UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2010

OR

For the transition period from                   to                   

Commission file number 001-31920

K-SEA TRANSPORTATION PARTNERS L.P.

(Exact name of registrant as specified in its charter)

One Tower Center Boulevard, 17th Floor
East Brunswick, New Jersey 08816
(Address of principal executive offices) (Zip Code)

(Registrant’s telephone number, including area code):  (732) 565-3818

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES x   NO o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES o   NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES o   NO x

At November 8, 2010, the number of the issuer’s outstanding common units was 19,155,414.

K-SEA TRANSPORTATION PARTNERS L.P.

FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2010

TABLE OF CONTENTS

1

PART I      FINANCIAL INFORMATION

Item 1.        Financial Statements

K-SEA TRANSPORTATION PARTNERS L.P.

UNAUDITED CONSOLIDATED BALANCE SHEETS

(in thousands, except unit amounts)

The accompanying notes are an integral part of these consolidated financial statements.

2

K-SEA TRANSPORTATION PARTNERS L.P.

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands except per unit data)

The accompanying notes are an integral part of these consolidated financial statements.

3

K-SEA TRANSPORTATION PARTNERS L.P.

UNAUDITED CONSOLIDATED STATEMENTS OF PARTNERS’ CAPITAL

(in thousands)

The accompanying notes are an integral part of these consolidated financial statements.

4

K-SEA TRANSPORTATION PARTNERS L.P.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

See accompanying notes to consolidated financial statements.

5

K-SEA TRANSPORTATION PARTNERS L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except unit and per unit amounts)

1. The Partnership

K-Sea Transportation Partners L.P. and its subsidiaries (collectively, the “Partnership”) provide marine transportation, distribution and logistics services for refined petroleum products in the United States.  On January 14, 2004, the Partnership completed its initial public offering of common units representing limited partner interests.

The Partnership’s general partner, K-Sea General Partner L.P. (“GP”), held 202,447 general partner units as of September 30, 2010, representing a 0.54% general partner interest in the Partnership, as well as a 100% equity interest in the entity that owns the incentive distribution rights (“IDRs”) in the Partnership.  IDRs represent the right to receive an increasing percentage of cash distributions after certain target distribution levels have been achieved.  The target distribution levels entitle the holder of the IDRs to receive 13% of total quarterly cash distributions in excess of $0.55 per unit until all unit holders have received $0.625 per unit, 23% of total quarterly cash distributions in excess of $0.625 per unit until all unit holders have received $0.75 per unit, and 48% of total quarterly cash distributions in excess of $0.75 per unit.  As of September 30, 2010 there were 37,543,617 limited partner units outstanding comprised of 18,416,206 Series A Preferred Units (see note 5) and 19,127,411 common units.

The Partnership is required to distribute all of its “available cash” from operating surplus, as defined in the Fourth Amended and Restated Agreement of Limited Partnership of K-Sea Transportation Partners L.P. (the “Restated Partnership Agreement”), which generally includes all of the Partnership’s cash and cash equivalents on hand at the end of each quarter less reserves established by the general partner for future requirements.  Cash distributions declared on limited partner units for the three months ended September 30, 2010 and 2009, were $0.00 per unit (see note 5) and $0.45 per unit, respectively.

In September 2010, the Partnership issued 18,416,206 Series A Preferred Units (“Preferred units”) to KA First Reserve, LLC (“KA First Reserve”), a partnership between First Reserve and Kayne Anderson Capital Advisors. Commencing with the quarter ended on September 30, 2010, the holders of the Preferred units as of an applicable record date are entitled to receive quarterly distributions in an amount equal to $0.18326 per outstanding Preferred unit, to be paid within forty five days after the end of each quarter.  Annualized quarterly distributions of $0.73304 per Preferred unit are 13.5% of the Preferred unit issue price of $5.43.  The Preferred units are entitled to paid-in-kind (“PIK”) distributions through the earlier of the quarter ended June 30, 2012, or when the Partnership resumes cash distributions on its common units.

On October 29, 2010 a PIK distribution of $0.18326 per Preferred unit was declared for the quarter ended September 30, 2010. Such distribution was prorated for the number of days between the Preferred unit issuance dates of September 10, 2010 and September 16, 2010, and September 30, 2010, as applicable, and approximated $737. Based on the current Series A Adjusted Issue Price (as defined per the Restated Partnership Agreement) of $5.43 used to calculate the number of units to be issued, 135,793 Preferred units are to be issued.

In the opinion of management, the unaudited interim consolidated financial statements included in this report as of September 30, 2010, and for the three month periods ended September 30, 2010 and 2009, reflect all adjustments (consisting of normal recurring entries) necessary for a fair statement of the financial results for such interim periods.  The results of operations for interim periods are not necessarily indicative of the results of operations to be expected for a full year.  These financial statements should be read together with the consolidated financial statements and notes thereto included in the Partnership’s Annual Report on Form 10-K for the fiscal year ended June 30, 2010 (the “Form 10-K”).  The June 30, 2010 financial information included in this report has been derived from the audited consolidated financial statements included in the Form 10-K, but does not include all disclosures required by accounting principles generally accepted in the United States of America.  Certain disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted in this report pursuant to Securities and Exchange Commission, or SEC, rules and regulations.

6

2. Accounting Policies

Basis of Consolidation

These consolidated financial statements are for the Partnership and its wholly owned subsidiaries.  All material intercompany transactions and balances have been eliminated in consolidation.

During fiscal 2008, the Partnership acquired a 50% interest in a joint venture formed to own and charter a tank barge.  The joint venture is a single asset leasing entity and is considered a variable interest entity as such term is defined by the Financial Accounting Standards Board (“FASB”).  The joint venture as lessor of the asset loses the right to exercise residual power over the asset during the term of the lease, which the Partnership  refers to as the bareboat charter agreement.  The Partnership is the lessee under the bareboat charter agreement, which includes renewal options that result in the Partnership having greater decision making ability over the asset for substantially all of its useful life and consequently greater economic interest.  As a result, the Partnership is deemed the primary beneficiary of the variable interest entity requiring consolidation of the variable interest entity in the accompanying financial statements.  The joint venture had a term loan that matures on October 1, 2012, and which was collateralized by the related tank barge. During September 2010, the Partnership contributed cash of $730 to the joint venture. The non-controlling interest assumed the liability for the term loan of $1,460 and received a distribution of $730.  The Partnership is not required to provide financial support to the joint venture, other than what is required in the normal course of business pertaining to the bareboat charter agreement.  The carrying value of the tank barge was $10,670 and $10,789 at September 30, 2010 and June 30, 2010, respectively and is included in the line-item “vessels and equipment, net” on the consolidated balance sheet.  Joint venture borrowings outstanding on the term loan at June 30, 2010 were $1,622. The current and non-current portions of such borrowing are included in the line-items “current portion of long-term debt” and “term loans”, respectively, on the consolidated balance sheet as of June 30, 2010.

Accounting and reporting standards require for-profit entities that prepare consolidated financial statements to:  (a) present non-controlling interests as a component of equity, separate from the parent’s equity; (b) separately present the amount of consolidated net income attributable to non-controlling interests in the income statement; (c) consistently account for changes in a parent’s ownership interests in a subsidiary in which the parent entity has a controlling financial interest as equity transactions; (d) require an entity to measure at fair value its remaining interest in a subsidiary that is deconsolidated; and (e) require an entity to provide sufficient disclosures that identify and clearly distinguish between interests of the parent and interests of non-controlling owners.

The following table shows the non-controlling interests reconciliations from the beginning of the current fiscal year to the balance sheet date as well as for the comparative year to date period.

Financial Reporting by Enterprises Involved with Variable Interest Entities

In June 2009, the FASB issued amendments to an accounting standard to improve financial reporting by enterprises involved with variable interest entities, which is effective for fiscal years and interim periods within those fiscal years for fiscal years beginning after November 15, 2009. These amendments are to replace the quantitative-based risks and rewards calculation for determining which reporting entity, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which reporting entity has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. The amendments also require additional disclosures about a reporting entity’s involvement in variable interest entities. The Partnership’s adoption of these amendments on July 1, 2010 did not have an effect on the accompanying consolidated financial statements.

7

Allocation of net income (loss)

The allocation of net income between our general partner and limited partners was as follows:

(1)          Distributions to be paid for the three months ended September 30, 2010 are calculated as the number of PIK Preferred units issued in respect of the quarter ended September 30, 2010 (135,793) times the current Series A Adjusted Issue Price (as defined per the Restated Partnership Agreement) of $5.43. Distributions paid for the three months ended September 30, 2009 reflect the $0.45 per limited partner unit cash distributions declared in respect of the quarter ended September 30, 2009.

(2)          After deducting Preferred Unit distributions, undistributed earnings(loss)/distributions in excess of earnings is allocated pro rata among the general partner and limited partner common units based upon the aggregate general partner and limited partner common unit ownership interests.

Earnings per Unit

Net income (loss) per unit is calculated in accordance with ASC 260, “Earnings Per Share.” ASC 260 specifies the use of the two-class method of computing earnings per unit when participating or multiple classes of securities exist. Under this method, undistributed earnings for a period are allocated based on the contractual rights of each security to share in those earnings as if all of the earnings for the period had been distributed.

Basic net income (loss) per common unit is computed by dividing net income (loss) attributable to common units by the basic weighted average number of common units outstanding during the period. The basic weighted average number of common units includes restricted units with distribution equivalent rights (“DER”) granted under the Partnership’s long-term incentive plan. Dilutive net income (loss) per unit reflects potential dilution that could occur if restricted units without distribution equivalent rights were issued or convertible securities were converted into common units except when the assumed issuance or conversion would have an anti-dilutive effect on net income (loss) per unit. Dilutive net income (loss) per unit is computed by dividing net income (loss) attributable to common units by the basic weighted average number of units outstanding for common units during the period increased by the number of additional units that would have been outstanding if the dilutive potential units had been issued.

Basic and diluted net income (loss) per common unit is calculated as follows:

8

(1)          The Partnership’s potentially dilutive common units for the three months ended September 30, 2010 include weighted average common units to be issued upon conversion of convertible Preferred units of 4,024 and restricted units without DER of 16.  Such Preferred units and restricted units without DER were not included in the Partnership’s diluted earnings per unit as they were anti-dilutive. The Partnership’s potentially dilutive common units for the three months ended September 30, 2009 include weighted average common units to be issued for restricted units without DER of 21 which were not included as they were anti-dilutive.

3. Comprehensive Income (Loss)

Total comprehensive income (loss) for the three months ended September 30, 2010 and 2009 were as follows:

4. Vessels and Equipment and Construction in Progress

Depreciation and amortization of vessels and equipment was $12,567 and $18,186 for the three months ended September 30, 2010 and 2009, respectively.  Depreciation and amortization of vessels and equipment for the three months ended September 30, 2009 includes an impairment charge of $5,853 on certain single-hull vessels. The generally weak economy has resulted in a lower demand for oil and refined petroleum products in the United States. During the last six months of calendar year 2009, a number of major

9

refining companies announced the shut-down of refineries, which reduces demand for petroleum carrying barges and increases the industry’s availability of double- hull vessels, for which customers show a preference over single-hull vessels, thus causing an under utilization of single-hull vessels. The Partnership, therefore determined it would phase out certain of its single-hull vessels prior to their Oil Pollution Act of 1990 (“OPA 90”) phase out dates. The impairment loss was determined based on cash flow forecasts developed using the Partnership’s own data.

The Partnership took delivery of one 30,000-barrel tank barge in July 2010, the DBL 33; and one 30,000-barrel tank barge in August 2010, the DBL 34. These tank barges cost, in the aggregate and after the addition of certain special equipment, approximately $6,882. The Partnership has a long term contract with a customer relating to the DBL 33. As of September 30, 2010, construction in progress of $3,722 relates to the DBL 33, which is undergoing certain modifications relating to its contract commitment. In August 2010, the Partnership sold the DBL 34 for $2,291, net of selling costs.

During the three months ended September 30, 2010, the Partnership sold the DBL 34, two of its older double-hull barges, two tug boats, three smaller vessels and certain vessel equipment for net proceeds of $14,374 and recognized a gain on sales of $4,811.

The Partnership expects to take delivery of a 50,000 barrel tank barge in the third quarter of fiscal 2011 under a lease from a shipyard.

5. Financing

The Partnership’s outstanding debt balances were as follows as of the dates indicated:

Revolving Loan and Credit Agreements

The Partnership, through its wholly owned subsidiary, K-Sea Operating Partnership L.P. (the “Operating Partnership”), maintains a revolving loan agreement with a group of banks (the “Revolving Lenders”), with Key Bank National Association as administrative agent and lead arranger, to provide financing for the Partnership’s operations. The Partnership amended the revolving loan agreement on August 14, 2007 (and as amended “Original Revolver Agreement”) to among other things provide for an increase in availability to $175,000, and under certain conditions, the Partnership had the right to utilize an accordion feature to increase the amount available under the revolving facility by up to $75,000, to a maximum total facility amount of $250,000. On November 7, 2007, the Partnership exercised this right and increased the facility by $25,000 to $200,000. The revolving facility is collateralized by a first perfected security interest in a pool of vessels and certain equipment and machinery related to such vessels. Through the period from August 14, 2007 until December 22, 2009, amounts borrowed under the revolving facility bore interest at the London Interbank Offered Rate (“LIBOR”), plus a margin ranging from 0.7% to 1.5% depending on our ratio of total funded debt to EBITDA (as defined in the agreement). The Partnership also incurred commitment fees, payable quarterly, on the unused amount of the facility at a rate ranging from 0.15% to 0.30% based also upon the ratio of Total Funded Debt to EBITDA.

On December 23, 2009, the Operating Partnership entered into an amendment (the “December Revolver Amendment”) to its Original Revolver Agreement (as amended, the “December Revolving Loan Agreement”). The December Revolver Amendment, among other things, (1) reduced the Revolving Lenders’ commitments from $200,000 to $175,000 (subject to a maximum borrowing base equal to 75% of the orderly liquidation value of the vessel collateral), (2) eliminated the accordion feature of the Revolving Loan Agreement whereby the Partnership could request an increase in the total commitments under the December Revolving Loan Agreement by up to $50,000, (3) accelerated the maturity date from August 14, 2014 to July 1, 2012 and (4) required additional security to be assigned to the security trustee under the December Revolving Loan Agreement.

For the period from December 23, 2009 through September 9, 2010, borrowings under the December Revolving Loan Agreement bore interest at a rate per annum equal, at the option of the Operating Partnership, to (a) the greater of the prime rate, the federal funds rate plus 0.5% or 1% above the adjusted 30-day LIBOR (a “base rate loan”) or (b) the 30-day LIBOR, in each case plus a margin based upon the ratio of total funded debt to EBITDA, as defined in the December Revolving Loan Agreement. The Operating Partnership also incurred commitment fees, payable quarterly, on the unused amounts under the revolving credit facility.

10

The base rate margin ranged from 1.75% to 3.75%, the LIBOR margin ranged from 2.75% to 4.75% and the commitment fee ranged from 0.375% to 0.625%, each based on the ratio of total funded debt to EBITDA. Based on the Partnership’s internal projections in May 2010, the Partnership projected that it would breach certain of its financial covenants at June 30, 2010. As a result on June 30, 2010, the Operating Partnership entered into an amendment (the “Amendment Letter”) to its December Revolving Loan Agreement. For the period from June 30, 2010 through August 31, 2010, the Amendment Letter, among other things, (1) provided a waiver of the fixed charge coverage and total funded debt to EBITDA financial covenants and (2) reduced the Revolving Lenders’ commitments from $175,000 to $155,000 (subject to a maximum borrowing base equal to 75% of the orderly liquidation value of the vessel collateral). As of June 30, 2010, the Partnership had $144,450 outstanding under the December Revolving Loan Agreement at the LIBOR rate.

On August 31, 2010, and effective September 10, 2010; the Operating Partnership amended (the “Revolver Amendment”) its December  Revolving Loan Agreement (as amended, the “Revolving Loan Agreement”) to among other things, (1) reduce the Revolving Lenders’ commitments from $175,000 to $115,000 (subject to a maximum borrowing base equal to two-thirds of the orderly liquidation value of the vessel collateral), (2) amend the fixed charge coverage and funded debt to EBITDA covenants and increase the asset coverage ratio, (3) maintain a July 1, 2012 maturity date (4) and allow the Partnership to pay cash distributions subject to liquidity requirements and certain minimum financial ratios starting with the fiscal quarter ending March 31, 2011. Due to the reduction in the borrowing capacity of the Revolving Loan Agreement, the Partnership recorded an expense of $502 for the three months ended September 30, 2010 relating to the unamortized deferred financing costs associated with the December Revolving Loan Agreement. Such expense is included in the line-item “interest expense, net” in the consolidated statement of operations. The Revolver Amendment was subject to an amendment and restructuring fee totaling $1,163 and other transaction costs of $751. Both the remaining unamortized deferred financing costs of the December Revolving Loan Agreement of $1,052 as of August 31, 2010, as well as the $1,914 of fees and transaction costs incurred relating to the Revolver Amendment, are reflected as deferred financing costs in the consolidated balance sheet and are being amortized over the remaining term of the Revolving Loan Agreement which expires July 1, 2012.

As amended by the Revolver Amendment, the obligations under the Revolving Loan Agreement are collateralized by a first priority security interest, subject to permitted liens, on certain vessels of the Operating Partnership and other subsidiaries of the Partnership having an orderly liquidation value equal to at least 1.50 times the amount of the aggregate obligations (including letters of credit) outstanding under the Revolving Loan Agreement.

Borrowings under the Revolving Loan Agreement bear interest at a rate per annum equal, at the option of the Operating Partnership, to (a) the greater of the prime rate, the federal funds rate plus 0.5% or 1% above the 30-day LIBOR (a “base rate loan”) or (b) the 30-day LIBOR, in each case plus a margin based upon the ratio of total funded debt to EBITDA, as defined in the Revolving Loan Agreement. The Operating Partnership also incurs commitment fees, payable quarterly, on the unused amounts under this facility.

The following table summarizes the applicable margins under the Revolving Loan Agreement, as amended:

provided; that commencing January 1, 2011, all pricing associated with a ratio in excess of 6.00:1.00 shall increase by 0.50% and shall continue to increase an additional 0.50% for each fiscal quarter thereafter for each quarter that such ratio exceeds 6.00:1.00.

Interest on a base rate loan is payable monthly over the term of the Revolving Loan Agreement. Interest on a LIBOR-based loan is due, at the Partnership’s election, one, two or three months after such loan is made. Outstanding principal amounts are due upon termination of the Revolving Loan Agreement. As of September 30, 2010, the Partnership had $52,800 outstanding under the Revolving Loan Agreement at the LIBOR rate.

As a result of the Revolver Amendment, the minimum fixed charge coverage ratio decreased from 1.50 to 1.00 as follows: 0.75 to 1.00 at June 30, 2010; 0.50 to 1.00 through December 31, 2010; 0.60 to 1.00 through June 30, 2011; 0.70 to 1.00 through December 31, 2011; 0.75 to 1.00 through March 31, 2012; and 1.05 to 1.00 through June 30, 2012 and thereafter. The definition of the

11

fixed charge coverage ratio was modified to include distributions, all capital expenditures above a certain agreed-upon level, and pro forma adjustments for acquisitions and equity issuances. In addition, the Operating Partnership’s ratio of total funded debt to EBITDA may not exceed 6.50 to 1.00 at June 30, 2010; 6.90 to 1.00 through December 31, 2010; 6.75 to 1.00 through March 31, 2011; 6.50 to 1.00 through June 30, 2011; 5.75 to 1.00 through September 30, 2011; 5.20 to 1.00 through December 30, 2011; 4.85 to 1.00 through March 31, 2012; and 4.40 to 1.00 through June 30, 2012 and thereafter.

The Revolver Amendment limits quarterly cash distributions to the Partnership’s unit holders to $0.45 per unit and requires that, among other things, the Partnership maintain a minimum liquidity of $17,500 in order to declare any cash distributions. In general, the Revolver Amendment defines liquidity as the sum of (a) unrestricted cash determined on a consolidated basis plus (b) (i) the lesser of (A) $115,000 and (B) the orderly liquidation value of the vessel collateral divided by 1.50, minus (ii) the aggregate amount outstanding to the lenders as of the date of such determination. The Partnership will be permitted to pay cash distributions if a) the fixed charge coverage ratio is at least 1.0 times for two consecutive fiscal quarters prior to and after giving effect to such distribution(s); b) the projected fixed charge coverage ratio is equal to or greater than 1.0 times for the next twelve months and is equal to or greater than 1.0 times in three of four of those quarters; and c) the total funded debt to EBITDA ratio is less than 5.0 to 1.0. No such cash distributions may be paid prior to the end of the March 31, 2011 quarter.

The Partnership also has a separate $4,000 revolver with a commercial bank to support its daily cash management. Advances under this facility bear interest at 30-day LIBOR plus a margin ranging from 1.4% - 4.25%. The outstanding balances on this revolver at September 30, 2010 and June 30, 2010 were $0 and $0, respectively.

Term Loan and other amendments

On June 25, 2010, the Operating Partnership entered into an amendment to one of its terms loan agreements, which is referred to as the ATB Loan that provided for the temporary waiver of compliance with the financial covenants of the ATB Loan for the period June 30, 2010 through August 31, 2010. On August 31, 2010, and effective September 10, 2010; the Partnership entered into an amendment (“ATB Amendment”), which amends the ATB Loan, (as amended, the “ATB Agreement”). The ATB Amendment amends the financial covenants in the ATB Loan to conform to the financial covenants and LIBOR margins in the Revolving Loan Agreement, as amended by the Revolver Amendment. The ATB Agreement LIBOR margins range from 2.75% to 5.75% and commencing January 1, 2011, all pricing associated with a total funded debt to EBITDA ratio in excess of 6.00:1.00 shall increase by 0.50% and shall continue to increase an additional 0.50% for each fiscal quarter thereafter for each quarter that such ratio exceeds 6.00:1.00. The ATB Amendment required that an amendment fee of 0.5% of the August 31, 2010 outstanding principal balance of $55,286 be paid along with certain other creditor costs. Total creditor fees relating to the amendment of $296 were recorded as deferred financing fees and are being amortized over the remaining term of the agreement which expires in November 2016. At September 30, 2010, borrowings outstanding under the ATB Agreement were $55,286.

The weighted average interest rate on term loans as of September 30, 2010 and June 30, 2010 were 6.6% and 6.3%, respectively.

As of June 30, 2010, the Partnership obtained a waiver of compliance with the financial covenants of a certain Bareboat Charter Agreement dated as of June 23, 2009 (the “Bareboat Charter”). On August 31, 2010 the Bareboat Charter was terminated in conjunction with the sale of the vessel by the original lessor to a third party (the “New Lessor”). The Partnership was required to pay the original lessor a termination fee of $706. For the three months ended September 30, 2010, both the $706 termination fee and unamortized deferred lease expenses of $452 are included in the line-item “other operating expenses” in the consolidated statement of operations. The Partnership entered into an eight year operating lease with the New Lessor which requires monthly charter payments of approximately $140.

On August 31, 2010, the Partnership obtained consents on five operating leases to incorporate by reference the financial covenants in the Revolver Amendment. In connection with the consents the Partnership incurred fees of $189, which were expensed, are included in the line-item “vessel operating expenses” in the consolidated statement of operations.

Restrictive Covenants

The agreements governing the revolving loan and credit agreements, the term loans and the operating lease agreements contain restrictive covenants, some of which were amended as a result of the amendments and consents described above. The restrictive covenants, among other things, (a) prohibit any cash distributions prior to March 31, 2011, (b) limit quarterly cash distributions to our unit holders to $0.45 per unit and requires that the Partnership maintain a minimum liquidity of $17,500 and meet certain financial covenants in order to declare any distributions, (c) prohibit distributions if a default has occurred and is continuing, (d) restrict capital expenditures, permitted acquisitions, investments and sales of assets, and (e) require the Partnership to adhere to certain financial covenants, including defined ratios of (i) Asset Coverage of at least 1.333 to 1.00 at June 30, 2010 and at least 1.50 to 1.00 at September 30, 2010 and thereafter, (ii) Fixed Charge Coverage of at

12

least 0.75 to 1.00 at June 30, 2010; 0.50 to 1.00 through December 31, 2010; 0.60 to 1.00 through June 30, 2011; 0.70 to 1.00 through December 31, 2011; 0.75 to 1.00 through March 31, 2012; and 1.05 to 1.00 through June 30, 2012 and thereafter, (iii) Total Funded Debt to EBITDA not to exceed 6.50 to 1.00 at June 30, 2010; 6.90 to 1.00 through December 31, 2010; 6.75 to 1.00 through March 31, 2011; 6.50 to 1.00 through June 30, 2011; 5.75 to 1.00 through September 30, 2011; 5.20 to 1.00 through December 31, 2011; 4.85 to 1.00 through March 31, 2012; and 4.40 to 1.00 through June 30, 2012 and thereafter (each ratio as defined in the agreements). As of September 30, 2010 and as of June 30, 2010 the Partnership was in compliance with all of its financial and debt covenants. As of September 30, 2010 the Partnership’s asset coverage, fixed charge coverage and total funded debt to EBITDA ratios were 3.95 to 1.00, 1.10 to 1.00 and 4.50 to 1.00, respectively.  As of June 30, 2010 the Partnership’s asset coverage, fixed charge coverage and total funded debt to EBITDA ratios were 1.48 to 1.00, 1.04 to 1.00 and 5.86 to 1.00, respectively.

Preferred Unit Investment

On September 10, 2010, the Partnership issued 15,653,775 Preferred units to KA First Reserve in exchange for $85,000. On September 16, 2010, KA First Reserve purchased an additional 2,762,431 Preferred units for $15,000 following clearance of a Hart-Scott-Rodino review. The Preferred units are convertible at any time into common units on a one-for-one basis, subject to certain adjustments in the event of certain dilutive issuances of common units. The Preferred units are entitled to cumulative distributions at an annualized rate of $0.73304 per Preferred unit.  Commencing with the quarter ended September 30, 2010 and through the earlier of the quarter ended June 30, 2012 or when the Partnership resumes cash distributions on its common units such distributions will be PIK distributions. The Partnership has an option to force the conversion of the Preferred units after three years if (1) the price of its common units is 150% of the conversion price on average for 20 consecutive days on a volume weighted basis, and (2) the average daily trading volume of its common units for such 20 day period exceeds 50,000 common units. The Preferred units were priced at $5.43 per unit, which represents a 10% premium to the 5-day volume weighted average price of the Partnership’s common units as of August 26, 2010. The Partnership used the net proceeds from the sale of the Preferred units to KA First Reserve to reduce outstanding indebtedness and pay fees and expenses related to the transaction.

Common Unit Offerings

On August 12, 2009, the Partnership 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 $59,167 from the offering, after payment of underwriting discounts and commissions and other transaction costs, were used to repay borrowings of approximately $35,000 under the Partnership’s credit agreements and were used to make construction progress payments in connection with the Partnership’s vessel new-building program.

6. Derivative Financial Instruments

The Partnership is exposed to certain financial risks relating to its ongoing business operations.  Currently, the only risk managed by using derivative instruments is interest rate risk.  Interest rate swaps are used to manage interest rate risk associated with the Partnership’s floating-rate borrowings.  As of September 30, 2010 the Partnership had seven interest rate swap contracts, four relating to term loans that expire during the period from May 2012 to August 2018 concurrently with the hedged term loans, two relating to LIBOR loans under the revolving credit agreement that expire in December 2010 and one with a September 30, 2010 notional amount of $52,050, which had related to a LIBOR loan under our revolving credit agreement prior to such LIBOR loan’s repayment on September 10, 2010.  Therefore this $52,050 notional amount interest rate swap contract, which has a fixed interest rate of 4.01% and which expires December 31, 2010, no longer qualifies as a cash flow hedge. As of September 30, 2010, the total notional amount of the remaining six receive-variable/pay-fixed interest rate swaps was $185,616. These six interest rate contracts have fixed interest rates, including applicable margins, ranging from 5.87% to 9.33%, with a weighted average rate of 8.19%.  Interest rate swaps having a notional amount of $132,816 at September 30, 2010, decrease as principal payments on the respective debt are made.

Information on the location and amounts of derivative fair values in the consolidated balance sheets and derivative gains and losses in the consolidated statements of operations is shown below:

13

Fair Values of Derivative Instruments

The Effect of Derivative Instruments on the Statement of Operations

For the Three Months Ended September 30, 2010 and 2009