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.

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:

º •
º 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;

º •
º 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;

º •
º 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

º •
º 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       Contract of      Voyage     Bareboat
                            Charter     Affreightment   Charter(1)   Charter
          Typical          One year     One year or     Single       Two
          contract         or more      more            voyage       years or
          length                                                     more
          Rate basis       Daily        Per barrel      Varies       Daily
          Voyage           Customer     We pay          We pay       Customer
          expenses(2)      pays                                      pays
          Vessel           We pay       We pay          We pay       We pay
          operating
          expenses(2)
          Idle time        Customer     Customer does   Customer     Customer
                           pays as      not pay         does not     pays
                           long as                      pay
                           vessel is
                           available
                           for
                           operations


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   º (1)

º (2)
º 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.

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.

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.

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.

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:

º •
º 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.

º •
º 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.

º •
º 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.

º •
º Bareboat charter and other revenue. Bareboat charter and other revenue includes revenue from bareboat charters and from towing and other miscellaneous services.

º •
º 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.

º •
º 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.

º •
º 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.

º •
º 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.

º •
º 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.

º •
º 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.

º •
º 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.

º •
º 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.

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            62.5 %      62.6 %      63.1 %
             expenses to total revenues
      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          26,197      16,671       6,386
           taxes
      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           $   180,893   $ 123,182   $ 101,324
             revenue(a)
         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


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   º (a)

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.

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.

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 . . .