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 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. 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, ConocoPhillips, ExxonMobil and Tesoro. 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 December 31, 2008, approximately 79% of our barrel-carrying capacity was double-hulled, and we are 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.

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 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. 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. 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.

Significant Events

Common Unit Offering

On August 20, 2008, we closed 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 $49.8 million from the offering, after payment of underwriting discounts and commissions and other transaction costs, were used to repay borrowings under the credit agreements and to make construction progress payments in connection with our vessel new-building program.

Change in Accounting Estimates

In assessing the appropriateness of the useful lives and salvage values of our vessels, we considered the recent growth in the fleet and changes in its composition. We concluded, based on our accumulated data on useful lives and the planned future use of our vessels, as well as a review of industry data, that our assets are fully operative and economic for periods greater than those previously used for book depreciation purposes. Accordingly, effective July 1, 2008, we prospectively increased the estimated useful lives of double-hulled tank barges and tugboats to a range of ten to thirty years, from the previous ranges of ten to twenty five years and ten to twenty years, respectively, and increased salvage values for double-hulled tank barges. These changes in accounting estimates increased both operating income and net income by $1.6 million and net income per fully diluted limited partner unit by $0.10 for the three months ended December 31, 2008 and increased operating income and net income by $3.3 million and $3.2 million, respectively, and net income per fully diluted limited partner unit by $0.21, for the six months ended December 31, 2008.

Insurance Call

In December 2008, we received an additional call from our mutual insurance carrier. The call was primarily retrospective for policy years covering February 2006 through February 2009. The decision to make the call was based primarily on falling investment returns and projected underwriting losses. Although such additional calls are uncommon, our insurance carrier has the right to make these calls when it believes the level of its reserves will be insufficient to meet certain regulatory requirements. The additional calls, which were based upon the information available in mid-November 2008, totaled approximately $3.4 million. The calls are scheduled for payment in February 2009 and August 2009 for the first two policy years and January 2010 and August 2010 for the last policy year. Our insurance carrier has scheduled these payments over this time period to reassess at various points whether the calls are necessary. We received updated information from our insurance carrier reflecting improved investment returns and underwriting results. Based on the information provided, our financial statements reflect additional insurance expense, included in vessel operating expenses, of approximately $2.3 million for the three and six months ended December 31, 2008. Such estimates may be subject to change in the future and additional liabilities may be recorded if market conditions or underwriting results should deteriorate.

Definitions

In order to understand the 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. 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.

† 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.

Please refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations - Definitions" included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2008 for definitions of certain other terms used in our discussion of results of operations.

                             Results of Operations



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



                                               Three Months Ended          Six Months Ended
                                                  December 31,               December 31,
                                               2008          2007         2008         2007

Voyage revenue                              $    83,034    $  80,416    $ 167,674    $ 149,361
Bareboat charter and other revenue                5,225        3,260       12,079        6,076
Total revenues                                   88,259       83,676      179,753      155,437
Voyage expenses                                  19,473       19,632       42,978       35,375
Vessel operating expenses                        38,270       32,374       75,336       59,891
% of voyage and vessel operating
expenses to total revenue                          65.4 %       62.2 %       65.8 %       61.3 %
General and administrative expenses               7,403        7,251       15,364       13,595
% of total revenue                                  8.4 %        8.7 %        8.5 %        8.7 %
Depreciation and amortization                    13,751       12,075       26,526       22,404
Net (gain) loss on disposal of vessels
and equipment                                         9          (79 )        303         (300 )
Operating income                                  9,353       12,423       19,246       24,472
% of total revenue                                 10.6 %       14.9 %       10.7 %       15.7 %
Interest expense, net                             5,509        5,338       11,414       11,158
Other expense (income), net                         120       (2,168 )        118       (2,173 )
Income before provision for income taxes          3,724        9,253        7,714       15,487
Provision for income taxes                          121          277          257          505
Net income                                  $     3,603    $   8,976    $   7,457    $  14,982

Net voyage revenue by trade
Coastwise
Total tank vessel days                            4,193        3,987        8,310        7,277
Days worked                                       3,807        3,558        7,483        6,549
Scheduled drydocking days                            33          178          140          322
Net utilization                                      91 %         89 %         90 %         90 %
Average daily rate                          $    13,151    $  13,556    $  13,090    $  13,497
Total coastwise net voyage revenue (a)      $    50,067    $  48,233    $  97,954    $  88,394
Local
Total tank vessel days                            2,180        2,279        4,432        4,763
Days worked                                       1,801        1,857        3,636        3,746
Scheduled drydocking days                            62            -          131           39
Net utilization                                      83 %         81 %         82 %         79 %
Average daily rate                          $     7,493    $   6,759    $   7,355    $   6,832
Total local net voyage revenue (a)          $    13,494    $  12,551    $  26,742    $  25,592

Tank vessel fleet
Total tank vessel days                            6,373        6,266       12,742       12,040
Days worked                                       5,608        5,415       11,119       10,295
Scheduled drydocking days                            95          178          271          361
Net utilization                                      88 %         86 %         87 %         86 %
Average daily rate                          $    11,334    $  11,225    $  11,215    $  11,072
Total fleet net voyage revenue (a)          $    63,561    $  60,784    $ 124,696    $ 113,986

Three Months Ended December 31, 2008 Compared to Three Months Ended December 31, 2007

Voyage Revenue and Voyage Expenses

Voyage revenue was $83.0 million for the three months ended December 31, 2008, an increase of $2.6 million, or 3.2%, as compared to voyage revenue of $80.4 million for the three months ended December 31, 2007. Voyage expenses were $19.5 million for the three months ended December 31, 2008, a decrease of $0.1 million, or 0.5%, as compared to voyage expenses of $19.6 million for the three months ended December 31, 2007.

Net voyage revenue

Net voyage revenue was $63.6 million for the three months ended December 31, 2008, which exceeded net voyage revenue of $60.8 million for the three months ended December 31, 2007 by $2.8 million, or 4.6%. In our coastwise trade, net voyage revenue was $50.1 million for the three months ended December 31, 2008, an increase of $1.9 million, or 3.9%, as compared to $48.2 million for the three months ended December 31, 2007. Net utilization in our coastwise trade was 91% for the three months ended December 31, 2008 as compared to 89% for the three-month period ended December 31, 2007. The net voyage revenue increase of $1.9 million for the three months ended December 31, 2008, was attributable to the delivery of two of our newbuild barges (1) the DBL 77, which began operations in July 2008, and (2) the DBL 76, which began operations in November 2008. Net utilization during the three months ended December 31, 2008 increased as a result of decreased scheduled drydocking days. Coastwise average daily rates decreased 3.0% to $13,151 for the three months ended December 31, 2008 from $13,556 for the three months ended December 31, 2007. The decrease in coastwise average daily rates is primarily due to a $1.2 million write-down in the carrying value of fuel inventory used to operate our tugboats in the second quarter of fiscal 2009.

Net voyage revenue in our local trade for the three months ended December 31, 2008 increased by $0.9 million, or 7.1%, to $13.5 million from $12.6 million for the three months ended December 31, 2007. Local net voyage revenue increased by $1.0 million during the three months ended December 31, 2008 due to the increased number of working days for the newbuild barges, DBL 24 and DBL 25, which were delivered in December 2007 and March 2008, respectively. Net utilization in our local trade was 83% for the three months ended December 31, 2008, compared to 81% for the three months ended December 31, 2007. Average daily rates in our local trade increased 10.9% to $7,493 for the three months ended December 31, 2008 from $6,759 for the comparative prior year period as a result of higher spot market rates on certain clean oil vessels due to an earlier winter season than the comparative prior year period as well higher rates on certain newbuild vessels.

Bareboat Charter and Other Revenue

Bareboat charter and other revenue was $5.2 million for the three months ended December 31, 2008, compared to $3.3 million for the three months ended December 31, 2007. Of this $1.9 million increase, $1.8 million was attributable to increased towing revenue from the purchase of eight tugboats in June 2008.

Vessel Operating Expenses

Vessel operating expenses were $38.3 million for the three months ended December 31, 2008 compared to $32.4 million for the three months ended December 31, 2007, an increase of $5.9 million. Voyage and vessel operating expenses as a percentage of total revenues were 65.4% for the three months ended December 31, 2008 and 62.2% for the three months ended December 31, 2007. Vessel labor and related costs for the three months ended December 31, 2008 increased $5.5 million as a result of a contractual labor rate increase reflected in our new two year labor contract with certain of our vessel employees and a higher average number of employees due to the operation of the additional barges and tugboats described under "-Net voyage revenue" and "-Bareboat Charter and Other Revenue" above. Other vessel operating costs increased $0.4 million for the three months ended December 31, 2008, which was attributable to an increase in vessel insurance premiums of $2.8 million due an increased number of vessels and rate increases, including $2.3 million relating to the additional insurance call described in "-Significant Events" above, and an increase of $0.1 million relating to fuel and other costs. Such increases were partially offset by a decrease of $1.9 million in outside towing expenses as a result of the purchase of eight additional tug boats in June 2008 and a decrease of $0.4 million for repairs, maintenance, supplies and parts.

Depreciation and Amortization

Depreciation and amortization was $13.8 million for the three months ended December 31, 2008, an increase of $1.7 million, or 14.0%, compared to $12.1 million for the three months ended December 31, 2007. Of this $1.7

million increase, $0.9 million was attributable to depreciation on newbuilds and purchased vessels during fiscal years 2008 and 2009, and $2.3 million relates to increased drydocking amortization, partially offset by a decrease of $1.6 million due to the change in estimated useful lives of our vessels and salvage values as described under "-Significant Events" above.

General and Administrative Expenses

General and administrative expenses were $7.4 million for the three months ended December 31, 2008, an increase of $0.1 million, or 1.4%, as compared to $7.3 million for the three months ended December 31, 2007. The $0.1 million increase for the three months ended December 31, 2008 is primarily the result of increased personnel costs resulting from increased annual salaries. As a percentage of total revenues, general and administrative expenses were 8.4% for the three month period ended December 31, 2008 and 8.7% for the three month period ended December 31, 2007.

Interest Expense, Net

Net interest expense was $5.5 million for the three months ended December 31, 2008, or $0.2 million higher than the $5.3 million incurred in the three months ended December 31, 2007. The increase resulted from higher average debt balances resulting from increased credit line and term loan borrowings in connection with our acquisitions and newbuild vessels, offset by lower average interest rates.

Provision for Income Taxes

Our interim provisions for income taxes are based on our estimated annual effective tax rate. For the three months ended December 31, 2008, our effective tax rate was 3.2% as compared to a rate of 3.0% for the three months ended December 31, 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 quarter ended December 31, 2008 was higher than the comparable prior year period primarily due to a discrete item related to unit compensation costs.

Net income

Net income was $3.6 million for the three months ended December 31, 2008; a decrease of $5.4 million compared to net income of $9.0 million for the three months ended December 31, 2007. This decrease resulted primarily from a $3.0 million decrease in operating income, a $2.3 million decrease in other expense (income), and a $0.2 million increase in interest expense.

Six Months Ended December 31, 2008 Compared to Six Months Ended December 31, 2007

Voyage Revenue and Voyage Expenses

Voyage revenue was $167.7 million for the six months ended December 31, 2008; an increase of $18.3 million, or 12.2%, as compared to voyage revenue of $149.4 million for the six months ended December 31, 2007. Voyage expenses were $43.0 million for the six months ended December 31, 2008, an increase of $7.6 million, or 21.5%, as compared to voyage expenses of $35.4 million for the six months ended December 31, 2007.

Net voyage revenue

Net voyage revenue was $124.7 million for the six months ended December 31, 2008, which exceeded net voyage revenue of $114.0 million for the six months ended December 31, 2007 by $10.7 million, or 9.4%. In our coastwise trade, net voyage revenue was $98.0 million for the six months ended December 31, 2008, an increase of $9.6 million, or 10.9%, as compared to $88.4 million in the six months ended December 31, 2007. The acquisition of the Smith Maritime Group in August 2007 resulted in increased coastwise net voyage revenue of $3.5 million. Net voyage revenue increased by an additional $6.0 million for the six months ended December 31, 2008 due to an increase in the number of working days for
(1) the DBL 77, which began operations in July 2008, (2) the DBL 101, which was in the shipyard for an extended period in fiscal 2008, (3) the DBL 76, which began operations in November 2008, and (4) the Washington, which was placed in service in July 2008. Net utilization in our coastwise trade was 90% for each of the six-month periods ended December 31, 2008 and 2007. Average daily rates in the coastwise trade decreased 3.0% to $13,090 for the six months ended December 31, 2008 from $13,497 for the six months ended December 31, 2007. The decrease in coastwise average daily rates in the six months ended December 31, 2008 is primarily due to lower average rates of certain vessels operated in the Gulf of

Mexico as a result of lost time related to Hurricanes Gustav and Ike and a $2.0 million write-down in the carrying value of fuel inventory used to operate our tugboats.

Net voyage revenue in our local trade for the six months ended December 31, 2008 increased by $1.1 million, or 4.3%, to $26.7 million from $25.6 million for the six months ended December 31, 2007. Local net voyage revenue increased by $2.9 million during the six months ended December 31, 2008 due to the increased number of working days for the newbuild barges DBL 23, DBL 24 and DBL 25, which were delivered in September 2007, December 2007, and March 2008, respectively. This increase was offset by a decrease in local net voyage revenue of $2.0 million due to the retirement of three single-hull vessels. Net utilization in our local trade was 82% for the six months ended December 31, 2008 as compared to 79% for the six months ended December 31, 2007; this increase was mainly due to fewer scheduled drydocking days. Average daily rates in our local trade increased 7.7% to $7,355 for the six months ended December 31, 2008 from $6,832 for the comparative prior year due to higher spot market rates on certain clean oil vessels due to an earlier winter season than the comparative prior year period as well higher rates on certain newbuild vessels.

Bareboat Charter and Other Revenue

Bareboat charter and other revenue was $12.1 million for the six months ended December 31, 2008, compared to $6.1 million for the six months ended December 31, 2007. Of this $6.0 million increase, $4.9 million was attributable to increased revenue from the purchase of eight tugboats in June 2008 and $1.1 million was a result of the Smith Maritime Group acquisition.

Vessel Operating Expenses

Vessel operating expenses were $75.3 million for the six months ended December 31, 2008 compared to $59.9 million for the six months ended December 31, 2007, an increase of $15.4 million. Voyage and vessel operating expenses as a percentage of total revenues increased to 65.8% for the six months ended December 31, 2008 from 61.3% for the six months ended December 31, 2007. Vessel labor and related costs for the six months ended December 31, 2008 increased $12.5 million as a result of a contractual labor rate increase reflected in our new two year labor contract with certain of our vessel employees and a higher average number of employees due to the operation of the additional barges and tugboats described under "-Net voyage revenue" and "-Bareboat Charter and Other Revenue" above. Other vessel operating costs increased $2.9 million for the six months ended December 31, 2008. This increase is primarily comprised of a $1.2 million increase in repairs, maintenance, supplies and parts, a $1.0 million increase in fuel and other costs associated with the purchase of eight additional tug boats in June 2008 and a $3.7 million increase in vessel insurance premiums due to an increased number of vessels and rate increases, including $2.3 million relating to the additional insurance call described in "-Significant Events" above. Such increases were partially offset by a decrease of $3.4 million in outside towing expenses as a result of the purchase of eight additional tug boats in June 2008.

Depreciation and Amortization

Depreciation and amortization was $26.5 million for the six months ended December 31, 2008, an increase of $4.1 million, or 18.3%, compared to $22.4 million for the six months ended December 31, 2007. Of this $4.1 million increase, $3.0 million was attributable to depreciation on newbuilds and purchased vessels during fiscal years 2008 and 2009 and $3.7 million relates to increased drydocking amortization, partially offset by a decrease of $3.3 million due to the change in estimated useful lives of our vessels and salvage values as described under "-Significant Events" above.

General and Administrative Expenses

General and administrative expenses were $15.4 million for the six months ended December 31, 2008, an increase of $1.8 million, as compared to general and administrative expenses of $13.6 million for the six months ended December 31, 2007. The $1.8 million increase for the six months ended December 31, 2008 is primarily the result of increased personnel costs resulting from increased headcount to support our growth and the additional facilities costs of our new offices in Hawaii and Seattle. As a percentage of total revenues, general and administrative expenses decreased to 8.5% for the six months ended December 31, 2008 from 8.7% for the six months ended December 31, 2007.

Interest Expense, Net

Net interest expense was $11.4 million for the six months ended December 31, 2008, or $0.2 million higher than the $11.2 million incurred in the six months ended December 31, 2007. The increase resulted from higher average

debt balances resulting from increased credit line and term loan borrowings in connection with our acquisitions and newbuild vessels, offset by lower average interest rates.

Provision for Income Taxes

Our interim provisions for income taxes are based on our estimated annual . . .