DISRUPTION TO FUNCTIONING OF CAPITAL MARKETS

Multiple events during 2008 involving numerous financial institutions have effectively restricted current liquidity within the capital markets throughout the United States and around the world. Despite efforts by treasury and banking regulators in the United States, Europe and other nations around the world to provide liquidity to the financial sector, capital markets currently remain constrained. We expect that our ability to raise debt and equity at prices that are similar to offerings in recent years to be limited over the next three to six months and possibly longer should capital markets remain constrained.

In the weeks following the third quarter, our unit price declined to a closing low of $18.00 on October 10, 2008. Since that date our unit price recovered partially to a level of $[ .] on November 7, 2008. We currently intend to move forward with our planned internal growth projects, and in the near-term we will focus on maintaining sufficient liquidity to fund our growth programs, see "Liquidity and Capital Resources." Maintaining adequate liquidity may involve the issuance of debt and/or equity at less attractive terms.

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 the fractionating and marketing of NGLs. The midstream segment generated 96.4% and 94.5% of our total segment margin for the three months ended September 30, 2008 and 2007, respectively, and 95.7% and 93.8% of our total segment margin for the nine months ended September 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 3.6% and 5.5% of our total segment margin for the three months ended September 30, 2008 and 2007, respectively, and 4.3% and 6.2% of our total segment margin for the nine months ended September 30, 2008 and 2007, respectively.

Our midstream assets currently consist of 14 natural gas gathering systems with approximately 2,087 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

Distribution Increase. On October 24, 2008, we declared a cash distribution for the third quarter of 2008. This declared quarterly distribution on our common and subordinated units increased to $0.88 per unit (an annualized rate of $3.52 per unit) from our most recent distribution of $0.8625 per unit (an annualized rate of $3.45 per unit). This represents a 2.0% increase over the prior quarter and a 16.6% increase over the distribution for the same quarter of the prior year. The distribution will be paid on November 14, 2008 to unitholders of record on November 4, 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. During the second quarter 2008, we increased our allowance for doubtful accounts and bad debt expense by $8.1 million for related product sales through June 30, 2008. On October 20, 2008, the United States Bankruptcy Court for the District of Delaware entered an order approving the assumption of a Natural Gas Liquids Marketing Agreement (the "SemStream Agreement") between SemStream, L.P., an affiliate of SemGroup, L.P., and us relating to the sale of natural gas liquids and condensate at our Bakken and Badlands plants and gathering systems. As a result of the assumption, and in accordance with the order, on October 21, 2008, SemStream paid $12.1 million to us, representing amounts owed to us from SemStream for June and July 2008 product sales under the SemStream Agreement. The assumption of the SemStream Agreement restores us and SemStream, L.P. to our pre-bankruptcy contractual relationship.

Our third quarter results of operations reflect a reversal of $7.8 million of the $8.1 million allowance for doubtful accounts and bad debt expense previously recorded on our statement of operations in the second quarter of 2008. After receipt of the October 21 payment, our total pre-petition credit exposure to SemGroup, related to condensate sales to SemCrude, LLC, and outside of the SemStream Agreement, is approximately $0.3 million, which we have reserved as of September 30, 2008.

Financial Hedge Agreement. On October 7, 2008, we entered into a floating-to-fixed interest rate swap agreement with an investment grade counterparty whereby we pay a monthly fixed interest rate of 2.245% and receive a monthly variable rate based on the one month posted LIBOR interest rate on a notional amount of $100.0 million. The swap agreement is effective January 2, 2009 and terminates on January 1, 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. As of September 30, 2008, we have initially invested $0.4 million in the project. The expected startup of the initial phase of the project should occur no later than the second quarter of 2009.

During the third quarter of 2008, we invested approximately $10.4 million to expand our Woodford Shale gathering system's throughput capacity to approximately 65,000 Mcf/d.

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 September 30,
                                                           2008                2007
                                                                (in thousands)
Total Segment Margin Data:
Midstream revenues                                   $         114,548    $        66,431
Midstream purchases                                             81,895             45,789
Midstream segment margin                                        32,653             20,642
Compression revenues (1)                                         1,205              1,205
Total segment margin (2)                             $          33,858    $        21,847

Summary of Operations Data:
Midstream revenues                                   $         114,548    $        66,431
Compression revenues                                             1,205              1,205
Total revenues                                                 115,753             67,636

Midstream purchases (exclusive of items shown
separately below)                                               81,895             45,789
Operations and maintenance                                       7,881              6,157
Depreciation, amortization and accretion                         9,554              7,583
Bad debt                                                        (7,799 )                -
General and administrative                                       2,259              1,715
Total operating costs and expenses                              93,790             61,244
Operating income                                                21,963              6,392
Other income (expense)                                          (3,322 )           (3,138 )
Net income                                                      18,641              3,254

Add:
Depreciation, amortization and accretion                         9,554              7,583
Amortization of deferred loan costs                                147                114
Interest expense                                                 3,271              3,126
EBITDA (3)                                           $          31,613    $        14,077

Operating Data:
Inlet natural gas (Mcf/d)                                      261,345            219,544
Natural gas sales (MMBtu/d)                                     95,889             84,281
NGL sales (Bbls/d)                                               6,036              4,721




                                                       Nine Months Ended September 30,
                                                           2008                2007
                                                                (in thousands)
Total Segment Margin Data:
Midstream revenues                                   $        319,058    $        191,691
Midstream purchases                                           238,586             137,320
Midstream segment margin                                       80,472              54,371
Compression revenues (1)                                        3,615               3,615
Total segment margin (2)                             $         84,087    $         57,986

Summary of Operations Data:
Midstream revenues                                   $        319,058    $        191,691
Compression revenues                                            3,615               3,615
Total revenues                                                322,673             195,306

Midstream purchases (exclusive of items shown
separately below)                                             238,586             137,320
Operations and maintenance                                     22,201              16,108
Depreciation, amortization and accretion                       27,652              21,362
Bad debt                                                          304                   -
General and administrative                                      6,423               5,108
Total operating costs and expenses                            295,166             179,898
Operating income                                               27,507              15,408
Other income (expense)                                        (10,047 )            (7,495 )
Net income                                                     17,460               7,913

Add:
Depreciation, amortization and accretion                       27,652              21,362
Amortization of deferred loan costs                               426                 290
Interest expense                                                9,888               7,519
EBITDA (3)                                           $         55,426    $         37,084

Operating Data:
Inlet natural gas (Mcf/d)                                     245,098             210,878
Natural gas sales (MMBtu/d)                                    89,615              78,998
NGL sales (Bbls/d)                                              5,763               4,340

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

                                                        Three Months Ended September 30,
                                                           2008                  2007
                                                                 (in thousands)
Reconciliation of Total Segment Margin to
Operating Income
Operating income                                     $          21,963     $           6,392
Add:
Operations and maintenance expenses                              7,881                 6,157
Depreciation, amortization and accretion                         9,554                 7,583
Bad debt                                                        (7,799 )                   -
General and administrative expenses                              2,259                 1,715
Total segment margin                                 $          33,858     $          21,847




                                                         Nine Months Ended September 30,
                                                           2008                  2007
                                                                 (in thousands)
Reconciliation of Total Segment Margin to
Operating Income
Operating income                                     $          27,507     $          15,408
Add:
Operations and maintenance expenses                             22,201                16,108
Depreciation, amortization and accretion                        27,652                21,362
Bad debt                                                           304                     -
General and administrative expenses                              6,423                 5,108
Total segment margin                                 $          84,087     $          57,986

We view total segment margin, a non-GAAP financial measure, as an important performance measure of the core profitability of our operations because it is directly related to our volumes and commodity price changes. 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. Our total segment margin may not be comparable to similarly titled measures of other companies as other companies may not calculate total segment margin in the same manner.

(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 September 30, 2008 Compared with Three Months Ended September 30, 2007

Revenues. Total revenues (midstream and compression) were $115.7 million for the three months ended September 30, 2008 compared to $67.6 million for the three months ended September 30, 2007, an increase of $48.1 million, or 71.1%. This $48.1 million increase was primarily due to: (i) increased natural gas sales volumes of 15,830 MMBtu/day (MMBtu per day) and increased NGL sales volumes of 609 Bbls/day (Bbls per day) related to the Woodford Shale gathering system, (ii) increased NGL sales volumes of 646 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 September 30, 2008 as compared to the same period in 2007, resulting in increased revenues for nearly all of our gathering systems. Revenues from compression assets were the same for both periods.

Midstream revenues were $114.5 million for the three months ended September 30, 2008 compared to $66.4 million for the three months ended September 30, 2007, an increase of $48.1 million, or 72.4%. Of this $48.1 million increase in midstream revenues, approximately $13.3 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 $34.8 million was attributable to significantly higher average realized natural gas and NGL sales prices for the three months ended September 30, 2008 as compared to the same period in 2007, resulting in increased revenues for all of our gathering systems.

Inlet natural gas was 261,345 Mcf/d (Mcf per day) for the three months ended September 30, 2008 compared to 219,544 Mcf/d for the three months ended September 30, 2007, an increase of 41,801 Mcf/d, or 19.0%. 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 Worland gathering systems.

Natural gas sales volumes were 95,889 MMBtu/d for the three months ended September 30, 2008 compared to 84,281 MMBtu/d for the three months ended September 30, 2007, an increase of 11,608 MMBtu/d, or 13.8%. This 11,608 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, Worland and Kinta gathering systems.

NGL sales volumes were 6,036 Bbls/d for the three months ended September 30, 2008 compared to 4,721 Bbls/d for the three months ended September 30, 2007, a net increase of 1,315 Bbls/d, or 27.9%. This net increase is primarily attributable to volume growth at our Woodford Shale and Badlands gathering systems.

Average realized natural gas sales prices were $7.57 per MMBtu for the three months ended September 30, 2008 compared to $5.20 per MMBtu for the three months ended September 30, 2007, an increase of $2.37 per MMBtu, or 45.6%. Average realized NGL sales prices were $1.55 per gallon for the three months ended September 30, 2008 compared to $1.16 per gallon for the three months ended September 30, 2007, an increase of $0.39 per gallon or 33.6%. 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 September 30, 2008 compared to the three months ended September 30, 2007.

Cash received from our counterparty on cash flow swap contracts for natural gas derivative transactions that closed during the three months ended September 30, 2008 totaled $1.1 million compared to $1.5 million for the three months ended September 30, 2007. The $1.1 million gain for the three months ended September 30, 2008 increased averaged realized natural gas prices to $7.57 per MMBtu from $7.44 per MMBtu, an increase of $0.13 per MMBtu. The $1.5 million gain for the three months ended September 30, 2007 increased averaged realized natural gas prices to $5.20 per MMBtu from $5.00 per MMBtu, an increase of $0.20 per MMBtu. Cash paid to our counterparty on cash flow swap contracts for NGL derivative transactions that closed during the three months ended September 30, 2008 totaled $2.5 million compared to $0.6 million for the three months ended September 30, 2007.

The $2.5 million loss for the three months ended September 30, 2008 reduced averaged realized NGL prices to $1.55 per gallon from $1.65 per gallon, a decrease of $0.10 per gallon. The $0.6 million loss for the three months ended September 30, 2007 reduced averaged realized NGL prices to $1.16 per gallon from $1.18 per gallon, a decrease of $0.02 per gallon.

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

Midstream Purchases. Midstream purchases were $81.9 million for the three months ended September 30, 2008 compared to $45.8 million for the three months ended September 30, 2007, an increase of $36.1 million, or 78.9%. The $36.1 million increase is primarily due to volume growth at the Woodford Shale gathering system, the expanded Badlands gathering system, including the nitrogen rejection plant, which commenced operation in August 2007 and higher natural gas and NGL purchase prices, resulting in increased midstream purchases for all of our gathering systems.

Midstream Segment Margin . Midstream segment margin was $32.6 million for the three months ended September 30, 2008 compared to $20.6 million for the three months ended September 30, 2007, an increase of $12.0 million, or 58.2%. 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 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 28.5% and 31.1% for the three months ended September 30, 2008 and 2007, respectively, a reduction of 2.6%. 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 September 30, 2008 totaling $1.3 million, after being offset by an unrealized non-cash gain of $5.6 million related to a non-qualifying mark-to-market cash flow derivative for forecasted sales in 2010, compared to net gains of $0.9 million on closed/settled derivative transactions and unrealized non-cash gains on derivative transactions for the three months ended September 30, 2007.

Operations and Maintenance. Operations and maintenance expense totaled $7.9 million for the three months ended September 30, 2008 compared with $6.2 million for the three months ended September 30, 2007, an increase of $1.7 million, or 28.0%. Of this increase, $1.2 million was attributable to increased operations and maintenance at the expanded Badlands gathering system and $0.4 million was attributable to increased operations and maintenance at the Woodford Shale gathering system.

Depreciation, Amortization and Accretion. Depreciation, amortization and accretion expense totaled $9.6 million for the three months ended September 30, 2008 compared with $7.6 million for the three months ended September 30, 2007, an increase of $2.0 million, or 26.0 %. Of this increase, $0.6 million was attributable to increased depreciation on the expanded Badlands gathering system, $0.7 million was attributable to the Woodford Shale gathering system and $0.3 million was attributable to increased depreciation on the Bakken gathering system.

Bad Debt. During the three months ended September 30, 2008, we recorded a reversal of an uncollectible trade accounts receivable of $7.8 million related to a receivable from a significant customer in which we had previously reserved an allowance for uncollectible accounts of $8.1 million during the second quarter of 2008. Accordingly, we have decreased our reserve for uncollectible accounts to $0.3 million, which represents the remaining potential exposure to this significant customer. We had no bad debts for the three months ended September 30, 2007.

General and Administrative. General and administrative expense totaled $2.3 million for the three months ended September 30, 2008 compared with $1.7 million for the three months ended September 30, 2007, an increase of $0.5 million, or 31.7 %. Salaries expense increased by $0.5 million as a result of increased non-cash unit based compensation and increased staffing during the three months ended September 30, 2008 as compared to the three months ended September 30, 2007.

Other Income (Expense). Other income (expense) totaled $(3.3) million for the three months ended September 30, 2008 compared with $(3.1) million for the three months ended September 30, 2007, an increase in expense of $0.2 million. The increase is primarily attributable to additional interest expense from borrowings on our credit facility to fund expansions at the Badlands gathering system, Woodford Shale gathering system, and the Kinta gathering systems, after being offset by lower interest rates incurred during the three months ended September 30, 2008 compared to interest rates incurred during the three months . . .