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. As of September 1, 2009, we operated a fleet of 69 tank barges and 66 tugboats that serves a wide range of customers, including major oil companies, oil traders and refiners. With approximately 4.1 million barrels of capacity, as of September 1, 2009, 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. 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:

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


--------------------------------------------------------------------------------
   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.

Common Unit Offering

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 $49.8 million from the offering, after payment of underwriting discounts and commissions and other transaction costs, were used to repay borrowings under our 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 operating income by $6.4 million and net income by $6.3 million, respectively and net income per fully diluted limited partner unit by $0.40 for the year ended June 30, 2009.

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 call for the first policy year was paid in February 2009 and the call for the second policy year is expected to be paid in September 2009. The call for the last policy year is

scheduled for payment in January 2010 and August 2010. 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 $2.5 million for the year ended June 30, 2009. Such estimates are subject to change and additional liabilities may be recorded if market conditions or underwriting results should deteriorate.

In August 2009, we completed a public offering of 3,244,500 common units representing limited partner interests. The price to the public was $19.15 per unit. The aggregate net proceeds of approximately $59.4 million from the offering, after payment of underwriting discounts and commissions but excluding other transaction costs, were used to repay borrowings of approximately $35.0 million under our credit agreements and to make construction progress payments in connection with our vessel newbuilding 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 fuel and other items such as 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 Other revenue. 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 shore side 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,
                                                     2009         2008        2007
      Voyage revenue                               $  310,429   $ 312,680   $ 216,924
      Other revenue                                    20,033      13,600       9,650

        Total revenues                                330,462     326,280     226,574
      Voyage expenses                                  67,029      79,427      45,875
      Vessel operating expenses                       144,291     124,551      96,005
          % of voyage and vessel operating               63.9 %      62.5 %      62.6 %
          expenses to total revenues
      General and administrative expenses              29,806      28,947      20,472
          % of total revenues                             9.0 %       8.9 %       9.0 %
      Depreciation and amortization                    53,582      48,311      33,415
      Net (gain) loss on sale of vessels                 (702 )      (601 )       102

        Operating income                               36,456      45,645      30,705
          % of total revenues                            11.0 %      14.0 %      13.6 %
      Interest expense, net                            21,503      21,275      14,097
      Other expense (income), net                         719      (1,827 )       (63 )

        Income before provision for income             14,234      26,197      16,671
        taxes
      Provision for income taxes                          287         529         851

        Net income                                $    13,947   $  25,668   $  15,820

      Net voyage revenue by trade
        Coastwise
          Total tank vessel days                       16,262      15,103      11,032
          Days worked                                  14,246      13,174       9,954
          Scheduled drydocking days                       333         831         511
          Net utilization                                  88 %        87 %        90 %
          Average daily rate                       $   13,457   $  13,731   $  12,375
             Total coastwise net voyage           $   191,711   $ 180,893   $ 123,182
             revenue (a)
        Local
          Total tank vessel days                        8,545       9,267       8,864
          Days worked                                   6,880       7,406       6,987
          Scheduled drydocking days                       218         174         232
          Net utilization                                  81 %        80 %        79 %
          Average daily rate                       $    7,513   $   7,070   $   6,851
             Total local net voyage revenue (a)   $    51,689   $  52,360   $  47,867
        Tank vessel fleet
          Total tank vessel days                       24,807      24,370      19,896
          Days worked                                  21,126      20,580      16,941
          Scheduled drydocking days                       551       1,005         743
          Net utilization                                  85 %        84 %        85 %
          Average daily rate                       $   11,521   $  11,334   $  10,097
             Total fleet net voyage revenue (a)   $   243,400   $ 233,253   $ 171,049


--------------------------------------------------------------------------------
   º (a)

Fiscal Year Ended June 30, 2009 Compared to the Fiscal Year Ended June 30, 2008

Voyage Revenue and Voyage Expenses

Voyage revenue was $310.4 million for the year ended June 30, 2009, a decrease of $2.3 million, or 0.7%, as compared to voyage revenue of $312.7 million for the year ended June 30, 2008. Voyage expenses were $67.0 million for the year ended June 30, 2009, a decrease of $12.4 million, or 15.6%, as compared to voyage expenses of $79.4 million for the year ended June 30, 2008. The decrease in voyage expenses primarily relates to the decrease in the price of fuel.

Net Voyage Revenue

Net voyage revenue was $243.4 million for the year ended June 30, 2009, an increase of $10.1 million, or 4.3%, as compared to net voyage revenue of $233.3 million for the year ended June 30, 2008. In our coastwise trade, net voyage revenue was $191.7 million for the year ended June 30, 2009, an increase of $10.8 million, or 6.0%, as compared to $180.9 million for the year ended June 30, 2008. Net utilization in our coastwise trade was 88% for the year ended June 30, 2009 as compared to 87% for the year ended June 30, 2008. Net voyage revenue in our coastwise trade increased $15.0 million for the year ended June 30, 2009 due (1) to an increase in the number of working days for our barges (a) the DBL 77 and the Washington, both of which began operations in July 2008 and (b) the DBL 76 and the DBL 79, which began operations in November 2008 and January 2009, respectively, and (2) the net decrease in scheduled drydocking days in fiscal year 2009 versus fiscal year 2008. These increases were partially offset by a decrease of $2.5 million relating to two barges that were sold and a decrease of $1.8 million relating to a barge which worked in the spot market in the year ended June 30, 2009 as compared to being on a time charter for the year ended June 30, 2008. Average daily rates in our coastwise trade decreased 2.0% to $13,457 for the year ended June 30, 2009 from $13,731 for the year ended June 30, 2008 due to a write down of our fuel inventory to reflect lower fuel cost and lower rates in the Gulf Coast region due to decreased demand for #6 oil due to the lower price of natural gas.

Net voyage revenue in our local trade for the year ended June 30, 2009 decreased by $0.7 million, or 1.3%, to $51.7 million from $52.4 million for the year ended June 30, 2008. Local net voyage revenue increased by $3.8 million during the year ended June 30, 2009 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. Additionally, local net voyage revenue increased by $2.0 million due to the movement of two vessels from performing operational support activities for our waste water treatment and Philadelphia facilities during the year ended June 30, 2008 to the spot bunker market in the year ended June 30, 2009 and the return to service of a vessel that was in shipyard for an extended period during the year ended June 30, 2008. The $5.8 million increase was offset by a decrease in local net voyage revenue of $6.4 million due to the retirement of six single-hull vessels, four of which were sold as of June 30, 2009. Net utilization in our local trade was 81% for the year ended June 30, 2009, compared to 80% for the year ended June 30, 2008. Average daily rates in our local trade increased 6.3% to $7,513 for the year ended June 30, 2009 from $7,070 for the year ended June 30, 2008 due to higher rates on certain clean oil vessels due to a colder winter as compared to the year ended June 30, 2008 and higher rates on certain newbuild vessels.

Other Revenue

Other revenue increased by $6.4 million, or 47.1%, to $20.0 million for the year ended June 30, 2009, as compared to $13.6 million for the year ended June 30, 2008. Of this $6.4 million increase, $5.9 million was attributable to increased revenue from the purchase of eight tugboats in June 2008, $0.9 million was a result of a full year of operations relating to the Smith Maritime Group acquisition, and $0.5 million related to a customer contract cancellation settlement during fiscal year 2009. These

increases were partially offset by a $1.0 million decrease due to three vessels whose charters terminated during fiscal year 2009 and which had operated under charters during the year ended June 30, 2008.

Vessel Operating Expenses

Vessel operating expenses were $144.3 million for the year ended June 30, 2009, an increase of $19.7 million, or 15.8%, as compared to $124.6 million for the year ended June 30, 2008. Voyage and vessel operating expenses as a percentage of total revenues increased to 63.9% for the year ended June 30, 2009 from 62.5% for the year ended June 30, 2008. Vessel labor and related costs for the year ended June 30, 2009 increased $18.0 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 for the year ended June 30, 2009 due to the operation of the additional barges and tugboats described under "-Net voyage revenue" and "-Other Revenue" above. Other vessel operating costs increased approximately $1.8 million for the year ended June 30, 2009, including $8.4 million of aggregate increases attributable to (1) an increase in vessel insurance premiums of $4.4 million due an increased number of vessels and rate increases, including $2.5 million relating to the additional call described in "-Significant Events" above; (2) an increase of $1.2 million for repairs, damages, maintenance, supplies and parts; (3) an increase of $0.6 million relating to bad debt expense primarily as a result of the resolution of an arbitration proceeding; (4) an increase of $0.9 million in outside charter fees primarily due to certain sale-leaseback agreements entered into during fiscal 2009; and (5) an increase of $1.3 million relating to fuel and other costs. Such increases were partially offset by a decrease of $6.0 million in outside towing expenses as a result of the purchase of eight additional tug boats in June 2008 and a $0.6 million decrease in uninsured losses relating to the deductible portion of insurance claims.

Depreciation and Amortization

Depreciation and amortization was $53.6 million for the year ended June 30, 2009, an increase of $5.3 million, or 11.0%, as compared to $48.3 million for the year ended June 30, 2008. The increase in depreciation and amortization for the year ended June 30, 2009 includes $5.0 million for vessels purchased and newbuilds placed in service during fiscal years 2009 and 2008 and $5.8 million for increased drydocking amortization. These increases were partially offset by a decrease of $6.4 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 $29.8 million for the year ended June 30, 2009, an increase of $0.9 million, or 3.1%, as compared to general and administrative expenses of $28.9 million for the year ended June 30, 2008. As a percentage of total revenues, general and administrative expenses increased to 9.0% for the year ended June 30, 2009 from 8.9% for the year ended June 30, 2008. The $0.9 million increase for the year ended June 30, 2009 is primarily the result of increased personnel costs resulting from increased average headcount for the year ended June 30, 2009 to support our growth and the additional facilities costs of our offices in Hawaii and Seattle.

Interest Expense, Net

Net interest expense was $21.5 million for the year ended June 30, 2009, or $0.2 million higher than the $21.3 million incurred for the year ended June 30, 2008. Net interest expense increased slightly for the year ended June 30, 2009 compared to June 30, 2008 because of higher average debt balances, partially offset by lower variable interest rates.

Other Expense (Income), Net

Other expense (income), net of $0.7 million for the year ended June 30, 2009 is primarily comprised of a $0.5 million provision for contract cancellation. Other expense (income), net of ($1.8 million) for the year ended June 30, 2008 is primarily comprised of a reimbursement of certain expenses totaling $2.1 million resulting from a court settlement relating to an incident with one of our tank barges in November 2005.

Provision for Income Taxes

Our provision for income taxes is based on our estimated annual effective tax rate. For the fiscal year ended June 30, 2009 and 2008, our effective tax rate was 2.0%. 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.

Net Income

Net income was $13.9 million for the year ended June 30, 2009, a decrease of $11.8 million compared to net income of $25.7 million for the year ended . . .