General

We are a leading provider of marine transportation, distribution and logistics services for refined petroleum products in the United States. As of September 30, 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 30, 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. For the fiscal year ended June 30, 2009, our fleet transported approximately 150 million barrels of refined petroleum products for our customers, including BP, ConocoPhillips, ExxonMobil and Tesoro. We do not assume ownership of any of the products we transport. During fiscal 2009, we derived approximately 80% 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 September 30, 2009, approximately 83% 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 products in U.S. waters. As of September 30, 2009, all of our tank vessels except two operated under the U.S. flag, and all but three were 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.

Outlook

Reductions in refinery utilization, which worsened in the month of September with announced shutdowns, have adversely affected the demand for our tank vessels and charter rates as reflected by the reduced renewals of existing term charters and lower spot market rates. As is typical of our business, during the past several months long-term charters on 14% of our fleet's capacity expired. Despite ongoing negotiations with our customers we were unable to obtain additional long-term charters, resulting in such vessels moving to the spot market. An increased availability of vessels in the spot market, combined with the aforementioned refinery shutdown announcements, has made it apparent that the reduced revenues experienced in the first quarter may continue in the near term. An additional 28% of our capacity has long-term charters that are due for renewal or extension over the remaining three quarters of fiscal 2010. A continuing or further economic downturn could negatively affect the terms or likelihood of charter renewals, ultimately resulting in the vessels operating in the spot market. The extent of such weakened demand and how long it may last is unknown. If we are unable to obtain additional long-term charters at acceptable rates, or if more of our vessels operate in the spot market, our revenues may be reduced or subject to greater variability, and we could have less cash available for distributions to our unitholders. In addition, these possible reductions in our revenues and profitability could result in breaches of the financial covenants under our loan and lease agreements. We are currently in the process of negotiating amendments to these agreements, although there is no assurance that we will be successful. It should be noted that we will be commencing operations of two new build vessels in December 2009 and May 2010 that are already chartered under seven year contracts.

Significant Events

Long Lived Assets Impairment Charge

The expiration of long-term contracts has resulted in increased double-hull availability within the industry. In addition, the customer preference for double-hull vessels has intensified in recent months, resulting in the commercial obsolescence of single-hull equipment. As a result, it is becoming increasingly difficult to employ single-hull vessels at margins sufficient to operate them profitably. Therefore, although we are permitted to continue to operate our single-hull tank vessels until January 1, 2015, we expect to phase out certain of our single hulls in the near term. Accordingly, we recorded an impairment charge of $5.9 million relating to certain single-hull vessels for the three months ended September 30, 2009.

Common Unit Offering

On August 12, 2009, we completed a public offering of 2,900,000 common units at a price to the public of $19.15 per unit. On August 21, 2009 the underwriters exercised a portion of their over-allotment option to purchase additional common units resulting in the issuance of an additional 344,500 common units at $19.15 per unit. The net proceeds of $59.2 million from the offering, after payment of underwriting discounts and commissions and other transaction costs, were used to repay borrowings of approximately $35.0 million under our credit agreements and will be used to make construction progress payments in connection with our vessel newbuilding program.

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, 2009 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
                                                                  September 30,
                                                                2009          2008

Voyage revenue                                               $    66,426    $  84,640
Other revenue                                                      4,176        6,854
Total revenues                                                    70,602       91,494
Voyage expenses                                                   10,519       23,505
Vessel operating expenses                                         35,456       37,066
% of voyage and vessel operating expenses to total
revenue                                                             65.1 %       66.2 %
General and administrative expenses                                6,979        7,961
% of total revenue                                                   9.9 %        8.7 %
Depreciation and amortization                                     18,922       12,775
Net loss on disposal of vessels                                        -          294
Operating income (loss)                                           (1,274 )      9,893

Interest expense, net                                              4,177        5,905
Other expense (income), net                                         (510 )         (4 )
Income (loss) before income taxes                                 (4,941 )      3,992

Provision for income taxes                                           202          136
Net income (loss)                                                 (5,143 )      3,856

Less net income attributable to non-controlling interest              99            2
Net income (loss) attributable to K-Sea Transportation
Partners L.P. unitholders                                    $    (5,242 )  $   3,854

Net voyage revenue by trade
Coastwise
Total tank vessel days                                             3,955        4,117
Days worked                                                        3,501        3,676
Scheduled drydocking days                                              -          107
Net utilization                                                       89 %         89 %
Average daily rate                                           $    12,509    $  13,027
Total coastwise net voyage revenue (a)                       $    43,794    $  47,888
Local
Total tank vessel days                                             2,103        2,252
Days worked                                                        1,680        1,835
Scheduled drydocking days                                             34           69
Net utilization                                                       80 %         81 %
Average daily rate                                           $     7,210    $   7,219
Total local net voyage revenue (a)                           $    12,113    $  13,247

Tank vessel fleet
Total tank vessel days                                             6,058        6,369
Days worked                                                        5,181        5,511
Scheduled drydocking days                                             34          176
Net utilization                                                       86 %         87 %
Average daily rate                                           $    10,791    $  11,093
Total fleet net voyage revenue (a)                           $    55,907    $  61,135

Three Months Ended September 30, 2009 Compared to Three Months Ended September 30, 2008

Voyage Revenue and Voyage Expenses

Voyage revenue was $66.4 million for the three months ended September 30, 2009, a decrease of $18.2 million, or 21.5%, as compared to voyage revenue of $84.6 million for the three months ended September 30, 2008. Voyage expenses were $10.5 million for the three months ended September 30, 2009, a decrease of $13.0 million, or 55.3%, as compared to voyage expenses of $23.5 million for the three months ended September 30, 2008. The decrease in voyage expenses primarily relates to the decrease in the price of fuel.

Net voyage revenue

Net voyage revenue was $55.9 million for the three months ended September 30, 2009, a decrease of $5.2 million, or 8.5%, as compared to net voyage revenue of $61.1 million for the three months ended September 30, 2008. In our coastwise trade, net voyage revenue was $43.8 million for the three months ended September 30, 2009, a decrease of $4.1 million, or 8.6%, as compared to $47.9 million for the three months ended September 30, 2008. Net utilization in our coastwise trade was 89% for both the three months ended September 30, 2009 and the three months ended September 30, 2008. Net voyage revenue in our coastwise trade decreased by $9.0 million for the three months ended September 30, 2009 due to (1) a decrease of $2.7 million relating to three single-hull barges, of which two were sold as of June 30, 2009 and one was returned to the lessor, (2) a decrease of $4.6 million relating to seven barges which worked in the spot market in the three months ended September 30, 2009 as compared to being on time charters for the three months ended September 30, 2008, and (3) a decrease of $1.7 million relating to five barges which moved from transporting petroleum products during the three months ended September 30, 2008 to performing storage activities for the processing of waste water at our waste water treatment facility during the three months ended September 30, 2009. The aggregate decrease was partially offset by an aggregate increase of $3.9 million in net voyage revenue for the three months ended September 30, 2009 due to (1) an increase in the number of working days for our barges the DBL 77, which began operations in July 2008, the DBL 76, which began operations in November 2008, and the DBL 79, which began operations in January 2009, and (2) one barge which was in the shipyard for an extended period during the three months ended September 30, 2008. Coastwise average daily rates decreased 4% to $12,509 for the three months ended September 30, 2009 from $13,027 for the three months ended September 30, 2008 mainly as a result of lower rates relating to storage contracts serviced by vessels supporting our waste water treatment facility.

Net voyage revenue in our local trade for the three months ended September 30, 2009 decreased by $1.1 million, or 8.3%, to $12.1 million from $13.2 million for the three months ended September 30, 2008. Local net voyage revenue decreased $1.9 million for the three months ended September 30, 2009 due to (1) the retirement of four single-hull vessels and (2) the movement of one vessel from time charter during the three months ended September 30, 2008 to performing waste water storage activities for the processing of waste water at our waste water treatment facility during the three months ended September 30, 2009. The $1.9 million decrease was partially offset by an aggregate $0.7 million increase for the three months ended September 30, 2009, including (1) a $0.4 million increase due to the return to service of two vessels that were in the shipyard for extended periods during the three months ended September 30, 2008 and (2) a $0.3 million increase due to a vessel which was placed in service during the fourth quarter of fiscal 2009 and was in the spot bunker market for the three months ended September 30, 2009. Net utilization in our local trade was 80% for the three months ended September 30, 2009, compared to 81% for the three months ended September 30, 2008. Average daily rates in our local trade decreased to $7,210 for the three months ended September 30, 2009 from $7,219 for the three months ended September 30, 2008.

Other Revenue

Other revenue was $4.2 million for the three months ended September 30, 2009 as compared to $6.9 million for the three months ended September 30, 2008. The decrease of $2.7 million was mainly attributable to the expiration of time charters relating to tugboats acquired in fiscal year 2008 and a customer contract cancellation settlement which occurred during fiscal year 2009.

Vessel Operating Expenses

Vessel operating expenses were $35.5 million for the three months ended September 30, 2009 as compared to $37.1 million for the three months ended September 30, 2008, a decrease of $1.6 million. Voyage and vessel operating expenses as a percentage of total revenues was 65.1% for the three months ended September 30, 2009 compared to 66.2% for the three months ended September 30, 2008. Vessel labor and related costs for the three months ended September 30, 2009 decreased $0.7 million, primarily due to a decrease in crew headcount

resulting in lower wages and crew travel, partially offset by higher medical insurance costs. Other vessel operating costs decreased approximately $0.8 million for the three months ended September 30, 2009, including (1) a decrease of $2.0 million in repairs, maintenance, damages and vessel supplies,
(2) a decrease of $0.8 million relating to fuel and other costs and (3) a decrease of $0.2 million in outside towing expenses as a result of the purchase of eight additional tug boats in June 2008. These decreases were partially offset by $2.2 million of aggregate increases attributable to (1) an increase of $1.6 million in outside charter fees due to the sale of eight tank barges under sale leaseback agreements in fiscal year 2009, (2) an increase in vessel insurance premiums of $0.4 million due to rate increases and (3) an increase of $0.2 million relating to an increase in operating costs for our waste water treatment facility.

Depreciation and Amortization

Depreciation and amortization was $18.9 million for the three months ended September 30, 2009, an increase of $6.1 million, or 47.7%, as compared to $12.8 million for the three months ended September 30, 2008. The increase is primarily due to a $5.9 million impairment charge relating to certain single-hull vessels recorded for the three months ended September 30, 2009.

General and Administrative Expenses

General and administrative expenses were $7.0 million for the three months ended September 30, 2009, a decrease of $1.0 million, or 12.5%, as compared to general and administrative expenses of $8.0 million for the three months ended September 30, 2008. As a percentage of total revenues, general and administrative expenses were 9.9% for the three months ended September 30, 2009 and 8.7% for the three months ended September 30, 2008. The $1.0 million decrease includes a $0.9 million decrease in wages and travel expenses resulting from a decrease in headcount.

Interest Expense, Net

Net interest expense was $4.2 million for the three months ended September 30, 2009 and $5.9 million for the three months September 30, 2008. Net interest expense decreased for the three months ended September 30, 2009 because of lower average debt balances and lower variable interest rates for the three months ended September 30, 2009.

Provision for Income Taxes

Our provision for income taxes is based on our estimated annual effective tax rate. For the three months ended September 30, 2009, our effective tax rate was (4.0%), or 33.8% before an asset impairment charge and its related tax effect. Our effective tax rate was 3.4% for the three months ended September 30, 2008. The increase in our effective tax rate, before asset impairment charges, was a result of adjustments made to record fixed asset timing differences on an August 2007 acquisition. 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.

An Internal Revenue Service ("IRS") examination of K-Sea Transportation Partners L.P. for calendar year 2006 has been completed, with the IRS proposing no adjustments to the partnership's 2006 federal income tax return.

Net Income (Loss)

Net loss was $5.2 million for the three months ended September 30, 2009, a decrease of $9.1 million compared to net income of $3.9 million for the three months ended September 30, 2008. This decrease resulted primarily from an $11.2 million decrease in operating income (including an asset impairment charge of $5.9 million) and a $0.1 million increase in the provision for income taxes, partially offset by a $1.7 million decrease in interest expense and a $0.5 million increase in other income.

Liquidity and Capital Resources

Operating Cash Flows

Net cash provided by operating activities was $7.6 million for the three months ended September 30, 2009, a decrease of $8.5 million compared to $16.1 million for the three months ended September 30, 2008. The decrease resulted from an $8.0 million negative impact from changes in assets and liabilities and a $3.4 million negative impact from operating results (after adjusting for non-cash expenses such as depreciation and amortization), which were partially offset by a $2.9 million decrease in drydocking payments. During the three months ended September 30, 2009, our working capital increased, thereby decreasing cash flow, primarily due to an increase in accounts receivable and a decrease in accounts payable as a result of the timing of payments.

Investing Cash Flows

Net cash used in investing activities totaled $14.7 million for the three months ended September 30, 2009, compared to $32.4 million used during the three months ended September 30, 2008. Tank vessel construction in the three months ended September 30, 2009 aggregated $14.2 million and included progress payments on the construction of one 185,000-barrel articulated tug barge unit and one 100,000-barrel tank barge. Capital expenditures of $1.5 million for the three months ended September 30, 2009 consisted primarily of coupling tugboats to our newbuild tank barges. Receipts from notes receivable from the purchasers of two vessels sold in fiscal year 2009 were $0.9 million for the three months ended September 30, 2009. Tank vessel construction in the three months ended September 30, 2008 aggregated $31.1 million and included progress payments on the construction of one 80,000-barrel tank barge, one 185,000-barrel articulated tug barge unit and one 100,000-barrel tank barge. Other capital expenditures, relating primarily to coupling tugboats to our newbuild tank barges, totaled $1.9 million in the three months ended September 30, 2008. Cash proceeds on the sale of vessels in the three months ended September 30, 2008 were $0.6 million.

Financing Cash Flows

Net cash provided by financing activities was $9.4 million for the three months ended September 30, 2009 compared to $18.3 million of net cash provided by financing activities for the three months ended September 30, 2008. The primary financing activities for the three months ended September 30, 2009 were $62.1 million in gross proceeds ($59.2 million net proceeds after payment of underwriting discounts and commissions and other transaction costs) from the issuance of 3,244,500 new common units in August 2009, and the repayment of $35.0 million of credit agreement borrowings with a portion of the equity offering proceeds. We also made $12.2 million in distributions to partners as described under "-Payment of Distributions" below. The primary financing activities for the three months ended September 30, 2008 were $51.6 million in gross proceeds ($49.8 million net proceeds after payment of underwriting discounts and commissions and other transaction costs) from the issuance of 2,000,000 new common units in August 2008, and the repayment of $37.5 million of credit agreement borrowings with a portion of the equity offering proceeds, offset by $26.3 million of net additional credit agreement borrowings. We also made $11.7 million in distributions to partners as described under "-Payment of Distributions" below.

Payment of Distributions

The board of directors of K-Sea General Partner GP LLC declared a quarterly distribution to unitholders of $0.77 per unit in respect of the quarter ended June 30, 2009, which was paid on August 14, 2009 to unitholders of record on August 10, 2009. The board of directors of K-Sea General Partner GP LLC declared a quarterly distribution to unitholders of $0.45 per unit in respect of the quarter ended September 30, 2009, which will be paid on November 16, 2009 to unitholders of record on November 9, 2009. Additionally, the board declared a quarterly distribution to unitholders of $0.77 per unit in respect of the quarter ended September 30, 2008, which was paid on November 14, 2008 to unitholders of record on November 7, 2008.

Oil Pollution Act of 1990

Tank vessels are subject to the requirements of OPA 90, which mandates that all single-hull tank vessels operating in U.S. waters be removed from petroleum product transportation services at various times through January 1, 2015, and provides a schedule for the phase-out of the single-hull vessels based on their age and size. At

September 30, 2009, approximately 83% of the barrel-carrying capacity of our tank vessel fleet was double-hulled in compliance with OPA 90, and the remainder will be in compliance with OPA 90 until January 2015, please read "Significant Events - Long Lived Assets Impairment Charge" above.

Ongoing Capital Expenditures

Marine transportation of refined petroleum products is a capital intensive business, requiring significant investment to maintain an efficient fleet and to stay in regulatory compliance. We estimate that, over the next five years, we will spend an average of approximately $22.2 million per year to drydock and maintain our fleet. We expect such expenditures to approximate $20.6 million in fiscal 2010. In addition, we anticipate that we will spend $1.0 million annually for other general maintenance capital expenditures. Periodically, we also make expenditures to acquire or construct additional tank vessel capacity . . .