OVERVIEW

We are engaged in purchasing, gathering, compressing, dehydrating, treating, processing and marketing of natural gas, fractionating and marketing of NGLs and providing air compression and water injection services for oil and gas secondary recovery operations. Our operations are primarily located in the Mid-Continent and Rocky Mountain regions of the United States.

We manage our business and analyze and report our results of operations on a segment basis. Our operations are divided into two business segments:

† Midstream Segment, which is engaged in purchasing, gathering, compressing, dehydrating, treating, processing and marketing of natural gas and fractionating and marketing of NGLs. The midstream segment generated 95.6% and 93.6% of our total segment margin for the three months ended June 30, 2008 and 2007, respectively, and 95.2% and 93.3% of our total segment margin for the six months ended June 30, 2008 and 2007, respectively.

† Compression Segment, which is engaged in providing air compression and water injection services for oil and gas secondary recovery operations that are ongoing in North Dakota. The compression segment generated 4.4% and 6.4% of our total segment margin for the three months ended June 30, 2008 and 2007, respectively, and 4.8% and 6.7% of our total segment margin for the six months ended June 30, 2008 and 2007, respectively.

Our midstream assets currently consist of 14 natural gas gathering systems with approximately 2,079 miles of gas gathering pipelines, five natural gas processing plants, seven natural gas treating facilities and three NGL fractionation facilities. Our compression assets consist of two air compression facilities and a water injection plant.

Our results of operations are determined primarily by five interrelated variables: (1) the volume of natural gas gathered through our pipelines; (2) the volume of natural gas processed; (3) the volume of NGLs fractionated; (4) the level and relationship of natural gas and NGL prices; and (5) our current contract portfolio. Because our profitability is a function of the difference between the revenues we receive from our operations, including revenues from the products we sell, and the costs associated with conducting our operations, including the costs of products we purchase, increases or decreases in our revenues alone are not necessarily indicative of increases or decreases in our profitability. To a large extent, our contract portfolio, the pricing environment for natural gas and NGLs and the price of NGLs relative to natural gas prices will dictate increases or decreases in our profitability. Our profitability is also dependent upon prices and market demand for natural gas and NGLs, which fluctuate with changes in market and economic conditions and other factors.

Recent Events

Officer Selection and Re-Alignment. On August 4, 2008, Mr. Kent C. Christopherson was appointed Vice-President - Chief Operations Officer. On August 7, 2008, Mr. Robert Shain was appointed to Vice-President - Chief Commercial Officer from Vice-President - Operations and Engineering.

Distribution Increase. On July 25, 2008, we declared a cash distribution for the second quarter of 2008. This declared quarterly distribution on our common and subordinated units increased to $0.8625 per unit (an annualized rate of $3.45 per unit) from our most recent distribution of $0.8275 per unit (an annualized rate of $3.31 per unit). This represents a 4.2% increase over the prior quarter and a 17.7% increase over the distribution for the same quarter of the prior year. The distribution will be paid on August 14, 2008 to unitholders of record on August 5, 2008. Under our partnership agreement, generally our general partner is entitled to 15% of the amount we distribute to each unitholder in excess of $0.495 per unit per quarter up to $0.5625 per unit per quarter, 25% of the amount we distribute to each unitholder in excess of $0.5625 per unit per quarter up to $0.675 per unit per quarter and 50% of the excess over $0.675 per unit per quarter.

Significant Trade Account Receivable. On July 22, 2008, SemGroup, L.P. and certain subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code. Affiliates of SemGroup, L.P. purchase our natural gas liquids and condensate, primarily at our Bakken and Badlands plants and gathering systems. As a result, we have increased our allowance for doubtful accounts and bad debt expense by approximately $8.1 million in the three and six month periods ended June 30, 2008. We estimate additional potential exposure of approximately $5.0 million with this purchaser for uninvoiced product sales from July 1

through July 18, 2008. We have made temporary arrangements with other third parties for our product sales while assessing our options in light of SemGroup's bankruptcy. We are monitoring the bankruptcy cases closely to pursue the best course of action to obtain payment of the amounts owed to us and to continue natural gas liquids and condensate sales at our Bakken and Badlands plants and gathering systems. This matter is not expected to cause us to be out of compliance with our covenants under our credit facility or impact our liquidity position in any material respect.

Financial Hedge Agreement. On May 27, 2008 we entered into a cash flow swap agreement with an investment grade counterparty to sell 178,000 MMBtu per month at a fixed price of $10.50 per MMBtu for the calendar year 2010.

Organic Growth Projects. During the second quarter 2008, we entered into an agreement with CLR to construct and operate gathering pipelines, processing plants and related facilities in the Bakken Shale play in northwestern North Dakota in which CLR has dedicated approximately 129,000 gross acres to us. The initial term of the agreement is for 10 years and grants us the right to process natural gas, share in the sales proceeds of the natural gas liquids and residue gas and receive certain fixed fees for treating the natural gas. We plan to make an initial capital investment of approximately $10.0 million by the end of 2008 with additional investments of up to $17.0 million over the next three years to build processing and treating facilities and install field gathering, compression and associated equipment. The expected startup of the initial phase of the project should occur no later than the second quarter of 2009.

Additionally, we have accelerated the expansion of our Woodford Shale gathering system and plan to expand the system's capacity to over 65,000 Mcf/d by the end of the third quarter of 2008. We estimate a capital investment of approximately $10.0 million to complete the expansion.

Historical Results of Operations

Our historical results of operations for the periods presented may not be comparable, either from period to period or going forward due to increased volumes and associated operating expenses at our Badlands gathering system as a result of the construction of our nitrogen rejection plant which became operational in August 2007 and volumes and operating expenses at our Woodford Shale gathering system which commenced operation in April 2007.

Our Results of Operations



Set forth in the tables below are certain financial and operating data for the
periods indicated.



                                                     Three Months Ended June 30,
                                                      2008                 2007
                                                           (in thousands)
Total Segment Margin Data:
Midstream revenues                              $        114,236     $         65,411
Midstream purchases                                       88,073               47,916
Midstream segment margin                                  26,163               17,495
Compression revenues (1)                                   1,205                1,205
Total segment margin (2)                        $         27,368     $         18,700

Summary of Operations Data:
Midstream revenues                              $        114,236     $         65,411
Compression revenues                                       1,205                1,205
Total revenues                                           115,441               66,616

Midstream purchases (exclusive of items
shown separately below)                                   88,073               47,916
Operations and maintenance                                 7,551                4,980
Depreciation, amortization and accretion                   9,169                7,039
Bad debt                                                   8,103                    -
General and administrative                                 1,863                1,879
Total operating costs and expenses                       114,759               61,814
Operating income                                             682                4,802
Other income (expense)                                    (3,190 )             (2,306 )
Net income (loss)                                         (2,508 )              2,496

Add:
Depreciation, amortization and accretion                   9,169                7,039
Amortization of deferred loan costs                          145                   88
Interest expense                                           3,116                2,307
EBITDA (3)                                      $          9,922     $         11,930

Operating Data:
Inlet natural gas (Mcf/d)                                246,339              212,595
Natural gas sales (MMBtu/d)                               86,203               78,085
NGL sales (Bbls/d)                                         5,979                4,304

                                                      Six Months Ended June 30,
                                                      2008                 2007
                                                           (in thousands)
Total Segment Margin Data:
Midstream revenues                              $        204,510     $        125,259
Midstream purchases                                      156,691               91,531
Midstream segment margin                                  47,819               33,728
Compression revenues (1)                                   2,410                2,410
Total segment margin (2)                        $         50,229     $         36,138

Summary of Operations Data:
Midstream revenues                              $        204,510     $        125,259
Compression revenues                                       2,410                2,410
Total revenues                                           206,920              127,669

Midstream purchases (exclusive of items
shown separately below)                                  156,691               91,531
Operations and maintenance                                14,320                9,950
Depreciation, amortization and accretion                  18,098               13,779
Bad debt                                                   8,103                    -
General and administrative                                 4,164                3,394
Total operating costs and expenses                       201,376              118,654
Operating income                                           5,544                9,015
Other income (expense)                                    (6,725 )             (4,357 )
Net income (loss)                                         (1,181 )              4,658

Add:
Depreciation, amortization and accretion                  18,098               13,779
Amortization of deferred loan costs                          279                  176
Interest expense                                           6,617                4,393
EBITDA (3)                                      $         23,813     $         23,006

Operating Data:
Inlet natural gas (Mcf/d)                                236,885              206,376
Natural gas sales (MMBtu/d)                               86,174               76,313
NGL sales (Bbls/d)                                         5,626                4,146

(2) Reconciliation of total segment margin to operating income:

                                                     Three Months Ended June 30,
                                                        2008              2007
                                                            (in thousands)
Reconciliation of Total Segment Margin to
Operating Income
Operating income                                   $          682    $        4,802
Add:
Operations and maintenance expenses                         7,551             4,980
Depreciation, amortization and accretion                    9,169             7,039
Bad debt                                                    8,103                 -
General and administrative expenses                         1,863             1,879
Total segment margin                               $       27,368    $       18,700




                                                      Six Months Ended June 30,
                                                        2008              2007
                                                            (in thousands)
Reconciliation of Total Segment Margin to
Operating Income
Operating income                                   $        5,544    $        9,015
Add:
Operations and maintenance expenses                        14,320             9,950
Depreciation, amortization and accretion                   18,098            13,779
Bad debt                                                    8,103                 -
General and administrative expenses                         4,164             3,394
Total segment margin                               $       50,229    $       36,138

We view total segment margin, a non-GAAP financial measure, as an important performance measure of the core profitability of our operations. We review total segment margin monthly for a consistency and trend analysis. We define midstream segment margin as midstream revenue less midstream purchases. Midstream purchases include the following costs and expenses: cost of natural gas and NGLs purchased by us from third parties, cost of natural gas and NGLs purchased by us from affiliates, and the cost of crude oil purchased by us from third parties. We define compression segment margin as the revenue derived from our compression segment.

(3) We define EBITDA, a non-GAAP financial measure, as net income (loss) plus interest expense, provisions for income taxes and depreciation, amortization and accretion expense. EBITDA is used as a supplemental financial measure by our management and by external users of our financial statements such as investors, commercial banks, research analysts and others to assess: (1) the financial performance of our assets without regard to financial methods, capital structure or historical cost basis; (2) the ability of our assets to generate cash sufficient to pay interest costs and support our indebtedness; (3) our operating performance and return on capital as compared to those of other companies in the midstream energy sector, without regard to financing or structure; and (4) the viability of acquisitions and capital expenditure projects and the overall rates of return on alternative investment opportunities. EBITDA is also a financial measurement that, with certain negotiated adjustments, is reported to our banks and is used as a gauge for compliance with our financial covenants under our credit facility. EBITDA should not be considered an alternative to net income
(loss), operating income, cash flows from operating activities or any other measure of financial performance presented in accordance with GAAP. Our EBITDA may not be comparable to EBITDA of similarly titled measures of other entities, as other entities may not calculate EBITDA in the same manner as we do.

Three Months Ended June 30, 2008 Compared with Three Months Ended June 30, 2007

Revenues. Total revenues (midstream and compression) were $115.4 million for the three months ended June 30, 2008 compared to $66.6 million for the three months ended June 30, 2007, an increase of $48.8 million, or 73.3%. This $48.8 million increase was primarily due to (i) increased natural gas sales volumes of 12,109 MMBtu/day (MMBtu per day) and increased NGL sales volumes of 1,020 Bbls/day (Bbls per day) related to the Woodford Shale gathering system which commenced operation in April 2007, (ii) increased NGL sales volumes of 790 Bbls/day attributable to the expanded Badlands gathering system, including the nitrogen rejection plant, which commenced operation in August 2007 and
(iii) significantly higher average realized natural gas and NGL sales prices for the three months ended June 30, 2008 as compared to the same period in 2007, resulting in increased revenues for all of our gathering systems. Revenues from compression assets were the same for both periods.

Midstream revenues were $114.2 million for the three months ended June 30, 2008 compared to $65.4 million for the three months ended June 30, 2007, a net increase of $48.8 million, or 74.6%. Of this $48.8 million increase in midstream revenues, approximately $11.3 million was attributable to revenues from increased natural gas and NGL sales volumes at our Woodford Shale, Badlands, Bakken and Matli gathering systems and approximately $37.5 million was attributable to significantly higher average realized natural gas and NGL sales prices for the three months ended June 30, 2008 as compared to the same period in 2007, resulting in increased revenues for all of our gathering systems.

Inlet natural gas was 246,339 Mcf/d (Mcf per day) for the three months ended June 30, 2008 compared to 212,595 Mcf/d for the

three months ended June 30, 2007, a net increase of 33,744 Mcf/d, or 15.9%. This increase is primarily attributable to volume growth at our Woodford Shale and Badlands gathering systems offset by volume declines at our Eagle Chief and Kinta gathering systems.

Natural gas sales volumes were 86,203 MMBtu/d for the three months ended June 30, 2008 compared to 78,085 MMBtu/d for the three months ended June 30, 2007, a net increase of 8,118 MMBtu/d, or 10.4%. This 8,118 MMBtu/d net increase in natural gas sales volumes was attributable to increased natural gas sales volumes at our Woodford Shale, Bakken and Matli gathering systems offset by reduced natural gas sales volumes at our Eagle Chief and Kinta gathering systems. NGL sales volumes were 5,979 Bbls/d for the three months ended June 30, 2008 compared to 4,304 Bbls/d for the three months ended June 30, 2007, a net increase of 1,675 Bbls/d, or 38.9%. This net increase is primarily attributable to volume growth at our Woodford Shale and Badlands gathering systems.

Average realized natural gas sales prices were $9.29 per MMBtu for the three months ended June 30, 2008 compared to $6.03 per MMBtu for the three months ended June 30, 2007, an increase of $3.25 per MMBtu, or 54.0%. Average realized NGL sales prices were $1.64 per gallon for the three months ended June 30, 2008 compared to $1.09 per gallon for the three months ended June 30, 2007, an increase of $0.55 per gallon or 50.1%. The increase in our average realized natural gas and NGL sales prices was primarily a result of significantly higher index prices for natural gas and posted prices for NGLs during the three months ended June 30, 2008 compared to the three months ended June 30, 2007.

Cash received from our counterparty on cash flow swap contracts for natural gas derivative transactions that closed during the three months ended June 30, 2008 totaled $0.1 million compared to $1.4 million for the three months ended June 30, 2007. The $0.1 million gain was immaterial to average realized natural gas sales prices for the three months ended June 30, 2008. The $1.4 million gain for the three months ended June 30, 2007 increased averaged realized natural gas prices to $6.03 per MMBtu from $5.84 per MMBtu, an increase of $0.19 per MMBtu. Cash paid to our counterparty on cash flow swap contracts for NGL derivative transactions that closed during the three months ended June 30, 2008 totaled $3.1 million compared to $0.5 million for the three months ended June 30, 2007. The $3.1 million loss for the three months ended June 30, 2008 reduced averaged realized NGL prices to $1.64 per gallon from $1.76 per MMBtu, a decrease of $0.12 per gallon. The $0.5 million loss for the three months ended June 30, 2007 reduced averaged realized NGL prices to $1.09 per gallon from $1.11 per MMBtu, a decrease of $0.02 per gallon.

Compression revenues were $1.2 million for the each of the three months ended June 30, 2008 and 2007.

Midstream Purchases. Midstream purchases were $88.1 million for the three months ended June 30, 2008 compared to $47.9 million for the three months ended June 30, 2007, an increase of $40.2 million, or 83.8%. The $40.2 million increase is primarily due to volume growth at the Woodford Shale gathering system which commenced operation in April 2007, the expanded Badlands gathering system, including the nitrogen rejection plant, which commenced operation in August 2007 and higher natural gasand NGL purchase prices, resulting in increased midstream purchases for all of our gathering systems.

Midstream Segment Margin . Midstream segment margin was $26.2 million for the three months ended June 30, 2008 compared to $17.5 million for the three months ended June 30, 2007, an increase of $8.7 million, or 50.0%. The increase is primarily due to favorable gross processing spreads, significantly higher average realized natural gas and NGL prices, volume growth at the Woodford Shale gathering system which commenced operation in April 2007 and volume growth at the expanded Badlands gathering system, including the nitrogen rejection plant, which commenced operations in August 2007. As a percent of midstream revenues, midstream segment margin was 22.9% and 26.7% for the three months ended June 30, 2008 and 2007, respectively, a reduction of 3.8%. This reduction is attributable to net losses on closed/settled derivative transactions and unrealized non-cash losses on derivative transactions for the three months ended June 30, 2008, including an unrealized non-cash loss of $1.5 million related to a non-qualifying mark-to-market cash flow hedge for forecasted sales in 2010, compared to net gains on closed/settled derivative transactions and unrealized non-cash gains on derivative transactions for the three months ended June 30, 2007.

Operations and Maintenance. Operations and maintenance expense totaled $7.6 million for the three months ended June 30, 2008 compared with $5.0 million for the three months ended June 30, 2007, an increase of $2.6 million, or 51.6%. Of this increase, $1.5 million was attributable to increased operations and maintenance at the expanded Badlands gathering system and $0.9 million was attributable to increased operations and maintenance at the Bakken, Eagle Chief, Matli and Woodford Shale gathering systems.

Depreciation, Amortization and Accretion. Depreciation, amortization and accretion expense totaled $9.2 million for the three months ended June 30, 2008 compared with $7.0 million for the three months ended June 30, 2007, an increase of $2.1 million, or 30.3 %. Of this increase, $0.8 million was attributable to increased depreciation on the expanded Badlands gathering system, $0.5 million was attributable to the Woodford Shale gathering system and $0.4 million was attributable to increased depreciation on the Bakken gathering system.

Bad Debt. For the three months ended June 30, 2008 we have determined that collection of a trade accounts receivable from a significant customer totaling $8.1 million is doubtful. Accordingly, we have increased our reserve for doubtful accounts and recorded a bad debt expense of $8.1 million. We estimate additional potential exposure of approximately $5.0 million from this customer for uninvoiced product sales from July 1, 2008 through July 18, 2008. We had no bad debts for the three months ended June 30, 2007.

General and Administrative. General and administrative expense totaled $1.9 million for each of the three months ended June 30, 2008 and 2007. Salaries expense increased by $0.4 million as a result of increased non-cash unit based compensation and decreased capitalized labor during the three months ended June 30, 2008 as compared to the three months ended June 30, 2007. Salaries expense decreased by $0.2 million due to the timing of payments of current year executive bonuses, which were paid in the three months ended March 31, 2008 as compared to prior years' executive bonuses, which were paid in the three months ended June 30, 2007. General and administrative expense decreased as a result of incurring $0.2 million of acquisition evaluation costs in the three months ended June 30, 2007 that were non-existent in the three months ended June 30, 2008.

Other Income (Expense). Other income (expense) totaled ($3.2) million for the three months ended June 30, 2008 compared with ($2.3) million for the three months ended June 30, 2007, an increase in expense of $0.9 million. The increase is primarily attributable to additional interest expense from borrowings on our credit facility to fund the expansion project at the Badlands gathering system and to construct the Woodford Shale gathering system.

Six Months Ended June 30, 2008 Compared with Six Months Ended June 30, 2007

Revenues. Total revenues (midstream and compression) were $206.9 million for the six months ended June 30, 2008 compared to $127.7 million for the six months ended June 30, 2007, an increase of $79.3 million, or 62.1%. This $79.3 million increase was primarily due to (i) increased natural gas sales volumes of 13,162 MMBtu/day (MMBtu per day) and increased NGL sales volumes of 1,043 Bbls/day (Bbls per day) related to the Woodford Shale gathering system which commenced operation in April 2007, (ii) increased NGL sales volumes of 523 Bbls/day attributable to the expanded Badlands gathering system, including the nitrogen rejection plant, which commenced operation in August 2007 and
(iii) significantly higher average realized natural gas and NGL sales prices for the six months ended June 30, 2008 as compared to the same period in 2007, resulting in increased revenue at all of our gathering systems. Revenues from compression assets were the same for both periods.

Midstream revenues were $204.5 million for the six months ended June 30, 2008 compared to $125.3 million for the six months ended June 30, 2007, a net increase of $79.3 million, or 63.3%. Of this $79.3 million increase in midstream revenues, approximately $22.7 million was attributable to revenues from increased natural gas and NGL sales volumes at the Woodford Shale, Badlands, Bakken and Matli gathering systems and approximately $56.5 million was attributable to significantly higher average realized natural gas and NGL sales prices for the three months ended June 30, 2008 as compared to the same period in 2007, resulting in increased revenues for all of our gathering systems.

Inlet natural gas was 236,885 Mcf/d (Mcf per day) for the six months ended June 30, 2008 compared to 206,376 Mcf/d for the six months ended June 30, 2007, . . .