operation of property or assets by any Security Party (or, after foreclosure, by any Creditor or any of their respective successors or assigns), (c) the breach of any representation, warranty or covenant set forth in this Agreement (including the use of the proceeds of the Facility and any claim made for any brokerage commission, fee or compensation from any Person arising from act or omissions of any Security Party), or (d) the execution, delivery, performance or non-performance of any Transaction Document, or any of the documents referred to herein or contemplated hereby (whether or not the Indemnitee is a party thereto). If and to the extent that the obligations of the Security Parties under this Section are unenforceable for any reason, the Borrower and, by its execution and delivery of the Consent and Agreement set forth below, the Parent Guarantor jointly and severally agree to make the maximum contribution to the payment and satisfaction of such obligations which is permissible under applicable law. The obligations of the Security Parties under this Section 15.1 shall survive the termination of this Agreement and the repayment to the Creditors of all amounts owing thereto under or in connection herewith. Notwithstanding anything contained herein to the contrary, none of the Security Parties shall have any liability under this Section 15.1 to any Indemnitee that arises out of such Indemnitee’s gross negligence or willful misconduct or that consists of or relates to any Excluded Tax.

SECTION 16. MISCELLANEOUS.

16.1 Time of Essence. Time is of the essence of this Agreement but no failure or delay on the part of any Creditor to exercise any power or right under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise by any Creditor of any power or right hereunder preclude any other or further exercise thereof or the exercise of any other power or right. The remedies provided herein are cumulative and are not exclusive of any remedies provided by law.

16.2 Prior Agreements, Merger. Any and all prior understandings and agreements heretofore entered into between the Security Parties on the one part, and the Creditors, on the other part, whether written or oral, other than the Fee Letter, are superseded by and merged into this Agreement and the other Transaction Documents and agreements (the forms of which are exhibited hereto) to be executed and delivered in connection herewith to which the Security Parties and/or any of the Creditors are parties, which alone fully and completely express the agreements between the Security Parties and the Creditors.

16.3 USA Patriot Act Notice; OFAC and Bank Secrecy Act. The Administrative Agent hereby notifies the Borrower that pursuant to the requirements of the USA Patriot Act (Title III of Pub. L. 107-56, signed into law October 26, 2001) (the “Patriot Act”), and the policies and practices of the Administrative Agent, each of the Creditors is required to obtain, verify and record certain information and documentation that identifies the Borrower, which information includes the name and address of the Borrower and such other information that will allow the Creditors to identify the Borrower in accordance with the Patriot Act. In addition, the Borrower shall: (a) ensure that no Person who owns a controlling interest in or otherwise controls the Borrower or any subsidiary of any thereof is or shall be listed on the Specially Designated Nationals and Blocked Person List or other similar lists maintained by the Office of Foreign Assets Control (“OFAC”), the Department of the Treasury or included in any Executive Orders; (b) not use or permit the use of the proceeds of the Facility to violate any of the foreign asset control regulations of OFAC or any enabling statute or Executive Order relating thereto; and (c) comply, and cause any of its subsidiaries to comply, with all applicable Bank Secrecy Act laws and regulations, as amended.

16.4 Further Assurances. The Borrower agrees that if this Agreement or any Transaction Document shall, in the reasonable opinion of the Creditors, at any time be deemed by the Creditors for any reason insufficient in whole or in part to carry out the true intent and spirit hereof or thereof, it shall execute or cause to be executed such other documents or deliver or cause to be delivered such further assurances as in the opinion of the Creditors may be required in order to more effectively accomplish the purposes of this Agreement or any other Transaction Document.

16.5 Remedies Cumulative and Not Exclusive; No Waiver. Each and every right, power and remedy herein given to the Administrative Agent shall be cumulative and shall be in addition to every other right, power and remedy of the Administrative Agent now or hereafter existing at law, in equity or by statute, and each and every right, power and remedy, whether herein given or otherwise existing, may be exercised from time to time, in whole or in part, and as often and in such order as may be deemed expedient by the Administrative Agent, and the exercise or the beginning of the exercise of any right, power or remedy shall not be construed to be a waiver of the right to exercise at the same time or thereafter any other right, power or remedy. No failure, delay or omission by the Administrative Agent or any of the Creditors in the exercise of any right or power or in the pursuance of any remedy accruing upon any breach or default by the Borrower or any Security Party shall impair any such right, power or remedy or be construed to be a waiver of any such right, power or remedy or to be an acquiescence therein; nor shall the acceptance by the Administrative Agent or any of the Creditors of any security or of any payment of or on account of any of the amounts due from the Borrower or any Security Party to the Administrative Agent and maturing after any breach or default or of any payment on

account of any past breach or default be construed to be a waiver of any right with respect to any future breach or default or of any past breach or default not completely cured thereby. In addition to the rights and remedies granted to it in this Agreement and in any other instrument or agreement securing, evidencing or relating to any of the Obligations, the Administrative Agent shall have rights and remedies of a secured party under the UCC.

16.6 Successors and Assigns. This Agreement and all obligations of the Borrower hereunder shall be binding upon the successors and assigns of the Borrower and shall, together with the rights and remedies of the Administrative Agent hereunder, inure to the benefit of the Administrative Agent, its respective successors and assigns.

16.7 Waiver; Amendment. None of the terms and conditions of this Agreement may be changed, waived, modified or varied in any manner whatsoever unless in writing duly signed by the Borrower and the Administrative Agent (with the consent of the Majority Lenders).

16.8 Amendments. Subject to Section 14.8, any provision of this Agreement or any other Transaction Document may be amended or waived if, but only if, such amendment or waiver is in writing and is signed by the Borrower, the Administrative Agent, the Security Trustee and the Majority Lenders.

16.9 Invalidity. If any provision of this Agreement shall at any time, for any reason, be declared invalid, void or otherwise inoperative by a court of competent jurisdiction, such declaration or decision shall not affect the validity of any other provision or provisions of this Agreement, or the validity of this Agreement as a whole and, to the fullest extent permitted by law, the other provisions hereof shall remain in full force and effect in such jurisdiction and shall be liberally construed in favor of the Administrative Agent in order to carry out the intentions of the parties hereto as nearly as may be possible. The invalidity and unenforceability of any provision hereof in any jurisdiction shall not affect the validity or enforceability of such provision in any other jurisdiction.

16.10 Notices. All notices, requests, demands and other communications to any party hereunder shall be in writing (including prepaid overnight courier, facsimile transmission, electronic transmission or similar writing) and shall be given to the Borrower, the Administrative Agent or the Security Trustee at the address, facsimile number or email address of each set forth below and to the Lenders at each such Lender’s address, facsimile numbers or email address set forth in Schedule 1 or at such other address, facsimile number or email address as such party may hereafter specify for the purpose by notice to each other party hereto. Any notice sent by facsimile or electronic transmission shall be confirmed by letter dispatched as soon as practicable thereafter.

If to the Borrower:
	K-SEA OPERATING PARTNERSHIP L.P.
	One Tower Center Boulevard, 17^th Floor
	East Brunswick, NJ 08816
	Facsimile No.: 732-565-3699
	Telephone No.: 732-565-3828
	Email: jnicola@k-sea.com
	Attention: John J. Nicola

If to the Administrative Agent or Security Trustee:
	DNB NOR BANK ASA
	200 Park Avenue
	New York, NY 10166-0396
	Facsimile No.: 212-681-3900
	Telephone No.: 212-681-3800
	Email: cathleen.buckley@dnbnor.no/ nikolai.nachamkin@dnbnor.no
	Attention: Cathleen Buckley/ Nikolai Nachamkin

Every notice or other communication shall, except so far as otherwise expressly provided by this Agreement, be deemed to have been received (provided that it is received prior to 2 p.m. local time; otherwise it shall be deemed to have been received on the next following Banking Day) (i) if given by facsimile or electronic transmission, on the date of dispatch thereof (provided further that if the date of dispatch is not a Banking Day in the locality of the party to whom such notice or demand is sent, it shall be deemed to have been received on the next following Banking Day in such locality) or (ii) if given by mail, prepaid overnight courier or any other means, when received at the address specified in this Section or when delivery at such address is refused.

16.11 Counterparts; Electronic Delivery. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all such counterparts together shall constitute one and the same instrument. Delivery of an executed counterpart of this Agreement by facsimile or electronic transmission shall be deemed as effective as delivery of an originally executed counterpart. In the event that the Borrower delivers an executed counterpart of this Agreement by facsimile or electronic transmission, the Borrower shall also deliver an originally executed counterpart as soon as practicable, but the failure of the Borrower to deliver an originally executed counterpart of this Agreement shall not affect the validity or effectiveness of this Agreement.

16.12 References. References herein to Sections, Exhibits and Schedules are to be construed as references to sections of, exhibits to, and schedules to, this Agreement, unless the context otherwise requires.

16.13 Headings. In this Agreement, Section headings are inserted for convenience of reference only and shall not be taken into account in the interpretation of this Agreement.

SECTION 17. APPLICABLE LAW, JURISDICTION AND WAIVERS.

17.1 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York without regard to principles of conflicts of laws thereof other than Sections 5-1401 and 5-1402 of the General Obligations Law of the State of New York.

17.2 Submission to Jurisdiction. The Borrower hereby irrevocably submits to the jurisdiction of the courts of the State of New York and of the United States District Court for the Southern District of New York in any action or proceeding brought against it by any of the Creditors under this Agreement or under any document delivered hereunder and hereby irrevocably agrees that valid service of summons or other legal process on it may be effected by serving a copy of the summons and other legal process in any such action or proceeding on the Borrower by mailing or delivering the same by hand to the Borrower at the address indicated for notices in this Agreement. The service, as herein provided, of such summons or other legal process in any such action or proceeding shall be deemed personal service and accepted by the Borrower as such, and shall be legal and binding upon the Borrower for all the purposes of any such action or proceeding. Final judgment (a certified or exemplified copy of which shall be conclusive evidence of the fact and of the amount of any indebtedness of the Borrower to the Creditors) against the Borrower in any such legal action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment. The Borrower shall advise the Administrative Agent promptly of any change of address for the purpose of service of process. Notwithstanding anything herein to the contrary, the Creditors may bring any legal action or proceeding in any other appropriate jurisdiction.

17.3 WAIVER OF IMMUNITY. TO THE EXTENT THAT THE BORROWER OR GUARANTOR HAS OR HEREAFTER MAY ACQUIRE ANY IMMUNITY FROM SUIT, JURISDICTION OF ANY COURT OR ANY LEGAL PROCESS (WHETHER THROUGH ATTACHMENT PRIOR TO JUDGMENT, ATTACHMENT IN AID OF EXECUTION, EXECUTION OF A JUDGMENT, OR FROM ANY OTHER LEGAL PROCESS OR REMEDY) WITH RESPECT TO ITSELF OR ITS PROPERTY, EACH OF THE BORROWER AND THE GUARANTOR HEREBY IRREVOCABLY WAIVES SUCH IMMUNITY IN RESPECT OF ITS OBLIGATIONS UNDER THIS AGREEMENT OR ANY OTHER TRANSACTION DOCUMENT.

17.4 WAIVER OF JURY TRIAL. IT IS MUTUALLY AGREED BY AND AMONG THE BORROWER, THE GUARANTOR AND THE CREDITORS THAT EACH OF THEM HEREBY WAIVES TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY ANY PARTY HERETO AGAINST ANY OTHER PARTY HERETO ON ANY MATTER WHATSOEVER ARISING OUT OF OR IN ANY WAY CONNECTED WITH THIS AGREEMENT OR ANY OTHER TRANSACTION DOCUMENT.

[Signature page follows]

IN WITNESS whereof the parties hereto have caused this Agreement to be duly executed by their duly authorized representatives as of the day and year first above written.

K-SEA OPERATING PARTNERSHIP L.P., by its general
partner K-SEA OLP, LP, LLC,
as Borrower


By:		/s/ John J. Nicola
	Name:	John J. Nicola
	Title:	Chief Financial Officer


DNB NOR BANK ASA,
as Administrative Agent and Security Trustee


By:		/s/ Nikolai A. Nachamkin
	Name:	Nikolai A. Nachamkin
	Title:	Senior Vice President


By:		/s/ Cathleen Buckley
	Name:	Cathleen Buckley
	Title:	Vice President

The Lenders:


DNB NOR BANK ASA


By:		/s/ Nikolai A. Nachamkin
	Name:	Nikolai A. Nachamkin
	Title:	Senior Vice President


By:		/s/ Cathleen Buckley
	Name:	Cathleen Buckley
	Title:	Vice President

CONSENT AND AGREEMENT

Each of the undersigned, referred to in the foregoing Agreement as the “Parent Guarantor” and the “Shipowner Guarantor” respectively, hereby consents and agrees to said Agreement and to the documents contemplated thereby and to the provisions contained therein relating to conditions to be fulfilled and obligations to be performed by the undersigned pursuant to or in connection with said Agreement and agrees particularly to be bound by the representations, warranties and covenants relating to the undersigned contained in Sections 2 and 9 of said Agreement to the same extent as if the undersigned were a party to said Agreement.

K-SEA TRANSPORTATION PARTNERS L.P.,
	by its general partner K-SEA GENERAL PARTNER L.P., by its general partner K-SEA GENERAL PARTNER GP, LLC, as Parent Guarantor

By:			/s/ John J. Nicola
		Name:	John J. Nicola
		Title:	Chief Financial Officer


K-SEA TRANSPORTATION LLC,
		as Shipowner Guarantor

By:			/s/ John J. Nicola
		Name:	John J. Nicola
		Title:	Chief Financial Officer

Schedule 1

Lenders and Commitments

Lenders	Commitment

DNB NOR BANK ASA 200 Park Avenue New York, NY 10166-0396 Facsimile No.: 212-681-3900 Telephone No.: 212-681-3800 Email: cathleen.buckley@dnbnor.no/ nikolai.nachamkin@dnbnor.no/ Attention: Cathleen Buckley/Nikolai Nachamkin	$	57,600,000

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