**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

 

**ý****ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the fiscal year ended December 31, 2005**

 

**OR**

 

**o****TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the transition period from           to           **

 

**Commission file number 001-32326**

 

**U.S. SHIPPING PARTNERS L.P.**

(Exact name of registrant as specified in its charter)

 
| **Delaware**                                                    | ** ** | **20-1447743**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State  or other jurisdiction of incorporation or organization) |       | (I.R.S.  Employer Identification No.) |

 

**399 Thornall St., 8th FloorEdison, NJ  08837**

(Address of principal executive offices)(Zip Code)

** **

**(732) 635-1500**

(Registrant’s telephone number, including area code)

 

Securities Registered pursuant to Section 12(b) of the Act:

 

| **Title of each class** | ** ** | **Name of each exchange on which registered** |
|-------------------------|------------|-----------------------------------------------|
| Common units            |       | New York Stock Exchange                       |

 

Securities registered pursuant to Section 12 (g) of the Act:  **None**

 

Indicate by check mark if the Registrant is awell-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  o    No  ý

 

Indicate by check mark if the Registrant isnot required to file reports pursuant to Section 13 or Section 15(d) ofthe Exchange Act. Yes  o    No  ý

 

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter 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  ý    No  o

 

Indicate by check mark if disclosure ofdelinquent filers pursuant to Item 405 of Regulation S-K is not containedherein, and will not be contained, to the best of registrant’s knowledge, indefinitive proxy or information statements incorporated by reference in PartIII of this Form 10-K or any amendment to this Form 10-K.    ý

 

Indicate by check mark whether the registrantis a large accelerated filer, an accelerated filer, or a non-acceleratedfiler.  See definition of acceleratedfiler and large accelerated filer in Rule 12b-2 of the Exchange Act).

 

Large accelerated filer  o    Accelerated filer  ý    Non-accelerated filer  o

 

Indicate by check mark whether the Registrantis a shell company (as defined in Rule 12b-2 of the Act). Yes  o    No  ý

 

The aggregate market value of theregistrant’s common units held by non-affiliates as of March 13, 2006, based onthe reported closing price of such units on the New York Stock Exchange on suchdate, was approximately $160,079,258. The number of common units outstanding of the registrant’s common unitsas of March 15, 2006 was 6,899,968.  Atthat date, 6,899,968 subordinated units were also outstanding.

 

 

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**U.S. SHIPPING PARTNERS L.P.**

**2005 ANNUAL REPORT ON FORM 10-K**

**TABLE OF CONTENTS**

 
| PART  I  | ** ** | ** **                                                                                                               |
|----------|------------|--------------------------------------------------------------------------------------------------------------------------|
|     | ITEM  1    | BUSINESS                                                                                                                 |   |
|     | ITEM  1A   | RISK FACTORS                                                                                                             |   |
|     | ITEM 1B    | UNRESOLVED STAFF COMMENTS                                                                                                |   |
|     | ITEM 2     | PROPERTIES                                                                                                               |   |
|     | ITEM 3     | LEGAL PROCEEDINGS                                                                                                        |   |
|     | ITEM 4     | SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                                     |   |
| PART II  |       |                                                                                                                     |   |
|     | ITEM 5     | MARKET FOR  REGISTRANT’S COMMON EQUITY, RELATED SECURITY HOLDER MATTERS, AND ISSUER  PURCHASES OF EQUITY SECURITIES |   |
|     | ITEM 6     | SELECTED FINANCIAL DATA                                                                                                  |   |
|     | ITEM 7     | MANAGEMENT’S DISCUSSION AND ANALYSIS OF  FINANCIAL CONDITION AND RESULTS OF OPERATIONS                              |   |
|     | ITEM 7A    | QUANTITATIVE AND QUALITATIVE  DISCLOSURES ABOUT MARKET RISK                                                              |   |
|     | ITEM 8     | FINANCIAL STATEMENTS AND SUPPLEMENTARY  DATA                                                                             |   |
|     | ITEM 9     | CHANGES IN  AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE                                    |   |
|     | ITEM 9A    | CONTROLS AND  PROCEDURES                                                                                                 |   |
|     | ITEM 9B    | OTHER INFORMATION                                                                                                        |   |
| PART III |       |                                                                                                                     |   |
|     | ITEM 10    | DIRECTORS  AND EXECUTIVE OFFICERS OF THE REGISTRANT                                                                      |   |
|     | ITEM 11    | EXECUTIVE COMPENSATION                                                                                                   |   |
|     | ITEM 12    | SECURITY OWNERSHIP OF CERTAIN  BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SECURITY HOLDER MATTERS                      |   |
|     | ITEM 13    | CERTAIN RELATIONSHIPS AND RELATED  TRANSACTIONS                                                                          |   |
|     | ITEM 14    | PRINCIPAL  ACCOUNTANT FEES AND SERVICES                                                                                  |   |
| PART IV  |       |                                                                                                                     |   |
|     | ITEM 15    | EXHIBITS AND  FINANCIAL STATEMENT SCHEDULES                                                                              |   |

 

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**FORWARD-LOOKING STATEMENTS**

 

Statements included in this report which are not historical facts(including statements concerning plans and objectives of management for futureoperations or economic performance, or assumptions related thereto) are forward-lookingstatements. In addition, we may from time to time make other oral or writtenstatements which are also forward-looking statements.

 

Forward-looking statements appear in a number of places andinclude statements with respect to, among other things:

 

•                  forecasts of our ability to make cashdistributions on the units;

•                  planned capital expenditures and availabilityof capital resources to fund capital expenditures;

•                  future supply of, and demand for, refinedpetroleum products;

•                  potential reductions in the supply of tankvessels due to restrictions set forth by the Oil Pollution Act of 1990 (“OPA90”);

•                  increases in domestic refined petroleumproduct consumption;

•                  the likelihood of a repeal of, or a delay inthe phase-out requirements for, single-hull vessels mandated by OPA 90;

•                  our ability to maintain long-termrelationships with major oil and chemical companies;

•                  the absence of disputes with our customers;

•                  our ability to maximize the use of ourvessels;

•                  expected financial flexibility to pursueacquisitions and other expansion opportunities;

•                  our expected cost of complying with OPA 90and our ability to finance such costs;

•                  estimated future maintenance capitalexpenditures;

•                  the absence of future labor disputes or otherdisturbances;

•                  expected demand in the domestic tank vesselmarket in general and the demand for our tank vessels in particular;

•                  future consolidation in the domestic tankvessel industry;

•                  customers’ increasing emphasis onenvironmental and safety concerns;

•                  continued outsourcing of non-strategicfunctions, such as domestic tank vessel operations, by companies in the oil andchemical industries;

•                  our future financial condition or results ofoperations and our future revenues and expenses; and

•                  our business strategy and other plans andobjectives for future operations.

 

These forward-looking statements are madebased upon management’s current plans, expectations, estimates, assumptions andbeliefs concerning future events impacting us and therefore involve a number ofrisks and uncertainties. We caution that forward-looking statements arenot guarantees and that actual results could differ materially from thoseexpressed or implied in the forward-looking statements.

 

Important factors that could cause our actualresults of operations or our actual financial condition to differ include, butare not necessarily limited to:

 

•                  insufficient cash from operations;

•                  a decline in demand for refined petroleum,petrochemical and commodity chemical products;

•                  a decline in demand for tank vessel capacity;

•                  intense competition in the domestic tankvessel industry;

•                  the occurrence of marine accidents or otherhazards;

•                  the loss of any of our largest customers;

•                  fluctuations in voyage charter rates;

•                  delays or cost overruns in the constructionof new vessels or the retrofitting or modification of older vessels;

•                  increases in interest rates;

•                  changes in international trade agreements;

•                  failure to comply with the Jones Act;

•                  modification or elimination of the Jones Act;and

•                  adverse developments in our marinetransportation business.

 

Pleaseread Risk Factors in Item 1A of this report for a discussion of the factorsthat could cause our actual results of operations or our actual financialcondition to differ from our expectations.

 

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**PART I**

**ITEM1.  BUSINESS**

 

**OurPartnership**

 

We are a leading provider of long-haul marinetransportation services, principally for refined petroleum products, in theU.S. domestic “coastwise” trade. We are also involved in the coastwisetransportation of petrochemical and commodity chemical products. Marinetransportation is a vital link in the distribution of refined petroleum,petrochemical and commodity chemical products in the United States. Our fleetconsists of ten tank vessels: six integrated tug barge units, or ITBs; oneproduct tanker; and three chemical parcel tankers. Our primary customers aremajor oil and chemical companies. A significant portion of our fleet capacityis currently committed to these companies pursuant to contracts with initialterms of one year or more, which provides us with a relatively predictablelevel of cash flow. We do not assume ownership of any of the products that wetransport on our vessels.

 

Our market is largely insulated from direct foreigncompetition because the Merchant Marine Act of 1920, commonly referred to asthe Jones Act, restricts U.S. point-to-point maritime shipping to vesselsoperating under the U.S. flag, built in the United States, at least 75% ownedand operated by U.S. citizens and manned by U.S. crews. All of our vessels arequalified to transport cargo between U.S. ports under the Jones Act.

 

We began operations in September 2002 when weacquired our six ITBs from a division of Amerada Hess that was managed byseveral executive officers of our general partner. Our six ITBs primarilytransport clean refined petroleum products, such as gasoline, diesel fuel, heatingoil, jet fuel and lubricants, from refineries and storage facilities to avariety of destinations, including other refineries and distribution terminals.Three of our ITBs are currently operating under time charters, two arecurrently operating in the spot market, and one is operating on a consecutivevoyage charter. Regardless of our contract rates and rates in the spot market,we are assured specified minimum charter rates for our ITBs throughSeptember 13, 2007, subject to certain limited exceptions, pursuant to asupport agreement we entered into with Hess in connection with our acquisitionof the six ITBs.

 

We acquired the first two of our parcel tankers, the*Chemical Pioneer* and the *Charleston*, in May 2003 andApril 2004, respectively.  Thesetankers primarily transport specialty refined petroleum, petrochemical andcommodity chemical products, such as lubricants, paraxylene, caustic soda andglycols, from refineries and petrochemical manufacturing facilities to othermanufacturing facilities or distribution terminals. We have contracts with DowChemical, ExxonMobil, Koch Industries, Lyondell Chemical and Shell withspecified minimum volumes that will, in aggregate, account for approximately74% of the anticipated usable capacity of the *Charleston*through July 2007 and 75% of the anticipated usable capacity of the *Chemical Pioneer* throughFebruary 2007. In addition, these customers are required to ship on ourparcel tankers any additional volumes of these products shipped to the portsspecified in the contracts. As a result, we expect these companies will utilizesubstantially all of the non-committed capacity of these vessels during thoseperiods.

 

In September 2005, we acquired the *Houston*, formerly the *Gus W. Darnell*, from the Wilmington TrustCompany. The vessel is a Jones Act coastwise double hulled product tanker,built in 1985. In December 2005, we signed a multi-year time charter for thevessel with Morgan Stanley Capital Group Inc. through mid-2011. The vessel willbe trading in clean petroleum products in the coastwise Jones Act trade. Sinceit entered service on October 13, 2005, the vessel has operated in the spotmarket and will continue to do so until its multi-year time charter with MorganStanley, which will account for 100% of the usable capacity of the *Houston,* begins in mid-2006.

 

In November 2005, we acquired the *Sea Venture*, a double-bottomed chemicalparcel tanker. The vessel was re-built in 1983 and is capable of carryingtwenty-one different grades of product in independent cargo tanks. The vesselis expected to begin operating in May 2006 after an extensive drydock.  At that time, it will be put in servicecovering the chemical contracts of our first ATB under construction through theprojected delivery of the ATB in December 2006. In 2007, we expect that thevessel will continue trading in chemical and/or petroleum products for thePartnership.

 

In August 2004, we entered into a contract withSouthern New England Shipyard Company (“SENESCO”) to build an articulated tugbarge (“ATB”) at a price of $45.4 million to be delivered in early 2006. InNovember 2005, SENESCO indicated that they were not able to complete the firstATB on the contract terms due to infrastructure problems and production lineissues, and that the completion of the barge would be delayed. In November2005, we entered into a revised agreement with SENESCO providing for completionof the ATB at another facility that SENESCO will operate. The total cost ofcompletion of the ATB pursuant to the revised agreement is currently expectedto be approximately $53.4 million with a contracted delivery date

 

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of December 2006.  SENESCO hasindicated that it is experiencing cost overruns and further delays incompleting the ATB.  The revisedagreement provides for substantial penalties for late delivery of the ATB.  There is risk that the cost of the ATB couldbe higher and that the ATB may not be completed in a timely manner, which couldhave a material adverse effect on our results of operations.

 

On February 16, 2006, we entered into a contractwith Manitowoc Marine Group (“MMG”) for the construction of two barges, whichare specified to have a carrying capacity of approximately 160,000 barrels at98% of capacity. The contract with MMG includes options to construct twoadditional barges.  On the same date, weentered into a contract for the construction of two tugs with EasternShipbuilding Group, Inc. (“Eastern”), which will be joined with the barges tocomplete the two ATB units. The contract with Eastern also includes options toconstruct and deliver up to four additional ATB tugs on the basis that eachsuch option shall cover an order for two tugs. The total construction cost forthe two ATBs is anticipated to be approximately $130 million, or $65 millionper unit.  We intend to finance the construction with borrowings under ourcredit facility and operating cash. Additionally, we intend to obtain additional debt financing facilities,as necessary, to cover the costs of this project.  We expect the two ATBs will be completed inAugust 2008 and November 2008, and we have options to build another two ATBs ata cost per unit of approximately $66 million. The options for the tugs must be exercised by August 2006 and February2007, and the options for the barges must be exercised by April 2006 and June2006.

 

Section 7704of the Internal Revenue Code provides that publicly traded partnerships will,as a general rule, be taxed as corporations. However, an exception, referred toas the “Qualifying Income Exception,” exists with respect to publicly tradedpartnerships that generates 90% or more of their gross income for every taxableyear from “qualifying income.” Qualifying income includes income and gainsderived from the transportation, storage and processing of crude oil, naturalgas and products thereof. Other types of qualifying income include interest(other than from a financial business), dividends, gains from the sale of realproperty and gains from the sale or other disposition of capital assets heldfor the production of income that otherwise constitutes qualifying income. The *Charleston* is currently and is expected tocontinue to transport specialty refined petroleum products and related productsthat generally generate qualifying income for federal income tax purposes. The *Sea Venture*, when it enters operationalservice in mid-2006, may transport either specialty refined petroleum productsand related products that generally generate qualifying income for federalincome tax purposes or chemical products that generally generate non-qualifyingincome. We are operating the *ChemicalPioneer* in a corporate subsidiary because it primarily will conductoperations that do not generate qualifying income. Dividends received from ourcorporate subsidiary will constitute qualifying income.  We estimate that less than 3% of our currentincome is not qualifying income; however, this estimate could change from timeto time.

 

**Business Strategies**

 

Our primary business objective is to increase ourdistributable cash flow per unit by executing the following strategies:

 

•                  *Operate our fleet safelyand efficiently to meet the most stringent customer vetting and industrystandards and remain a preferred supplier to major oil and chemical companies.* Major oil and chemical companies placeparticular emphasis on strong environmental and safety records and efficientoperations. We believe we are a high quality, cost-efficient and reliable tankvessel operator. We intend to continue improving our operational safety andefficiency through the use of new technology and comprehensive trainingprograms for new and existing employees. We also intend to minimize off-hiretime and costs by emphasizing efficient scheduling and timely completion ofplanned and preventative maintenance both on-shore and at sea. Thismaintenance, combined with the twin redundant engine configuration on our ITBs,has allowed us to average a very low rate of unscheduled off-hire per ITB peryear over the past five years. We intend to continue building on our reputationfor maintaining high standards of performance, reliability and safety, which webelieve has enabled us to attract highly-selective customers.

 

•                    *Contract a high proportion of our capacity with majoroil and chemical companies for periods of one year or more in an effort tomaintain steady cash flows from creditworthy customers through business cycles,while maintaining some flexibility to respond to changing market conditions.* Vessels operating on time charters orcontracts of affreightment generally provide more predictable cash flow, whilevessels operating under spot charters may generate increased profit marginsduring periods of increasing charter rates. We intend to pursue a strategy ofemphasizing longer-term contracts, while preserving operational flexibility totake advantage of changing market conditions. Four of our six ITBs areoperating under contracts that have been in effect, or renewed, for at leastone year. Our remaining two ITBs are currently operating in the spot market.However, the Hess support agreement effectively provides us with minimum fixedrates for our six ITBs through September 13, 2007, subject to certainlimited exceptions. Our product tanker, *Houston*,has operated in the spot market since entering service in October 2005 and willbegin a multi-year time charter in mid 2006. With respect to two of our parceltankers, the *Chemical Pioneer*andthe *Charleston*, we have contractsof affreightment that will, in aggregate, account for approximately 75% of theanticipated usable capacity of one vessel through February 2007 and 74% of theanticipated usable capacity of the other vessel through July 2007.  In addition, these contracts generallyrequire the customer to ship excess volume of the products covered by thecontract on the routes covered by the contract on our parcel tankers. As aresult, we expect these customers will account for substantially all of thenon-committed capacity of these vessels during those periods. Our third parceltanker, the *Sea Venture*, willcover the chemical contracts of our first ATB under construction through itsdelivery, scheduled for December 2006, at which point it will trade in chemicaland/or petroleum products.

 

•                  *Expand our fleet andaddress OPA 90 phase-out requirements through accretive strategic acquisitionsand construction of new vessels.* We have grown successfully in the past through strategic acquisitions.In September 2002 we acquired our six ITBs from Hess, and acquired our *Chemical Pioneer* and *Charleston* parcel tankers in May 2003 andApril 2004, respectively. In August 2004, we contracted for the construction ofan ATB, the

 

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deliveryof which is currently scheduled for late 2006, although it may not be delivereduntil 2007.  In 2005 we made two vesselacquisitions, the *Houston* and the*Sea Venture,* in September andNovember, respectively.  In February2006, we contracted for the construction of two additional ATBs, withanticipated delivery in August 2008 and November 2008, with options foradditional units. We expect to continue this strategy by consistently surveyingthe marketplace to identify and pursue acquisitions, as well as newbuildingopportunities, that expand the services and products we offer or that expandour geographic presence. While we will be required to make capital expenditureseither to bring our ITBs in compliance with OPA 90 or replace them withnewbuilds, we also plan to continue our strategy of vessel acquisitions.

 

**PrincipalExecutive Offices**

 

Our principal executive offices are located at 399Thornall Street, 8th Floor, Edison, New Jersey 08837, and our phonenumber is (732) 635-1500.  We also leaseadditional office space in New York, NY for use by our chairman and certainother personnel.

 

**OVERVIEW OF OUR INDUSTRY**

 

**Introduction**

 

We participate in the U.S. flag coastwise long-haulmarine transportation of refined petroleum, petrochemical and commoditychemical products. Coastwise marine transportation of bulk liquids is primarilyperformed by tank vessels, including deep-sea self propelled vessels,integrated tug barges, or ITBs, articulated tug barges, or ATBs, and unmannedtank barges. U.S. flag tank vessels generally transport products between portsin the continental United States (including through the Panama Canal) orbetween mainland ports and Puerto Rico, Alaska or Hawaii, although thesevessels may at times transport products internationally. Tank vessels provide avital link in the transportation of these products in the United States.

 

Tank vessels transport refined petroleum products,such as gasoline, jet fuel, diesel fuel and feedstocks, from refineries toterminals and facilities engaged in further processing, often in full vesselloads. Tank vessels with a relatively high number of tank segregations, calledparcel tankers, transport smaller cargoes of specialty refined petroleum,petrochemicals and commodity chemicals, such as lubricants, styrene, glycols,paraxylene, caustic soda and alcohols, in a variety of coastwise distributiveand balancing movements.

 

The U.S. flag coastwise marine transportationindustry operates under the Jones Act (Merchant Marine Act of 1920), a set ofFederal statutes that mandate that vessels engaged in trade between U.S. portsmust:

 

•                  operate under the U.S. flag;

•                  be built in the United States;

•                  be at least 75% owned and operated by U.S.citizens; and

•                  be manned by a U.S. crew.

 

One of the primary purposesof the Jones Act is to maintain a fleet of vessels eligible for charter to theU.S. government for national defense requirements.

 

**Methods ofTransporting Refined Petroleum, Petrochemical and Commodity Chemical Products**

 

Refined petroleum products are transported bypipelines, marine transportation, truck and railroads. Pipelines are the most efficientmode of transportation for long-haul movement of refined petroleum products,followed by tank vessels. Rail and truck transportation of these products aremore cost-effective only over short distances and, therefore, they account foronly a small percentage of total ton miles transported. The carrying capacityof a 30,000 deadweight ton (dwt) tank vessel, which can transport approximately225,000 barrels of refined petroleum products, is equivalent to approximately378 average-size rail tank cars and approximately 945 average-size tractortrailer tank trucks.  Marinetransportation provides a vital link between a number of major refinedpetroleum product producing and consuming regions of the United States. Thereare no pipelines connecting the major refining areas in the Pacific Northwestand the Texas and Louisiana region with consumption markets in California, orconnecting the major refining areas in the Texas and Louisiana region to theconsuming areas in Florida. The

 

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Northeastern United States, a significant consuming region, is servedby capacity-constrained pipelines connecting with the refining areas inTexas and Louisiana.

 

Petrochemical and commodity chemical products aretypically produced and moved in volumes considerably smaller than the capacityof an entire tank vessel. As pipelines cannot economically transport mostpetrochemical and commodity chemical products, most of these products aretransported by rail, as the smaller unit sizes of railcars are conducive totypical shipment sizes. Parcel tankers, with multiple cargo compartments andcargo handling systems, can cost-effectively transport these products becausethey can accommodate the small shipment sizes without having a portion of thevessel capacity unfilled. Parcel tankers generally enjoy significant costadvantages to rail transportation between plants or facilities having access todeep sea marine terminals.

 

**IndustryTrends**

 

We believe the following industry trends, which arecausing charter rates to rise and companies to seek longer term charters,create a positive outlook for our business:

 

*Demand for tank vessels continues to be strong. This strongdemand results principally from rising consumption of refined petroleum productsand the importance of marine transportation in the distribution of refinedpetroleum, petrochemical and commodity chemical products*. A major factor in determining tank vesseldemand is domestic refined petroleum product consumption, which continues torise. The Energy Information Administration of the Department of Energyprojects that retail demand for refined petroleum products in the United Stateswill increase between 2004 and 2030 at a compounded annual growth rate of 1.1%.Although pipelines are a key component in the distribution chain, they do notreach all markets, may lack specific capacity to meet increasing demand and arenot capable of transporting all refined petroleum products or economicallytransporting most chemical products. According to the Association of Oil PipeLines, approximately 28% of all domestic refined petroleum producttransportation was by water in 2004, making waterborne transportation thesecond-most used mode of transportation for refined petroleum products after pipelines.Many areas along the U.S. coast have access to refined petroleum, petrochemicaland commodity chemical products only by marine transportation.

 

*The domestic supply of tank vessels competing with us isdecreasing. This decrease is due to: OPA 90, which mandates the phase-out ofcertain non-double-hulled tank vessels at varying times byJanuary 1, 2015; and the Jones Act, which restricts the supply of newvessels by requiring that all vessels participating in the coastwise trade beconstructed in the United States*. As a result of OPA 90, the total barrel-carrying capacity ofexisting domestic tank vessels transporting refined petroleum products isprojected to decline significantly from its current levels in the absence ofnewbuildings or retrofittings of existing tank vessels. Given the intensivecapital requirements to construct new Jones Act tank vessels in U.S. shipyardsfor use in the coastwise trade and the limited number of U.S. shipyards willingand able to construct tank vessels, we believe that not all the domestic tankvessels will be replaced by newbuildings, providing current significantopportunities to existing owners of high quality vessels. We also believe thatcertain major oil companies prefer to place long-term charters on newly-built double-hulltankers and are less interested in chartering tank vessels that have beenretrofitted with double-hulls.  However,we believe that other oil companies and traders would be willing to accept highquality retrofitted tankers.  Due to theexpected reduction in the availability of domestic tank vessels due to OPA 90,the major oil and chemical companies are increasingly interested in enteringinto long-term charter agreements in order to ensure shipping capacity fortheir products.

 

*Major oil and chemical companies are increasingly selectivein their choice of tank vessel operators. These companies place particularemphasis on strong environmental and safety records, as well as operatingperformance.* Webelieve that the increasingly stringent U.S. regulatory environment, theemphasis on quality and environmental protection and increasingly demandingcustomer vetting standards and procedures governing eligibility of vessels toengage in the coastwise trade for, and enter terminal facilities of, these customers,will accelerate the obsolescence of older, lower quality tank vessels andprovide a competitive advantage to companies like us that operate high-qualitytank vessels.

 

*The domestic tank vessel industry is consolidating.*Partly as a result of OPA 90 and thecorresponding capital requirements to replace or retrofit existing tank vesselfleets, we believe many smaller, independent tank barge companies may find itincreasingly difficult to compete profitably. The continuation of this trend would provide us with opportunities bothto acquire additional assets and add customers.

 

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**Our Vessels**

 

***Integrated Tug Barge Unit Fleet***

 

In September 2002, we acquired a fleet of sixrefined petroleum product ITBs built in the United States in the 1980s andqualified for the coastwise trade. ITBs integrate a dedicated tugboat (whichprovides propulsion) into a cargo carrying barge using a coupling system thatconnects the two vessels. The rigid connection between the vessels enables thetug barge combination to be handled as though it were a single vessel, withbetter handling and maneuverability than a conventional tug and bargecombination. Unlike self-propelled tankers, ITBs are designed to allow the aftsection, containing the more complex controls and machinery, to be separatedfrom the forebody cargo area. The tug and barge sections are locked togetherand are only separated during scheduled drydockings every five years. ITBsprovide a major cost advantage compared to a tanker because ITBs require fewercrew members than tankers. Additionally, ITBs can operate in sea and weatherconditions that conventional tug-barge combinations cannot.

 

All six ITBs are “sister vessels” of the same designand built to the same specifications. As sister vessels, we can operate themmore efficiently because we can use common procedures with all the ITBs, whileinventory management can be centralized and crews and officers can beinterchanged among vessels. In addition, sister vessels allow us to substitutevessels in service and service the same contract with different vessels.

 

The following table sets forth the specificationsand highlights for our six ITBs:

 
| Deadweight capacity(1)        |   | 48,000  dwt/360,000 bbls                             |   |
|-------------------------------|--------|------------------------------------------------------|--------|
| Service  speed                |   | 14.0 knots                                           |   |
| Full load  draft (summer)     |   | 40.563 feet                                          |   |
| Hull  structure               |   | Double-bottom                                        |   |
| Propulsion  type              |   | 2x DeLaval  Medium Speed Diesel                      |   |
| Fuel  consumption (at sea)    |   | 42 long tons  of IFO 180 CST/day                     |   |
| Number of  cargo segregations |   | 7 different  types of refined products(2)            |   |
| Classification                |   | American  Bureau of Shipping A1 (all six vessels)(3) |   |

 

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(1)                                  A vessel’s cargo capacity is less than itsdeadweight capacity as a result of the fuel it carries for its operation. Avessel’s cargo capacity may be further reduced to the extent draft clearancelimits the ability of a vessel to enter or leave port with a full load.

 

(2)                                  One ITB has 10 cargo segregations.

 

(3)                                  The American Bureau of Shipping, or ABS, isan independent classification society that inspects the hull and machinery ofcommercial ships to assess compliance with minimum criteria as set by U.S. andinternational regulations. The classification of “A1” is ABS’ highest hullstructure classification.

 

Double-bottom ship configurations are superiorto single-hull configuration for the prevention of oil spills in the event of agrounding. As a result, charterers prefer double-bottom ships toconventional single-hull ships. Because the ITBs have two independentpropulsion plants and are equipped with dual propellers and rudders, the riskof mechanical failure and unscheduled downtime for this fleet is lessened. Wecan perform engine maintenance at sea while the vessel is operating on theother engine.

 

The following table summarizes information about ourITBs:

 
| **Vessel**   | ** ** | **Current Charter Type**   | ** ** | **Month/Year  Built** | ** ** | **OPA 90 Retrofit/  Phase-out Date** | ** ** |
|--------------|------------|----------------------------|------------|-----------------------|------------|--------------------------------------|------------|
| JACKSONVILLE |       | Spot                       |       | May 1982              |       | May 2012                             |       |
| GROTON       |       | Time                       |       | June 1982             |       | June 2012                            |       |
| NEW YORK     |       | Spot                       |       | February  1983        |       | February  2013                       |       |
| BALTIMORE    |       | Time                       |       | May 1983              |       | May 2013                             |       |
| PHILADELPHIA |       | Consecutive Voyage Charter |       | June 1984             |       | June 2014                            |       |
| MOBILE       |       | Time                       |       | August 1984           |       | August 2014                          |       |

 

Four of our ITBs are currently operating undercontracts with Hess, Shell and BP.  TheHess contract expires in December 2006, the Shell contract expires inJanuary 2008 and the BP contracts expire in December 2007. The remainingtwo

 

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ITBs are currently operating in the spot market under voyage charters;however, regardless of rates in the spot market, we are assured specifiedminimum rates for these vessels through September 13, 2007 under the Hesssupport agreement, subject to certain limited exceptions. Although our ITBsprincipally transport refined petroleum products, we will on occasion transportcrude oil if requested by a customer.

 

The ITBs are required by both domestic (UnitedStates Coast Guard) and international (International Maritime Organization)regulatory bodies to be overhauled for major repair and maintenance every fiveyears. During a drydocking an ITB is removed from service (typically for50-60 days) and major repair and maintenance work is carried out. Wecurrently estimate typical drydock costs for our ITBs will be approximately$6.0 million per vessel for work occurring in U.S. shipyards. We can alsodrydock the ITBs in foreign shipyards, where the drydocking costs are lower.However, if we choose to drydock an ITB in a foreign shipyard, the ITB may beoff-hire, and therefore not earning any revenue, for a longer period of time asit travels to and from the foreign shipyard if we cannot find a cargo totransport during that voyage. Drydocking costs are considered maintenancecapital expenditures for financial statement purposes but are generallyexpensed for tax purposes to the extent that the expenditures relate to repairsand maintenance. In addition to drydocking each ITB every five years, we arerequired to conduct a mid-period underwater survey in lieu of drydocking theITB for inspection. An underwater survey only requires an ITB to be removedfrom service for three to five days.

 

The following table sets forth information regardingthe drydocking of our ITBs:

 

| **Vessel**      | ** ** | **Last  Drydock** | ** ** | **Costs (in thousands)** | ** ** | **Days  Off-Hire** | ** ** | **Next  Scheduled  Drydock** | ** ** | **Estimated Days  Off-Hire (4)** | ** ** |
|-----------------|------------|-------------------|------------|--------------------------|------------|--------------------|------------|------------------------------|------------|----------------------------------|------------|
| JACKSONVILLE(1) |       | 2005              |       | $6,022                   |       | 70                 |       | 2010                         |       | N/S                              |       |
| GROTON(2)       |       | 2001              |       | 2,449                    |       | 90                 |       | 2Q 2006                      |       | 50                               |       |
| NEW YORK(3)     |       | 2005              |       | 6,052                    |       | 62                 |       | 2010                         |       | N/S                              |       |
| BALTIMORE       |       | 2002              |       | 5,888                    |       | 51                 |       | 2007                         |       | N/S                              |       |
| PHILADELPHIA    |       | 2002              |       | 4,705                    |       | 64                 |       | 2007                         |       | N/S                              |       |
| MOBILE          |       | 2001              |       | 3,743                    |       | 49                 |       | 4Q 2006                      |       | 50                               |       |

 

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(1)                                  Delays in shipyard due to labor shortages asa result of Hurricane Katrina.

(2)                                  Drydocked in China in 2001; includes transittime to and from shipyard.

(3)                                  Drydocked in Chile; includes transit time toand from shipyard.

(4)                                  N/S – Not scheduled

 

We are currently exploring several “end-of-life”options for our ITBs as they reach their OPA 90 phase-out dates, includingretrofitting our ITBs with an internal double-hull or constructing new vessels.A retrofit would involve installing double-sides internally in theexisting forebody, rearranging ballast tanks and protectively coating all cargoand ballast tank structural steel .This retrofit will result in a fullyconforming double-hull vessel since the existing double-bottom of the ITBis fully conforming; however, the capacity of the vessel will decrease byapproximately 5%. We estimate the current cost of this retrofit to beapproximately $25 million per vessel, and will require an off-hire periodof approximately 180 days.  Certainof our customers have indicated that they are not currently interested inchartering a retrofitted ITB.   Weestimate the current cost of constructing a series of new product tank vesselswould average approximately $120 million each. We have determined that at this time constructing new double-hulledforebodies for our ITBs is not economically feasible.

 

*Hess Support Agreement.*  Inconnection with our purchase of the six ITBs from Hess, we entered into asupport agreement with Hess that provides, among other things:

 

•                  We will use our commercially reasonableefforts to charter out the ITBs and maximize the amount of time that the ITBsare employed, either on a time charter or spot charter basis;

 

•                  If we propose to enter into a time charter orspot charter for an ITB, we must notify Hess in advance, and Hess has a rightto charter such ITB on the terms proposed with such third party;

 

•                  If we expect that an ITB will not bechartered for a period in excess of five consecutive days (other than fordowntime, as described below), Hess has the right to propose, and we arerequired to accept, a spot charter for itself or a third party on commerciallyreasonable terms;

 

•                  If the contracted rate (the “NegotiatedRate”) for a spot charter or time charter of an ITB is less than the theneffective charter rate for such ITB specified in the support agreement (the“Support Rate”), Hess is obligated to

 

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payus the difference between the Support Rate and the Negotiated Rate. However,Hess is not obligated to compensate us for any downtime, which is defined as:

 

•                  theITB not being in service due to drydock or casualty;

 

•                  thecharterer not being required to pay under the charter due to the ITB beingoff-hire; or

 

•                  theITB not being in service because it has been finally determined in arbitrationthat we did not use commercially reasonable efforts to charter out such ITB;

 

•                  If the Negotiated Rate for an ITB exceeds theSupport Rate, we must pay the excess to Hess to reimburse Hess for any paymentsmade to us by Hess under the support agreement and, once Hess has been fullyreimbursed for all payments made under the support agreement, we must pay Hess50% of any remaining excess. Our obligation to reimburse Hess for these paymentsterminates upon termination of the support agreement;

 

•                  If we enter into a time charter for an ITBwith a charterer having a senior unsecured long-term debt credit rating byMoody’s Investor Services of Baa2 or better and a senior unsecured debt creditrating by Standard & Poor’s of BBB or better, and (1) theNegotiated Rate for such charter equals or exceeds the then applicable SupportRate for the ITB and (2) the charterer consents to the assignment of suchcharter to our lenders as security for our debt, then Hess’ payment obligationwith respect to that ITB is suspended for the contracted term of the charter,whether or not the charterer is making payments to us or the charter is stillin effect;

 

•                  Neither we nor Hess can withhold or defer anypayment due under the support agreement, although we each have limited set-offrights in respect of indemnification payments due from the other under theagreement pursuant to which we purchased the six ITBs and we can defer (withinterest at the prime rate) any payment due to Hess under the support agreementif such payments would cause us to be in default under our senior creditfacility;

 

•                  Neither we nor Hess can terminate the supportagreement unilaterally;

 

•                  The support agreement will terminate onSeptember 13, 2007, or earlier if:

 

•                  Withrespect to any individual ITB, the date on which

 

•                  wesell such ITB,

 

•                  suchITB ceases to be certified for use in United States coastwise trade, or

 

•                  thereis an actual, constructive, compromised or agreed total loss of such ITB; and

 

•                  Withrespect to all ITBs, upon the occurrence of any one of the following events(each such event a “Sale of the Business”) that results in equity holders ofUnited States Shipping Master LLC ceasing to own, directly or indirectly, at least50% of the surviving entity (or entities) that hold(s) title to the ITBs:

 

•                  thesale of all or substantially all of our ITBs and related assets;

 

•                  thesale of all the issued and outstanding securities of our subsidiary that ownsthe ITBs and related assets; and

 

•                  themerger or consolidation of our subsidiary that owns the ITBs and relatedassets;

 

•                  If during the term of the support agreementwe sell one or more ITBs, other than in a Sale of the Business, or there is anactual, constructive, compromised or agreed total loss of one or more ITBs, wemust use all proceeds (including insurance proceeds) in excess of required debtpayments, taxes and out-of-pocket expenses incurred in connection with suchsale or insurance recovery to reimburse Hess for all payments made by it underthe support agreement and not previously reimbursed in the case of a sale andone-sixth of such payments in the case of an actual, constructive, compromisedor total loss of the ITB.

 

For the years ended December 31, 2005 and 2004,five ITBs were covered. For the year ended December 31, 2003, four ITBs werecovered.  One ITB is under contract withHess at a charter rate less than the support rate; this vessel will be coveredby the support agreement upon any termination of that contract.

 

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***Product Tanker Fleet***

 

In September 2005, weacquired the *Houston,*a U.S.flagged, double-hulled product tanker qualified to trade in the Jones Act.  The vessel, being double-hulled, has no OPA90 phase-out date.  The vessel is capableof carrying approximately 240,000 barrels of petroleum products.   The vessel’s last drydock occurred inSeptember 2005 at a cost of $3.1 million and its next drydock is required in2008.  The*Houston*, formerly the *GusW. Darnell*, was built for use by the Military Sealift Command of theU.S. Navy as part of a fleet of six vessels, which have been used primarily todeliver jet fuel to various locations around the world.

 

The following table setsforth the specifications and highlights for our product tanker:

 
| Deadweight Capacity(1)        |   | 30,610 dwt / 240,000 bbl                               |
|-------------------------------|--------|--------------------------------------------------------|
| Service Speed                 |   | 16 knots                                               |
| Full load draft (summer)      |   | 36 feet                                                |
| Hull Structure                |   | Double-hull                                            |
| Propulsion Type               |   | Single slow speed diesel  burning heavy fuel (IFO 380) |
| Fuel Consumption (at sea)     |   | 36 tons/day                                            |
| Number of Cargo  Segregations |   | 7                                                      |
| Classification                |   | American Bureau of  Shipping (ABS) Cap II              |

 

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(1)          Avessel’s cargo capacity is less than its deadweight capacity as a result of thefuel it carries for its operations.

 

In December 2005, we signeda multi-year time charter for the vessel with Morgan Stanley Capital Group Inc.through mid-2011. The vessel will be trading in clean petroleum products in thecoastwise Jones Act trade. Since it entered service on October 13, 2005, thevessel has operated in the spot market and will continue to do so until itsmulti-year time charter begins in mid-2006.

 

***Parcel Tanker Fleet***

 

Our parcel tankers carry specialty refinedpetroleum, petrochemical and commodity chemical products primarily fromrefineries and chemical manufacturing plants and storage tank facilities alongthe coast of the U.S. Gulf of Mexico to industrial users in and around EastCoast ports. The specialty refined petroleum products transported on our parceltankers are generally not the types of refined petroleum products transportedby our ITBs or our product tanker, but are products shipped in smaller volumesand used primarily in the manufacture of other products. Petrochemical andcommodity chemical products transported by our parcel tankers consist primarilyof paraxylene, caustic soda, alcohol, chlorinated solvents, alkylates, tolueneand ethylene glycol.

 

Because of the smaller cargo lot size requirements,parcel tankers are designed with many small cargo tanks. Unlike conventionaltankers, parcel tankers are typically designed with one dedicated cargo pump,and associated piping system, for each tank, in order to eliminate cargocontamination. Some of the specialty refined petroleum, petrochemical andcommodity chemical products transported must be carried in vessels withspecially coated or stainless steel cargo tanks, as many of these cargos arevery sensitive to contamination and require special cargo handling equipment.

 

We currently own three parcel tankers: the *Chemical Pioneer*, which we acquired fromDow Chemical in May 2003, the *Charleston*,which we acquired from ExxonMobil in April 2004, and the *Sea Venture*, which we acquired from MarineTransport Corporation, in November 2005.

 

The following table sets forth the specificationsand highlights of our parcel tankers:

 

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| ** **                    | ** ** | **CHARLESTON**                 | ** ** | **CHEMICAL PIONEER**           | ** ** | **SEA VENTURE**                           | ** ** |
|-------------------------------|------------|--------------------------------|------------|--------------------------------|------------|-------------------------------------------|------------|
| Deadweight  capacity(1)       |       | 48,000 dwt                     |       | 35,000 dwt                     |       | 19,000 dwt                                |       |
| Service  speed                |       | 16.0 knots                     |       | 16.0 knots                     |       | 14.8 knots                                |       |
| Full load  draft (summer)     |       | 42.0 feet                      |       | 35.656 feet                    |       | 29.2125 feet                              |       |
| Hull  structure               |       | Double-bottom                  |       | Double-hull                    |       | Double-bottom                             |       |
|                          |       |                           |       | (non-OPA 90 compliant)         |       |                                      |       |
| Propulsion  type              |       | Slow-speed diesel              |       | Steam turbine                  |       | Slow-speed diesel                         |       |
| Fuel consumption  (at sea)    |       | 52 MT/Day (IFO 180)            |       | 75 MT/Day (IFO 380)            |       | 19.75 MT/Day (IFO 380)                    |       |
| Number of  cargo segregations |       | 43 different types of products |       | 48 different types of products |       | 21 different types of products            |       |
| Classification(2)             |       | American Bureau of Shipping A1 |       | American Bureau of Shipping A1 |       | American Bureau of Shipping A1            |       |
| Condition  Assessment(3)      |       | CAP I                          |       | CAP II                         |       | Condition Assessment to be determined (4) |       |

 

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(1)                                  A vessel’s cargo capacity is less than itsdeadweight capacity as a result of the fuel it carries for its operation. Avessel’s cargo capacity may be further reduced to the extent draft clearancelimits the ability of a vessel to enter or leave port with a full load.

(2)                                  The classification of “A1” is ABS’ highesthull structure classification.

(3)                                  ABS also provides a condition assessmentrating system; a CAP I rating is equivalent to a new build steel structure anda CAP II rating is equivalent to a five year old ship.

(4)                                  The *SeaVenture*is currently undergoing an extensive drydock, which isanticipated to cost approximately $8.9 million and to be completed in May 2006.

 

The *Chemical Pioneer,* the *Charleston*and the*Sea Venture* are among the lastindependently owned carriers scheduled to be retired under OPA 90, withphase-out dates in 2013. Although the *ChemicalPioneer* is double-hulled, it is not OPA 90 compliant; however,we believe that a minor modification will bring the *Chemical Pioneer* into compliance with OPA 90. The *Charleston*and the*Sea Venture* are not OPA 90 compliant;however, we believe we will be able to obtain a waiver allowing us to carryrefined petroleum products in the *Charleston’s*center tanks and non-petroleum-based products in the other tanks.  Alternatively, since tankers carryingproducts or chemicals not regulated by OPA 90 (*i.e.*,non-petroleum-based) are not subject to the mandated OPA 90 phase-outdates and, therefore, have extended trading lives, we may elect to change theoperation of the parcel tankers to avoid having to retrofit them or phase themout. However, this change could materially adversely affect their value to us.

 

Both the *ChemicalPioneer* and the *Charleston*have over 40 cargo segregations and the *SeaVenture* has 21cargo segregations, which are configured, strengthenedand coated to handle various sized parcels of a wide variety of petroleumproducts and industrial chemicals, giving them the ability to handle a broaderrange of specialty refined petroleum, petrochemical and commodity chemicalproducts than other chemical-capable product carriers. Many of the petroleumand chemical products we transport in our parcel tankers are hazardoussubstances and, therefore, require highly qualified management and crew tooperate the vessel safely.

 

We currently have contracts of affreightment withDow Chemical, ExxonMobil, Koch Industries, Lyondell Chemical and Shell withspecified minimum cargo requirements that will, in aggregate, account forapproximately 74% of the anticipated usable capacity of the *Charleston* through July 2007 and 75%of the anticipated usable capacity of the *ChemicalPioneer* through February 2007. In addition, these contractsgenerally require the customer to ship excess volume of the products covered bythe contract on the routes covered by the contract on our parcel tankers. As aresult, we expect these companies will account for substantially all of thenon-committed capacity of these vessels during those periods. The *Sea Venture* will initially service thecharters that were to be serviced by our first ATB until that ATB is delivered,and, in addition, will supplement the *ChemicalPioneer* in delivering non-petroleum based products. With the futurereduction in chemical ship capacity we do not

 

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believe that we will encounter a problem in fully utilizing thecapacity of the *Sea Venture*.  When we acquired the *Charleston* from ExxonMobil inMay 2004, we agreed to transport cargo for ExxonMobil generallytransported by the *S/R Wilmington*while the vessel was in drydock. We operated under this arrangement fromJune 2004 through November 2004 and chartered in another vessel on a short-termbasis to fulfill our obligations under our charter agreements covering the *Charleston*.  We are obligated to use our best efforts toassist ExxonMobil in covering its cargo transportation requirements that wouldhave been covered by the *S/R Wilmington*during future drydocks of that vessel.

 

Our parcel tankers are required by both domestic(U.S. Coast Guard) and international (International Maritime Organization)regulatory bodies to be drydocked twice in a five year period. During adrydocking the vessel is removed from service (typically for 35 to50 days) and major repair and maintenance work is carried out. Wecurrently estimate typical drydock costs to be $3.0 million to $5.0 millionper vessel for work occurring in U.S. shipyards. Drydocking costs areconsidered maintenance capital expenditures for financial statement purposesbut are generally expensed for tax purposes to the extent that the expendituresrelate to repairs and maintenance.

 

| ** **            | ** ** | **Last**    | ** ** | ** **              | ** ** | **Days**    | ** ** | **Next**    | ** ** |
|-----------------------|------------|-------------|------------|-------------------------|------------|-------------|------------|-------------|------------|
| **Vessel**            | ** ** | **Drydock** | ** ** | **Costs**               | ** ** | **Offhire** | ** ** | **Drydock** | ** ** |
| ** **            | ** ** | ** **  | ** ** | **(in thousands)** | ** ** | ** **  | ** ** | ** **  | ** ** |
| Charleston  (1)       |       | 2003        |       | $                       | 1,500      |        | 65         |        | 3Q 2006    |   |   |
| Chemical  Pioneer (2) |       | 2003        |       | $                       | 12,448     |        | 122        |        | 2Q 2006    |   |   |
| Sea Venture  (3)      |       | 2006        |       | $                       | 8,900      | (4)         | 135        | (4)         | 2008       |   |   |

 

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(1)                                  Drydocked in Singapore.

(2)                                  Extensive drydock to bring the ship to ouroperational standards following acquisition. This drydocking substantiallyimproved the operating quality of the ship by, among other things, coating allballast and void tanks, completely overhauling and upgrading the mainpropulsion plant, and recoating all deck structures. Also during thisdrydocking, we conducted extensive work to successfully bring the vessel to CAPII quality.

(3)                                  Extensive drydocking is ongoing to bring theship to our operational standards following acquisition. This drydocking willsubstantially improve the operating quality of the ship by, among other things,coating most of the ballast and cargo tanks, completing special survey andother structural and mechanical repairs necessary to obtain an ABS CAP IIrating.

(4)                                  Estimated.

 

***Articulated Tug Barge Unit***

 

ATBs, similar to ITBs, consist of a tugboat (whichprovides propulsion) and a cargo carrying barge using a coupling system thatconnects the two vessels. Unlike the rigid connection found on ITBs, an ATBuses a hinged connection. The ATB’s configuration offers crewing costadvantages similar to those of an ITB. In addition, ATBs offer the additionaladvantage of substitutability, because the barge and tug may be decoupled. Thisoffers operational and commercial flexibility, allowing the barge unit to betowed by a third party tug in certain situations.

 

In August 2004, we entered into a contract withSouthern New England Shipyard Company (“SENESCO”) to build a 19,999 dwtarticulated tug barge (“ATB”) for us at a price of $45.4 million to bedelivered in early 2006. In November 2005, SENESCO indicated that they were notable to complete the first ATB on the contract terms due to infrastructure problemsand production line issues, and that the completion of the barge would bedelayed. In November 2005, we entered into a revised agreement with SENESCOproviding for completion of the ATB at another facility which SENESCO willoperate. The total cost of completion of the ATB pursuant to the revisedagreement is currently expected to be approximately $53.4 million with aprojected

 

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contracted delivery date of December 2006.  SENESCO has indicated that it is experiencingcost overruns and further delays in completing the ATB. The revised agreementprovides for substantial penalties for late delivery of the ATB. 

 

On February 16, 2006, we entered into a contractwith Manitowoc Marine Group (“MMG”) for the construction of two barges, whichare specified to have a carrying capacity of approximately 160,000 barrels at98% of capacity. The contract with MMG includes options to construct twoadditional barges.  On the same date, weentered into a contract for the construction of two tugs with EasternShipbuilding Group, Inc. (“Eastern”), which will be joined with the barges tocomplete the two ATB units. The contract with Eastern also includes options toconstruct and deliver up to four additional ATB tugs on the basis that eachsuch option shall cover an order for two tugs. The total construction price for the two ATBs is anticipated to beapproximately $130 million, or $65 million per unit.  We estimate that building two additional ATBswill cost approximately $66 million each.  We intend to finance the purchase price withborrowings under our credit facility and cash from operations.  Additionally, we intend to obtain additionaldebt financing facilities, as necessary, to cover the costs of this project.

 

The following table sets forth the specificationsand highlights for our ATB currently under construction:

 
| ** **                    | ** ** | **SENESCO**                                                | ** ** | **MMG/EASTERN**                                            |
|-------------------------------|------------|------------------------------------------------------------|------------|------------------------------------------------------------|
| Deadweight capacity(1)        |       | 19,999 dwt / 140,000 bbl                                   |       | 19,999 dwt / 156,000 bbl                                   |
|                          |       |                                                       |       |                                                       |
| Service speed                 |       | 13.5 knots                                                 |       | 13.5 knots                                                 |
| Full load draft (summer)      |       | 29”0”                                            |       | 29”0”                                            |
| Hull structure                |       | Double-hull                                                |       | Double-hull                                                |
| Propulsion type               |       | Twin medium speed diesel  burning heavy fuel oil (IFO 180) |       | Twin medium speed diesel  burning heavy fuel oil (IFO 180) |
|                          |       |                                                       |       |                                                       |
| Fuel consumption (at sea)     |       | 38 tons/day                                                |       | 38 tons/day                                                |
| Number of cargo  segregations |       | 10                                                         |       | 5                                                          |
| Classification                |       | Tug: ABS A1 Ocean Service                                  |       | Tug: ABS A1 Ocean Service                                  |
|                          |       | Barge: ABS A1 Oil and  Chemcial                            |       | Barge: ABS A1 Oil and  Chemical                            |

 

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(1)                                  A vessel’s cargo capacity is less than itsdeadweight capacity as a result of the fuel it carries for its operations.

 

We have entered into contracts of affreightment totransport commodity chemical products whose specified minimum volumes willutilize 77% of our SENESCO-built ATB’s anticipated capacity through September 2007and approximately 67% of our SENESCO-built ATB’s anticipated capacitythereafter through June 2010. In addition, these contracts generallyrequire the customer to ship excess volume of the products covered by thecontract on the routes covered by the contract on our SENESCO-built ATB. As aresult, we expect these companies will account for substantially all of thenon-committed capacity of this vessel during the term of the contract.   These contracts, which commence mid-2006,will be covered during 2006 by the *SeaVenture* until the SENESCO-built ATB is completed.

 

The contracts of affreightment we have for ourSENESCO-built ATB cover products that generally do not generate qualifyingincome for federal income tax purposes. As a result, we anticipate this ATBwill be owned by our corporate subsidiary because it primarily will conductoperations that do not generate qualifying income.

 

**OurCustomers**

 

Our three largest customers in 2005, 2004 and 2003based on gross revenue were BP, Hess and Shell, which, in aggregate, accountedfor approximately 65%, 59% and 90% of our consolidated revenues for thoseperiods respectively. No other customer accounted for more than 10% of ourconsolidated revenues for those periods. See note 3 to the consolidated financial statements in Item 8 of thisreport for a breakdown of revenues among these customers.  Revenues from Hess do not include payments byHess under the Support Agreement.

 

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**PreventativeMaintenance**

 

We have a computerized preventative maintenanceprogram that tracks U.S. Coast Guard and American Bureau of Shipping inspectionschedules and establishes a system for the reporting and handling of routinemaintenance and repair.

 

Vessel captains submit monthly inspection reports,which are used to note conditions that may require maintenance or repair.Vessel superintendents are responsible for reviewing these reports, inspectingidentified discrepancies, assigning a priority classification and generatingwork orders. Work orders establish job type, assign personnel responsible forthe task and record target start and completion dates. Vessel superintendentsinspect repairs completed by the crew, supervise outside contractors as neededand conduct quarterly inspections following the same criteria as the captains.Drills and training exercises are conducted in conjunction with theseinspections, which are typically more comprehensive in scope. In addition, anoperations duty officer is available on a 24-hour basis to handle anyoperational issues. The operations duty officer is prepared to respond on scenewhenever required and is trained in technical repair issues, spill control andemergency response.

 

The American Bureau of Shipping and the U.S. CoastGuard establish drydocking schedules. Prior to sending a vessel to a shipyard,we develop comprehensive work lists to ensure all required maintenance iscompleted. Repair facilities bid on these work lists, and jobs are awardedbased on price and time to complete. Once the vessel is gas-free, a certifiedmarine chemist issues paperwork certifying that no dangerous vapors arepresent. The vessel proceeds to the shipyard where the vessel superintendentand certain crew members assist in performing the maintenance and repair work.The planned maintenance period is considered complete when all work has beentested to the satisfaction of American Bureau of Shipping or U.S. Coast Guardinspectors or both.

 

**Safety**

 

***General***

 

We are committed to operating our vessels in a mannerthat protects the safety and health of our employees, the general public andthe environment. Our primary goal is to minimize the number of safety-and health-related accidents on our vessels and our property. We arefocused on avoiding personal injuries and reducing occupational health hazards.We seek to prevent accidents that may cause damage to our personnel, equipmentor the environment such as fire, collisions, petroleum spills and groundings ofour vessels. In addition, we are committed to reduce overall emissions andwaste generation from our operations and to the safe management of associatedcargo residues and cleaning wastes.

 

Our policy is to follow all laws and regulations asrequired, and we are actively participating with government, trade organizationsand the public in creating responsible laws, regulations and standards tosafeguard the workplace, the community and the environment. Our operationsdepartment is responsible for coordinating all facets of our health, safety andtraining programs. The operations department identifies areas that may requirespecial emphasis, including new initiatives that evolve within the industry.Supervisors are responsible for carrying out and monitoring compliance for allof the safety and health policies on their vessels.

 

***Tank Barge Characteristics***

 

To protect the environment, today’s tank barge hullsare required not only to be leakproof into the body of water in which theyfloat but also to be vapor-tight to prevent the release of any fumes orvapors into the atmosphere. Our tank barges that carry clean products such asgasoline or naphtha have alarms that indicate when the tank is full (95% ofcapacity) and when it is overfull (98% of capacity). Each tank barge also has avapor recovery system that connects the cargo tanks to the shore terminal viapipe and hose to return to the plant the vapors generated while loading.

 

***Safety Management Systems***

 

We are currently certified under the standards ofthe International Safety Management, or ISM, system. The ISM standards werepromulgated by the International Maritime Organization, or IMO, several yearsago and have been adopted through treaty by many IMO member countries,including the United States. Although ISM is not required for coastal tug andbarge operations, we have determined that an integrated safety managementsystem, including the ISM standards, will promote safer operations and willprovide us with necessary operational flexibility as we continue to grow. Wehave been awarded ISO 9001 Quality Management System certification as well asISO 14001 Environmental Management System certification. These standards arepart of a series of standards established by the International Organization forStandardization. ISO 9001 is one of

 

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a series of quality management system standards, while ISO 14001 is oneof a series of standards relating to the environment and its protection.

 

**ShipManagement, Crewing and Employees**

 

We maintain an experienced and highly qualified workforce of shore-based and seagoing personnel. As of March 1, 2006, weemployed approximately 435 persons, comprised of approximately 35 shore staffand approximately 400 fleet personnel. We have a collective bargainingagreement in place with two maritime unions, the American Maritime Officersunion, which covers the 182 officers of our vessels, and the Seafarers’International Union, which covers all our other seagoing personnel, that expirein 2007. Under the terms of the collective bargaining agreements, we arerequired to make contributions to pension and other welfare programs managed bythe unions. Management believes there are no unfunded pension liabilities underany of these agreements. Our vessel employees are paid on a daily or hourly basisand typically work 60 days on and 60 days off, in the case ofofficers, and 120 days on and 60 days off, in the case of all otherseagoing personnel. Our shore-based personnel are generally salaried andare primarily located at our headquarters in Edison, New Jersey.

 

Our shore staff provides support for all aspects ofour fleet and business operations, including sales and scheduling, crewing andhuman resources functions, compliance and technical management, financial andinsurance services.

 

**Classification,Inspection and Certification**

 

In accordance with standard industry practice, allof our coastwise vessels have been certified as being “in class” by theAmerican Bureau of Shipping. The American Bureau of Shipping is one of severalinternationally recognized classification societies that inspect vessels atregularly scheduled intervals to ensure compliance with American Bureau ofShipping classification rules and some applicable federal safety regulations.Most insurance underwriters require an “in class” certification by aclassification society before they will extend coverage to any vessel. Theclassification society certifies that the pertinent vessel has been built andmaintained in accordance with the rules of the society and complies with applicablerules and regulations of the country of registry of such vessel and theinternational conventions of which that country is a member. Inspections of ourITBs are conducted by a surveyor of the classification society in three surveysof varying frequency and thoroughness: annual surveys each year, anintermediate survey every two to three years, which is generally conductedthrough an underwater survey, and a special survey every five years. As part ofan intermediate survey, our vessels may be required to be drydocked every 24 to30 months for inspection of the underwater parts of such vessel and forany necessary repair work related to such inspection. Inspections of our parceltankers are conducted by a surveyor of the classification society annually aswell as when the vessel is drydocked, which must occur twice every five years.

 

Our vessels are inspected at periodic intervals bythe U.S. Coast Guard to ensure compliance with applicable safety regulationsissued by the U.S. Coast Guard. All of our tank vessels carry Certificates ofInspection issued by the U.S. Coast Guard.

 

Our vessels are also inspected and auditedperiodically by our customers, in some cases as a precondition to charteringour vessels. We maintain all necessary approvals required for our vessels tooperate in their normal trades. We believe that the high quality of ourvessels, our crews and our shoreside staff are advantages when competingagainst other vessel operators for long-term business.

 

**InsuranceProgram**

 

We believe that we have arranged for adequateinsurance coverage to protect against the accident-related risks involvedin the conduct of our business and risks of liability for environmental damageand pollution, consistent with industry practice. We cannot assure you, however,that all risks are adequately insured against, that any particular claims willbe paid or that we will be able to procure adequate insurance coverage atcommercially reasonable rates in the future.

 

Our hull and machinery insurance covers risks of actualor constructive loss from collision, fire, grounding, engine breakdown andother casualties up to an agreed value per vessel. Our war-risks insurancecovers risks of confiscation, seizure, capture, vandalism, sabotage and otherwar-related risks. While some tank vessel owners and operators obtainloss-of-hire insurance covering the loss of revenue during extended tank vesseloff-hire periods, we, along with several other tank vessel operators, do nothave this type of coverage. We believe that, given our diversified marinetransportation operations and high utilization rate, this type of coverage isnot economical and is of limited value to us. However, we evaluate the need forsuch coverage on an ongoing basis taking into account insurance market conditionsand the employment of our vessels.

 

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Our protection and indemnity insurance covers third-partyliabilities and other related expenses from, among other things, injury ordeath of crew, passengers and other third parties, claims arising fromcollisions, damage to cargo, damage to third-party property, asbestosexposure and pollution arising from oil or other substances. Our currentprotection and indemnity insurance coverage for pollution is $1 billion perincident and is provided by United Kingdom P&I Club, which is a member ofthe International Group of protection and indemnity mutual assuranceassociations. The 17 protection and indemnity associations that comprisethe International Group insure approximately 90% of the world’s commercialtonnage and have entered into a pooling agreement to reinsure eachassociation’s liabilities. Each protection and indemnity association has cappedits exposure to this pooling agreement at approximately $4.3 billion pernon-pollution incident. As a member of UK P&I Club, we are subject tocalls payable to the associations based on our claims records, as well as theclaim records of all other members of the individual associations and membersof UK P&I Club.

 

We are not currently the subject of any claimsalleging exposure to contaminants, although such claims may be brought in thefuture. In connection with our purchase of the six ITBs from Hess, we and Hessagreed that we would share liability for any claims by employees for exposureto contaminants including, without limitation, polychlorinated biphenyls,asbestos and radioactive substances, or working conditions on the vessels,based on the number of days such employee worked for Hess compared to thenumber of days such employee worked for us. If, notwithstanding the foregoing,we had to pay claims solely out of our own funds, it could have a materialadverse effect on our financial condition. Furthermore, any claims covered byinsurance would be subject to deductibles, and since it is possible that alarge number of claims could be brought, the aggregate amount of thesedeductibles could be material.

 

We may not be able to obtain insurance coverage inthe future to cover all risks inherent in our business, and insurance, ifavailable, may be at rates that we do not consider commercially reasonable. Inaddition, as more single-hull vessels are retired from active service, insurersmay be less willing to insure and customers less willing to hire single-hullvessels.

 

**Competition**

 

The Jones Act restricts U.S. point-to-point maritimeshipping to vessels operating under the U.S. flag, built in the United States,at least 75% owned and operated by U.S. citizens and manned by U.S. crews. Inour market areas, our primary direct competitors are the operators of U.S. flagocean-going tank vessels and U.S. flag parcel tankers, including thecaptive fleets of major oil and chemical companies. The domestic tank vesselindustry is highly competitive.

 

In the spot charter markets, our vessels competewith all other vessels of a size and type required by a charterer that can beavailable at the date specified. In the longer-term charter market, competitionis based primarily on price and availability, although we believe charterershave become more selective with respect to the quality of vessels they hire,with particular emphasis on factors such as age, double-hulls or double-bottomsand the reliability and quality of operations. We believe major oil andchemical companies are increasingly demonstrating a preference for modernvessels based on concerns about the environmental risks associated with oldervessels. Consequently, we believe that owners of large relatively modern fleetssuch as ours have been able to gain a competitive advantage over owners ofolder fleets.

 

U.S. flag tank vessels also compete with petroleumproduct pipelines and are affected by the level of imports on foreign flagproducts carriers. Because the existing U.S. pipeline network offers a low costmethod of transporting oil and refined petroleum products, it is capacityconstrained in many markets. We believe that high capital costs, tariffregulation and environmental considerations make it unlikely that a new refinedproduct pipeline system will be built in our market areas in the near future.It is possible, however, that new pipeline segments, including pipelinesegments that connect with existing pipeline systems, could be built or thatexisting pipelines could be expanded or converted to carry refined petroleumproducts. Either of these occurrences could have an adverse effect on ourability to compete in particular locations.

 

A substantial majority of all long-haul shipments ofchemicals in the United States are currently by rail.  We believe that the cost to ship by rail issignificantly higher than shipping by tanker, even when inventory and logisticscosts are factored in.  We believe thatthis lower cost and the availability of vessels with many tank segregationsthat allow smaller quantities of product to be carried will increase the demandfor tanker transportation of chemicals.

 

**Regulation**

 

Our operations are subject to significant federal,state and local regulation, the principal provisions of which are describedbelow.

 

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***Environmental***

 

*General.* Government regulation significantly affects the ownership and operationof our tank vessels. Our tank vessels are subject to international conventions,federal, state and local laws and regulations relating to safety and health andenvironmental protection, including the generation, storage, handling,emission, transportation and discharge of hazardous and non-hazardousmaterials. Although we believe that we are in substantial compliance withapplicable environmental laws and regulations, we cannot predict the ultimatecost of complying with these requirements, or the impact of these requirementson the resale value or useful lives of our tank vessels. The recent trend inenvironmental legislation is toward more stringent requirements, and this trendwill likely continue. In addition, a future serious marine incident occurringin U.S. waters or internationally that results in significant oil pollution orcauses significant environmental impact could result in additional legislationor regulation that could adversely affect our ability to pay cashdistributions.

 

Various governmental and quasi-governmentalagencies require us to obtain permits, licenses and certificates for theoperation of our tank vessels. While we believe that we are in substantialcompliance with applicable environmental laws and regulations and have allpermits, licenses and certificates necessary for the conduct of our operations,frequently changing and increasingly stricter requirements, futurenon-compliance or failure to maintain necessary permits or approvals couldrequire us to incur substantial costs or temporarily suspend operation of oneor more of our tank vessels.

 

We maintain operating standards for all our tankvessels that emphasize operational safety, quality maintenance, continuoustraining of our crews and officers, care for the environment and compliancewith U.S. regulations. Our tank vessels are subject to both scheduled andunscheduled inspections by a variety of governmental and private entities, eachof which may have unique requirements. These entities include the local portauthorities (U.S. Coast Guard or other port state control authorities),classification societies, flag state administration and charterers, particularlyterminal operators and oil companies.

 

We manage our exposure to losses from potentialdischarges of pollutants through the use of well maintained, well managed andwell equipped vessels and safety and environmental programs, including amaritime compliance program and our insurance program. Moreover, we believe wewill be able to accommodate reasonably foreseeable environmental regulatorychanges. However, the risks of substantial costs, liabilities and penalties areinherent in marine operations, including potential criminal prosecution andcivil penalties for negligent or intentional discharge of pollutants. As aresult, there can be no assurance that any new regulations or requirements orany discharge of pollutants by us will not have a material adverse effect onus.

 

*The Oil Pollution Act of1990.*  The Oil Pollution Act of 1990, or OPA 90,established an extensive regulatory and liability regime for the protection ofthe environment from oil spills. OPA 90 affects all vessels trading in U.S.waters, including the exclusive economic zone extending 200 miles seaward. OPA90 sets forth various technical and operating requirements for tank vesselsoperating in U.S. waters. In general, all newly-built or convertedtankers carrying crude oil and petroleum-based products in U.S. watersmust be built with double-hulls. Existing single-hull, double-sidedand double-bottomed tank vessels are to be phased out of service between1995 and 2015 based on their tonnage and age. Under the phase-out schedule, twoof our six ITBs will be precluded from transporting petroleum and petroleum-basedproducts in the United States by May and June 2012, an additional two ITBs andthe *Chemical Pioneer* and the *Charleston* must be phased out oftransporting petroleum and petroleum-based products by each of February,March, September and October 2013 and the remaining two ITBs must bephased out of service by June and August 2014. In order to bring our ITBs intocompliance with OPA 90, at a minimum we will be required to retrofit eachITB with double sides. The *Sea Venture*isscheduled to be phased out of petroleum service in September 2013, but mayremain in the chemical trade beyond 2013. Although the *Charleston* is not OPA 90 compliant, webelieve we will be able to obtain a waiver allowing us to carry refinedpetroleum products in the vessel’s center tanks and non-petroleum-basedproducts in the other tanks. Although the *ChemicalPioneer* is double-hulled, it is not OPA 90 compliant; however,we believe that a minor modification, that must be made by its mandatoryphase-out date in 2013, will bring the *ChemicalPioneer* into compliance with OPA 90. The *Houston* is adouble-hulled vessel and therefore does not have a phase-out date.

 

Under OPA 90, owners or operators of tank vesselsoperating in U.S. waters must file vessel spill response plans with the U.S.Coast Guard and operate in compliance with the plans. These vessel responseplans must, among other things:

 

•                  address a “worst case” scenario and identifyand ensure, through contract or other approved means, the availability ofnecessary private response resources;

 

•                  describe crew training and drills; and

 

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•                  identify a qualified individual with specificauthority and responsibility to implement removal actions in the event of anoil spill.

 

Our vessel response plans have been accepted by theU.S. Coast Guard, and all of our vessel crew members and spill management teampersonnel have been trained to comply with these guidelines. In addition, weconduct regular oil-spill response drills in accordance with the guidelines setout in OPA 90. We believe that all of our tank vessels are in substantialcompliance with OPA 90.

 

*Environmental Spill andRelease Liability.*  OPA 90 and various state laws substantiallyincreased over historic levels the statutory liability of owners and operatorsof vessels for the discharge or substantial threat of a discharge of oil andthe resulting damages, both regarding the limits of liability and the scope of damages.OPA 90 imposes joint and several strict liability on responsible parties,including owners, operators and bareboat charterers, for all oil spill andcontainment and clean-up costs and other damages arising from spillsattributable to their vessels. A complete defense is available only when theresponsible party establishes that it exercised due care and took precautionsagainst foreseeable acts or omissions of third parties and when the spill iscaused solely by an act of God, act of war (including civil war andinsurrection) or a third party other than an employee or agent or party in acontractual relationship with the responsible party. These limited defenses maybe lost if the responsible party fails to report the incident or reasonablycooperate with the appropriate authorities or refuses to comply with an orderconcerning clean-up activities. Even if the spill is caused solely by a thirdparty, the owner or operator must pay removal costs and damage claims and thenseek reimbursement from the third party or the trust fund established under OPA90. Finally, in certain circumstances involving oil spills from tank vessels,OPA 90 and other environmental laws may impose criminal liability on personneland/or the corporate entity.

 

OPA 90 limits the liability of each responsibleparty for a tank vessel to the greater of $1,200 per gross registered ton or$10 million per discharge. This limit does not apply where, among otherthings, the spill is caused by gross negligence or willful misconduct of, or aviolation of an applicable federal safety, construction or operating regulationby, a responsible party or its agent or employee or any person acting in acontractual relationship with a responsible party.

 

In addition to removal costs, OPA 90 provides forrecovery of damages, including:

 

•                  natural resource damages and relatedassessment costs;

 

•                  real and personal property damages;

 

•                  net loss of taxes, royalties, rents, fees andother lost revenues;

 

•                  net costs of public services necessitated bya spill response, such as protection from fire, safety or health hazards;

 

•                  loss of profits or impairment of earningcapacity due to the injury, destruction or loss of real property, personalproperty and natural resources; and

 

•                  loss of subsistence use of natural resources.

 

OPA 90 expanded the pre-existing financialresponsibility requirements for tank vessels operating in U.S. waters andrequires owners and operators of tank vessels to establish and maintain withthe U.S. Coast Guard evidence of their financial responsibility sufficient tomeet their potential liabilities imposed by OPA 90. Under the regulations, wemay provide evidence of insurance, a surety bond, a guarantee, letter ofcredit, qualification as a self-insurer or other evidence of financial responsibility.We have provided evidence of insurance under the regulations and have receivedcertificates of financial responsibility from the U.S. Coast Guard for all ofour tank vessels subject to this requirement.

 

OPA 90 expressly provides that individual states areentitled to enforce their own pollution liability laws, even if inconsistentwith or imposing greater liability than OPA 90. There is no uniform liabilityscheme among the states. Some states have OPA 90-like schemes for limitingliability to various amounts, some rely on common law fault-basedremedies and others impose strict and/or unlimited liability on an owner oroperator. Virtually all coastal states have enacted their own pollutionprevention, liability and response laws, whether statutory or through courtdecisions, with many providing for some form of unlimited liability. We believethat the liability provisions of OPA 90 and similar state laws have greatlyexpanded potential liability in the event of an oil spill, even where we arenot at fault. Some states have also established their own requirements forfinancial responsibility. However, in March 2000, the U.S. Supreme Courtdecided *United States v. Locke*.In that case, INTERTANKO challenged tank vessel regulations enacted by the Stateof Washington. The Court struck down several

 

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regulations and remanded the case for review of additional regulations.The Court held that the regulation of maritime commerce is generally a federalresponsibility because of the need for national and international uniformity,although it noted that states may regulate their own ports and waterways solong as the rules are based on the peculiarities of local waters and do notconflict with federal regulation. As a result of this ruling, at least twostates have repealed regulations concerning the operation, manning,construction or design of tank vessels.

 

Parties affected by oil pollution may pursue relieffrom the Oil Spill Liability Trust Fund, absent full recovery by them against aresponsible party.  Responsible partiesmay seek contribution from the fund for costs incurred that exceeded theliability limits of OPA 90. The responsible party would need to establish thatit is entitled to both a statutory defense against liability and to a statutorylimitation of liability to obtain contribution from the fund. If we are deemeda responsible party for an oil pollution incident and are ineligible forcontribution from the fund, the costs of responding to an oil pollutionincident could have a material adverse effect on our results of operations,financial condition and cash flows. We presently maintain oil pollutionliability insurance in an amount in excess of that required by OPA 90. Throughour protection and indemnity club, the UK P&I Club, our current coveragefor oil pollution is $1 billion per incident. It is possible, however,that our liability for an oil pollution incident may exceed the insurancecoverage we maintain.

 

We are also subject to potential liability arisingunder the U.S. Comprehensive Environmental Response, Compensation and LiabilityAct, or CERCLA, which applies to the discharge of hazardous substances, whetheron land or at sea. Specifically, CERCLA provides for liability of owners andoperators of tank vessels for cleanup and removal of hazardous substances andprovides for additional penalties in connection with environmental damage.Liability under CERCLA for releases of hazardous substances from vessels islimited to the greater of $300 per gross ton or $5 million per incidentunless attributable to willful misconduct or neglect, a violation of applicablestandards or rules, or upon failure to provide reasonable cooperation andassistance. CERCLA liability for releases from facilities other than vessels isgenerally unlimited.

 

We are required to show proof of insurance, suretybond, self insurance or other evidence of financial responsibility to paydamages under OPA 90 and CERCLA in the amount of $1,500 per gross ton forvessels, consisting of the sum of the OPA 90 liability limit of $1,200 pergross ton or $10 million per discharge and the CERCLA liability limit of$300 per gross ton or $5 million per discharge. We have satisfied theserequirements and obtained a U.S. Coast Guard Certificate of FinancialResponsibility. OPA 90 and CERCLA each preserve the right to recover damagesunder other existing laws, including maritime tort law.

 

*Water.*  TheFederal Water Pollution Control Act, also referred to as the Clean Water Act,or CWA, imposes restrictions and strict controls on the discharge of pollutantsinto navigable waters, and such discharges generally require permits. The CWAprovides for civil, criminal and administrative penalties for any unauthorizeddischarges and imposes substantial liability for the costs of removal,remediation and damages. State laws for the control of water pollution alsoprovide varying civil, criminal and administrative penalties and liabilities inthe case of a discharge of petroleum, its derivatives, hazardous substances,wastes and pollutants into state waters. In addition, the Coastal ZoneManagement Act authorizes state implementation and development of programs ofmanagement measures for non-point source pollution to restore and protectcoastal waters.

* *

*Solid Waste.*  Ouroperations occasionally generate and require the transportation, treatment anddisposal of both hazardous and non-hazardous solid wastes that are subject tothe requirements of the federal Resource Conservation and Recovery Act, orRCRA, and comparable state and local requirements. In August 1998, the EPAadded four petroleum refining wastes to the list of RCRA hazardous wastes. Inaddition, in the course of our tank vessel operations, we engage contractors toremove and dispose of waste material, including tank residue. In the event thatsuch waste is found to be “hazardous” under either RCRA or the CWA, and isdisposed of in violation of applicable law, we could be found jointly andseverally liable for the cleanup costs and any resulting damages. Finally, theEPA does not currently classify “used oil” as “hazardous waste,” providedcertain recycling standards are met. However, some states in which we pick upor deliver cargo have classified “used oil” as “hazardous” under state lawspatterned after RCRA. The cost of managing wastes generated by tank vesseloperations has increased in recent years under stricter state and federalstandards. Additionally, from time to time we arrange for the disposal ofhazardous waste or hazardous substances at offsite disposal facilities. If suchmaterials are improperly disposed of by third parties, we might still be liablefor clean up costs under CERCLA or the equivalent state laws.

 

*Air Emissions.*  Thefederal Clean Air Act of 1970, as amended by the Clean Air Act Amendments of1977 and 1990, or CAA, requires the EPA to promulgate standards applicable toemissions of volatile organic compounds and other air contaminants. Our vesselsare subject to vapor control and recovery requirements for certain cargoes whenloading, unloading, ballasting, cleaning and conducting other operations inregulated port areas. Our ITBs are equipped with vapor control systems thatsatisfy these requirements. In addition, in December 1999, the EPA issueda final rule regarding emissions standards for

 

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marine diesel engines. The final rule applies emissions standards tonew engines beginning with the 2004 model year. In the preamble to the finalrule, the EPA noted that it may revisit the application of emissions standardsto rebuilt or remanufactured engines, if the industry does not take steps tointroduce new pollution control technologies. Finally, the EPA has entered intoa settlement that will expand this rulemaking to include certain large dieselengines not previously addressed in the final rule. Adoption of such standardscould require modifications to some existing marine diesel engines and mayresult in material expenditures, however, we do not believe at this time thatany of our vessels will be affected by this rulemaking.

 

The CAA also requires states to draft StateImplementation Plans, or SIPs, designed to attain national health-basedair quality standards in primarily major metropolitan and/or industrial areas.Where states fail to present approvable SIPs or SIP revisions by certainstatutory deadlines, the federal government is required to draft a FederalImplementation Plan. Several SIPs regulate emissions resulting from bargeloading and degassing operations by requiring the installation of vapor controlequipment. As stated above, our ITBs are already equipped with vapor controlsystems that satisfy these requirements. Although a risk exists that newregulations could require significant capital expenditures and otherwiseincrease our costs, we believe, based upon the regulations that have beenproposed to date, that no material capital expenditures beyond those currentlycontemplated and no material increase in costs are likely to be required.

 

***Coastwise Laws***

 

Substantially all of our operations are conducted inthe U.S. domestic trade, which is governed by the coastwise laws of the UnitedStates. The U.S. coastwise laws reserve marine transportation between points inthe United States to vessels built in and documented under the laws of theUnited States (U.S. flag) and owned and manned by U.S. citizens. Generally, anentity is deemed a U.S. citizen for these purposes so long as:

 

•                  it is organized under the laws of the UnitedStates or of a state;

 

•                  its chief executive officer, by whatevertitle, its chairman of its board of directors and all persons authorized to actin the absence or disability of such persons are a U.S. citizen;

 

•                  no more than a minority of the number of itsdirectors (or equivalent persons) necessary to constitute a quorum are non-U.S.citizens;

 

•                  at least 75% of the stock or equity interestand voting power in the corporation is beneficially owned by U.S. citizens freeof any trust, fiduciary arrangement or other agreement, arrangement orunderstanding whereby voting power may be exercised directly or indirectly bynon-U.S. citizens; and

 

•                  in the case of a limited partnership, thegeneral partner meets U.S. citizenship requirements for U.S. coastwise trade.

 

Because we could lose our privilege of operating ourvessels in the U.S. coastwise trade if non-U.S. citizens were to own or controlin excess of 25% of our outstanding interests or those of our general partner,our limited partnership agreement initially restricts foreign ownership andcontrol of our common and subordinated units, and those of our general partner,to not more than 15% of the respective interests.

 

There have been repeated efforts aimed at repeal orsignificant change of the Jones Act. Although we believe it is unlikely thatthe Jones Act will be substantially modified or repealed, there can be noassurance that Congress will not substantially modify or repeal such laws. Suchchanges could have a material adverse effect on our operations and financialcondition.

 

As a result of the Hurricanes Katrina and Rita, ashort-term waiver, which expired on October 24, 2005, was granted by the Departmentof Homeland Security, lifting the Jones Act restriction on foreign-flagcarriers, allowing these carriers to replace transporting needs arising fromout-of-service pipelines.  Operationally,we were not materially impacted by this waiver as all of our available ITBswere covered by either long-term time charters or contracts of affreightment.  As a result of the hurricanes, our chemicalvessels experienced slight erosion of time charter equivalent rates due toweather delays and the drydocking of the *Jacksonville*was delayed due to labor shortages.

 

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***Other***

 

Our vessels are subject to the jurisdiction of theU.S. Coast Guard, the National Transportation Safety Board, the U.S. CustomsService and the U.S. Maritime Administration, as well as subject to rules ofprivate industry organizations such as the American Bureau of Shipping. Theseagencies and organizations establish safety standards and are authorized toinvestigate vessels and accidents and to recommend improved maritime safetystandards. Moreover, to ensure compliance with applicable safety regulations,the U.S. Coast Guard is authorized to inspect vessels at will.

 

***Occupational Health Regulations***

 

Our vessel operations are subject to occupationalsafety and health regulations issued by the U.S. Coast Guard and, to an extent,by the U.S. Occupational Safety and Health Administration. These regulationscurrently require us to perform monitoring, medical testing and recordkeepingwith respect to personnel engaged in the handling of the various cargoestransported by our vessels.

 

***Security***

 

Heightened awareness of security needs brought aboutby the events of September 11, 2001 has caused the U.S. Coast Guard, theInternational Maritime Organization, and the states and local ports to adoptheightened security procedures relating to ports and vessels. We have updatedour procedures in light of the new requirements.

 

In 2002, Congress passed the Maritime TransportationSecurity Act of 2002, or MTS Act, which, together with the InternationalMaritime Organization’s recent security proposals (collectively known as TheInternational Ship and Port Security Code), requires specific security plansfor our vessels and more rigorous crew identification requirements. We haveimplemented vessel security plans and procedures for each of our vesselspursuant to rules implementing the MTS Act that have been issued by the U.S.Coast Guard.

 

***Vessel Condition***

 

Our vessels are subject to periodic inspection andsurvey by, and drydocking and maintenance requirements of, the U.S. CoastGuard, the American Bureau of Shipping, or both. We believe we are currently incompliance in all material respects with the environmental and other laws andregulations, including health and safety requirements, to which our operationsare subject. We are unaware of any pending or threatened litigation or otherjudicial, administrative or arbitration proceedings against us occasioned byany alleged non-compliance with such laws or regulations. The risks ofsubstantial costs, liabilities and penalties are, however, inherent in marineoperations, and there can be no assurance that significant costs, liabilitiesor penalties will not be incurred by or imposed on us in the future.

 

**ITEM1A.  RISK FACTORS**

 

*In addition to the otherinformation set forth elsewhere in this report, you should carefully considerthe following factors when evaluating U.S. Shipping Partners L.P.:*

 

**RisksInherent in Our Business**

 

***We may not have sufficient available cashto enable us to pay the minimum quarterly distribution following establishmentof cash reserves and payment of fees and expenses, including payments to ourgeneral partner.***

 

We may not have sufficientavailable cash each quarter to pay the minimum quarterly distribution. Theamount of cash we can distribute on our common units principally depends uponthe amount of cash we generate from our operations, which will fluctuate fromquarter to quarter based on, among other things:

 

•                  the level of consumption of refinedpetroleum, petrochemical and chemical products in the markets in which weoperate;

 

•                  the prices we obtain for our services;

 

•                  the level of our operating costs, includingpayments to our general partner;

 

•                  the level of unscheduled off-hire days andthe timing of, and number of days required for, scheduled drydockings of ourvessels; and

 

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•                  prevailing economic conditions.

 

In addition, the actualamount of cash we will have available for distribution will depend on otherfactors such as:

 

•                  the level of capital expenditures we make,including for acquisitions, drydockings for repairs, retrofitting of vessels tocomply with OPA 90, newbuildings, and compliance with new regulations;

 

•                  the restrictions contained in our debtinstruments and our debt service requirements;

 

•                  fluctuations in our working capital needs;

 

•                  our ability to make working capital or otherborrowings; and

 

•                  the amount of reserves established by ourgeneral partner.

 

For 2006, weincreased our maintenance capital expenditure reserve from $17.2 million to$19.6 million, which will reduce our cash available for distribution by $2.4million in 2006 compared to 2005.

 

***The amount of cash we have available fordistribution to unitholders depends primarily on our cash flow and not solelyon profitability.***

 

The amount of cash we haveavailable for distribution depends primarily on our cash flow, including cashreserves, payments received under the Hess support agreement and workingcapital or other borrowings, and not solely on profitability, which will beaffected by non-cash items. As a result, we may make cash distributions duringperiods when we record losses and may not make cash distributions duringperiods when we record net income.  Ournet income per unit for each of 2005, 2004 and 2003 was less than the minimumannual distribution of $1.80 per unit.

 

The amount of available cash we need to pay theminimum quarterly distribution for four quarters on the common units, thesubordinated units and the general partner interest outstanding isapproximately $25.3 million.

 

***Our business would be adversely affected ifwe failed to comply with the Jones Act provisions on coastwise trade, or ifthose provisions were modified or repealed.***

 

We are subject to the Jones Act and other federallaws that restrict maritime transportation between points in the United Statesto vessels operating under the U.S. flag, built in the United States, at least75% owned and operated by U.S. citizens and manned by U.S. crews. Compliancewith the Jones Act increases our operating costs. We are responsible formonitoring the ownership of our common units and other partnership interests toensure our compliance with the Jones Act. If we do not comply with theserestrictions, we would be prohibited from operating our vessels in U.S.coastwise trade, and under certain circumstances we would be deemed to haveundertaken an unapproved foreign transfer, resulting in severe penalties,including permanent loss of U.S. coastwise trading rights for our vessels,fines or forfeiture of the vessels. In addition, if any of our ITBs ceases tobe qualified under the Jones Act, Hess will no longer be required to makesupport payments in respect of that vessel under the Hess support agreement.

 

During the past several years, interest groups havelobbied Congress to modify or repeal the Jones Act to facilitate foreign flagcompetition for trades and cargoes currently reserved for U.S. flag vesselsunder the Jones Act and cargo preference laws. Foreign vessels generally havelower construction costs and generally operate at significantly lower coststhan we do in the U.S. markets, which would likely result in reduced charterrates. We believe that continued efforts will be made to modify or repeal theJones Act and cargo preference laws currently benefiting U.S. flag vessels. Ifthese efforts are successful, it could result in significantly increasedcompetition and have a material adverse effect on our business, results ofoperations and financial condition and our ability to make cash distributions.As a result of hurricanes Katrina and Rita, a short-term waiver, which expiredon October 24, 2005, was granted by the U.S. Department of Homeland Security,lifting the Jones Act restriction on foreign-flag carriers, allowing thesecarriers to replace transporting needs arising from out of service pipelines.We cannot assure that future waivers will not be granted.

 

***Because we must make substantialexpenditures to comply with mandatory drydocking requirements for our fleet,and because these expenditures may be higher than we currently anticipate, wemay not have sufficient available cash to pay the minimum quarterlydistribution in full.***

 

Both domestic (U.S. Coast Guard) and international(International Maritime Organization) regulatory bodies require that our ITBsbe drydocked for inspection and maintenance every five years and that weconduct a mid-period underwater survey in lieu of drydocking, and that ourparcel tankers and the *Houston*bedrydocked twice every five years. In addition, vessels may have to be drydockedin the event of accidents or other unforeseen damage.

 

Two of our six ITBs were drydocked in 2005, anadditional two will be drydocked in 2006 and the remaining two in 2007. Weestimate that drydocking these vessels will cost approximately$6.0 million per vessel.  The *Houston* was drydocked

 

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in 2005 at a cost of $3.1 million and the *Sea Venture* was placed in drydock in January 2006 at anestimated cost of $8.9 million and will both be required to be drydocked againin 2008.  In addition, our parcel tankersare required to be drydocked in both 2006 and 2008. We estimate drydocking ofthe parcel tankers will cost approximately $3.0 million to$5.0 million per vessel. When drydocked, each of our ITBs will be out ofservice for approximately 50 to 60 days and each of our parcel tankerswill be out of service for approximately 35 to 50 days. At the time wedrydock these vessels, the actual cost of drydocking may be higher due toinflation and other factors. In addition, vessels in drydock will not generateany income, which will reduce our revenue and cash available for distribution.

 

Because the required drydocks for the *Sea Venture* in 2011 and the ITBs in 2010 (*Jacksonville* and *New York*), 2011 (*Groton* and *Mobile*) and 2012 (*Baltimore*and *Philadelphia*) occur near theirrespective mandatory phase-out dates under OPA 90, it may not be economical forus to perform the drydocks on one or more of those vessels if we determine notto retrofit such vessel to make it OPA 90 compliant. In such event, if thevessel taken out of service is not replaced, it could have a material adverseeffect on our business, results of operations and financial condition and ourability to make cash distributions.

 

***The cost of bringing our fleet intocompliance with OPA 90 will be significant; this may cause us to reduce theamount of our cash distributions or prevent us from raising the amount of ourcash distributions.***

 

Under OPA 90, we will be required to phase-out theuse of our vessels carrying petroleum-based products beginning in 2012unless we retrofit these vessels. The phase-out dates for these vessels are: *Groton* and *Jacksonville* (2012), *Baltimore,Charleston, Chemical Pioneer, Sea Venture* and *New York* (2013) and *Mobile* and *Philadelphia* (2014). As a result of these requirements,these vessels will be prohibited from transporting crude oil and petroleum-basedproducts in U.S. waters after these dates unless they are retrofitted to complywith OPA 90.

 

In order to bring our ITBs into compliance with OPA90, at a minimum we will be required to retrofit each ITB with double-sides.We estimate that the current cost to retrofit each ITB with double-sidesis approximately $25 million per vessel; however at the time we make theseexpenditures, the actual cost could be higher due to inflation and otherfactors. Several of our customers have indicated that they are currently notinterested in chartering retrofitted ITBs. The cost of retrofitting the ITBs compared to the cost of newbuildings,market conditions, charter rates, customer acceptance and the availability andcost of financing will be major factors in determining the OPA 90 complianceplan that we ultimately implement. Depending on the cost of the plan that weultimately adopt to comply with OPA 90 phase-out requirements, the board ofdirectors of our general partner, with approval by the conflicts committee, mayelect to increase our estimated maintenance capital expenditures, which wouldreduce our basic surplus and our cash available for distribution. In addition,if charter rates decline, it may not be economical for us to retrofit one ormore ITBs, in which event we would have to take them out of service, whichwould have a material adverse effect on our business, results of operations andfinancial condition and our ability to make cash distributions.  We may fund our OPA 90 compliance plan,particularly newbuildings, through off-balance sheet financing.  We may be required to make deposits toreserve shipyard berths in connection with our OPA 90 compliance plan, some orall of which may be non-refundable if we do not continue with our initial plan.

 

Furthermore, even if we are successful in fundingthe OPA 90 compliance costs for our fleet, the obligation to incur and fundsuch costs may make it difficult for us to increase our cash distributions perunit for the foreseeable future. Such an impact could adversely affect thetrading price of our common units.

 

Although the *ChemicalPioneer* is double-hulled, it is not OPA 90 compliant; however,we believe that a minor modification that must be made by 2013 will bring the *Chemical Pioneer* into compliance with OPA90. Although the *Charleston* isalso not OPA 90 compliant, our intent is to seek a waiver allowing us to carryrefined petroleum products in the vessel’s center tanks and non-petroleum-basedproducts in the other tanks rather than retrofit the vessel. If the waiver isnot obtained, or under certain circumstances even if the waiver is obtained, wemay not be able to transport a sufficient quantity of products that generatequalifying income, in which event we would be required to place the *Charleston* in a corporate subsidiary toavoid generating too much non-qualifying income. A corporate subsidiary will besubject to corporate-level tax, which will reduce the cash available fordistribution to us and, in turn, to you. The *Sea Venture*is not OPA90 compliant and we currently intend to operate the *Sea Venture* in the chemical trade beyond its OPA 90 phaseout date in September 2013.

 

***The amount of estimated maintenance capitalexpenditures our general partner is required to deduct from basic surplus eachquarter is based on our current estimates and could increase in the future.***

 

Our partnership agreement requires our generalpartner to deduct from basic surplus each quarter estimated maintenance capitalexpenditures as opposed to actual maintenance capital expenditures in order toreduce disparities in basic surplus caused by fluctuating maintenance capitalexpenditures, such as retrofitting or drydocking. Our annual estimatedmaintenance capital expenditures for purposes of calculating basic surplusincreased from $17.2 million in 2005 to

 

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$19.6 million in 2006. This amount is based on our currentestimates of the amounts of expenditures we will be required to make in thefuture, which we believe to be reasonable. The amount of estimated maintenancecapital expenditures deducted from basic surplus is subject to review andchange by the board of directors of our general partner at least once a year,with any change approved by the conflicts committee.

 

***Capital expenditures and other costsnecessary to operate and maintain our vessels tend to increase with the age ofthe vessel and may also increase due to changes in governmental regulations, safetyor other equipment standards.***

 

Capital expenditures and other costs necessary tooperate and maintain our vessels tend to increase with the age of the vessel.Accordingly, it is likely that the operating costs of our older vessels willincrease. In addition, changes in governmental regulations, safety or otherequipment standards, as well as compliance with standards imposed by maritimeself-regulatory organizations and customer requirements or competition, mayrequire us to make additional expenditures. For example, if the U.S. CoastGuard or the American Bureau of Shipping, an independent classification societythat inspects the hull and machinery of commercial ships to assess compliancewith minimum criteria as set by U.S. and international regulations, enacts newstandards, we may be required to make significant expenditures for alterationsor the addition of new equipment. In order to satisfy any such requirement, wemay be required to take our vessels out of service for extended periods oftime, with corresponding losses of revenues. In the future, market conditionsmay not justify these expenditures or enable us to operate our older vesselsprofitably during the remainder of their economic lives.

 

***If we are unable to fund our capitalexpenditures, we may not be able to continue to operate some of our vessels,which would have a material adverse effect on our business and our ability topay the minimum quarterly distribution.***

 

In order to fund our capital expenditures, we may berequired to incur borrowings or raise capital through the sale of debt orequity securities. Our ability to access the capital markets for futureofferings may be limited by our financial condition at the time of any suchoffering as well as by adverse market conditions resulting from, among otherthings, general economic conditions and contingencies and uncertainties thatare beyond our control. Our failure to obtain the funds for necessary futurecapital expenditures would limit our ability to continue to operate some of ourvessels and could have a material adverse effect on our business, results ofoperations and financial condition and our ability to make cash distributions.Even if we are successful in obtaining such funds, however, the terms of suchfinancings could limit our ability to pay cash distributions to unitholders.

 

***A decline in demand for refined petroleum,petrochemical and commodity chemical products, particularly in the coastalregions of the United States, or a decrease in the cost of importing refinedpetroleum products, could cause demand for U.S. flag tank vessel capacity andcharter rates to decline, which would decrease our revenues, profitability andcash available for distribution.***

 

The demand for U.S. flag tank vessel capacity isinfluenced by the demand for refined petroleum, petrochemical and commoditychemical products and other factors including:

 

•                  global and regional economic and politicalconditions;

 

•                  developments in international trade;

 

•                  changes in seaborne and other transportationpatterns, including changes in the distances that cargoes are transported;

 

•                  environmental concerns;

 

•                  availability and cost of alternative methodsof transportation of products; and

 

•                  in the case of tank vessels transportingrefined petroleum products, competition from alternative sources of energy,such as natural gas, and alternate transportation methods.

 

Any of these factors couldadversely affect the demand for U.S. flag tank vessel capacity and charterrates. Any decrease in demand for tank vessel capacity or decrease in charterrates could have a material adverse effect on our business, results ofoperations and financial condition and our ability to make cash distributions.

 

The demand for U.S. flag tank vessel capacity isalso influenced by the cost of importing refined petroleum products.Historically, charter rates for vessels qualified to participate in thecoastwise trade under the Jones Act have been higher than charter rates forforeign flag vessels because of the higher construction and operating costs ofU.S. flag vessels due to the Jones

 

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Act requirements that such vessels must be built in the United Statesand manned by U.S. crews. Therefore, it has historically been cheaper forcertain areas of the United States, such as the northeastern United States, toimport refined petroleum products than to obtain them from U.S. refineries.International shipping rates can influence the amount of refined petroleumproducts imported into the United States. If the cost of foreign shipping ofimported refined petroleum products, which is currently at historically highlevels, decreases, charter rates for foreign flag vessels may decline, makingit cheaper to import refined petroleum products to other regions of the EastCoast and the West Coast to meet increasing demand. If this were to occur,demand for our ITBs and charter rates could decrease, which could have amaterial adverse effect on our business, results of operations and financialcondition and our ability to make cash distributions.

 

The demand for U.S. flag tank vessel capacity andcharter rates are currently increasing as vessels are being phased-out ofservice under OPA 90. If the existing trend reverses due to changes under theJones Act or otherwise, demand for our tankers and charter rates coulddecrease, which could adversely affect our business.

 

***Marine transportation has inherentoperating risks, and our insurance may not be adequate to cover our losses.***

 

Our vessels and their cargoes are at risk of beingdamaged or lost because of events such as:

 

•                  marine disasters;

 

•                  bad weather;

 

•                  mechanical failures;

 

•                  grounding, fire, explosions and collisions;

 

•                  human error; and

 

•                  war and terrorism.

 

All of these hazards canresult in death or injury to persons, loss of property, environmental damages,delays or rerouting. If one of our vessels were involved in an accident withthe potential risk of environmental contamination, the resulting media coveragecould have a material adverse effect on our business, results of operations andfinancial condition and our ability to make cash distributions.

 

We carry insurance to protect against most of theaccident-related risks involved in the conduct of our business.Nonetheless, risks may arise against which we are not adequately insured. Forexample, a catastrophic spill could exceed our insurance coverage and have amaterial adverse effect on our operations. In addition, we may not be able toprocure adequate insurance coverage at commercially reasonable rates in thefuture, and we cannot guarantee that any particular claim will be paid. In thepast, new and stricter environmental regulations have led to higher costs forinsurance covering environmental damage or pollution, and new regulations couldlead to similar increases or even make this type of insurance unavailable.Furthermore, even if insurance coverage is adequate to cover our losses, we maynot be able to timely obtain a replacement ship in the event of a loss.

 

We do not carry loss-of-hire insurance, which coversthe loss of revenue during extended vessel off-hire periods, such as forunscheduled drydocking due to damage to the vessel from accidents. Accordingly,any loss of a vessel or extended vessel off-hire, due to accident or otherwise,could have a material adverse effect on our business, results of operations andfinancial condition and our ability to make cash distributions. Please read“—We have a limited number of vessels, and any loss of use of a vessel couldadversely affect our results of operations.”

 

***Because we obtain some of our insurancethrough protection and indemnity associations, we may also be subject to calls,or premiums, in amounts based not only on our own claim records, but also theclaim records of all other members of the protection and indemnityassociations.***

 

We may be subject to calls, or premiums, in amountsbased not only on our claim records but also the claim records of all othermembers of the protection and indemnity associations through which we receiveinsurance coverage for tort liability, including pollution-relatedliability. Our payment of these calls could result in significant expenses tous, which could have a material adverse effect on our business, results ofoperations and financial condition and our ability to make cash distributions.

 

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***The failure or inability of Hess to makesupport payments could adversely affect our business and cash available fordistribution.***

 

In connection with our purchase of six ITBs fromHess in September 2002, Hess agreed that if the contract rate for a charterof any of the vessels we acquired was less than the rate specified in oursupport agreement with Hess, Hess would, subject to specified limitedexceptions, pay us the difference between the two rates. During 2005, 2004 and2003, Hess made net support payments to us aggregating $1.0 million,$4.0 million and $5.3 million, respectively. If for any reason Hess isunable or fails to make any payments due to us under the support agreement, itcould have a material adverse effect on our business, results of operations andfinancial condition and our ability to make cash distributions.

 

In addition, if we enter into charters of our ITBswith companies having specified investment grade credit rating, the charterrate is equal to or higher than the rate specified in the support agreement andcertain other conditions are met, then the support agreement is not applicableto those charters even if the charterer subsequently fails to make paymentsunder the charter.

 

In the event the charter rates we receive at anytime during the term of the agreement on the ITBs exceed the Hess support rate,then we must pay such excess amounts to Hess until we have repaid Hess for allprior support payments previously made by Hess to us, and then we must share50% of any additional excess amount with Hess. The aggregate amount of allsupport payments made by Hess to us through December 31, 2005 is $13.6 million,of which we have repaid $1.2 million to Hess as of December 31, 2005.  This reimbursement and sharing obligation mayreduce cash that would otherwise be available for distribution.

 

***The termination of the Hess supportagreement could adversely affect our ability to make cash distributions.***

 

The Hess support agreement terminates onSeptember 13, 2007. If at the time of termination the charter rates we arereceiving on the six ITBs are less than the Hess support rates, it could have amaterial adverse effect on our business, and our cash available fordistribution will be adversely affected. In addition, any support payments receivedfrom Hess will be included in the calculation of adjusted basic surplus throughthe expiration of the agreement in 2007. As a result, any such payments couldallow 25% of the subordinated units to become eligible for early conversioninto common units on December 31, 2007 even if we are not able to earn andpay the minimum quarterly distribution on all common units after termination ofthe Hess support agreement.

 

***We rely on a limited number of customersfor a significant portion of our revenues. The loss of any of these customerscould adversely affect our business and operating results.***

 

The portion of our revenues attributable to anysingle customer changes over time, depending on the level of relevant activityby the customer, our ability to meet the customer’s needs and other factors,many of which are beyond our control. In 2005, 2004 and 2003, BP accounted for30%, 27% and 52% of our revenues, respectively, Shell accounted for 25%, 20%and 23% of our revenues, respectively, and Hess accounted for 10%, 12% and 15%of our revenues, respectively. If we were to lose any of these customers or ifany of these customers significantly reduced its use of our services, ourbusiness and operating results could be adversely affected. Revenues receivedfrom Hess exclude payments under the support agreement.

 

***We may not be able to renew our long-termcontracts when they expire.***

 

We have contracts with Dow Chemical, ExxonMobil,Koch Industries, Lyondell Chemical and Shell with specified minimum cargorequirements that will, in aggregate, account for approximately 74% of theanticipated usable capacity of the *Charleston*through July 2007 and 75% of the anticipated usable capacity of the *Chemical Pioneer* throughFebruary 2007. Additionally, we will commence a long-term charter withMorgan Stanley that will account for 100% of the usable capacity of the *Houston,* beginning mid-2006.  These arrangements may not be renewed, or ifrenewed, may not be renewed at similar rates. Under the Hess support agreement,we are assured of specified minimum charter rates for our ITBs throughSeptember 13, 2007. We may not be able to obtain charter rates for theITBs equal to or greater than the rates provided in the Hess support agreementfollowing expiration of the Hess support agreement. If we are unable to obtainnew charters at rates equivalent to those received under the old contracts orunder the Hess support agreement, it could have a material adverse effect onour business, results of operations and financial condition and our ability tomake cash distributions.

 

***We have a limited number of vessels, andany loss of use of a vessel could adversely affect our results of operations.***

 

We currently own six ITBs, one product tanker andthree parcel tankers. Four of our ITBs and two of our parcel tankers are underlong-term contracts. The *Houston*will commence a long-term contract in mid-2006 and the *Sea Venture*will begin covering thelong-term contract arranged for the first ATB until December 2006, when the ATBis expected to be placed

 

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in service.  In the event any ofour ITBs or parcel tankers has to be taken out of service for more than acouple of days, we may be unable to fulfill our obligations under theselong-term contracts with our remaining vessels. If we are unable to fulfillsuch obligations, we would have to contract with a third-party for use ofa vessel, at our expense, to transport the charterer’s products, which mightnot be possible on acceptable terms or at all, or default under the contract,which would allow the charterer to terminate the contract. We will not receiveany compensation under the Hess support agreement for ITBs taken out of servicefor repairs and maintenance.

 

Also, if our two new ATBs under construction are notcompleted by the scheduled due date, we may be unable to fulfill ourobligations under the long-term contracts we expect to have in place atthe time of delivery. If we are unable to fulfill such obligations, we wouldhave to contract with a third party for use of a vessel, at our expense, totransport the charterer’s products, which may not be possible on acceptableterms or at all, or default under the contract, which would allow the chartererto terminate the contract.  In addition,because our first ATB will not be completed by the originally scheduleddelivery date, we will have to use the *SeaVenture*to fulfill our obligations under contracts we entered intofor such ATB until it is delivered, currently scheduled for December 2006,which will reduce our revenue and cash available for distribution.

 

When we acquired the *Charleston* from ExxonMobil in May 2004, we agreed totransport cargo for ExxonMobil generally transported by the *S/R Wilmington* while such vessel was indrydock. We operated under this arrangement from June 2004 throughNovember 2004 and chartered in another vessel on a short-term basis tofulfill our obligations under our charter agreements covering the *Charleston*.  We are obligated to use our best efforts toassist ExxonMobil in covering its cargo transportation requirements that wouldhave been covered by the *S/R Wilmington*during future drydocks of that vessel.

 

We rely exclusively on the revenues generated fromour marine transportation business. Due to our lack of asset diversification,an adverse development in this business would have a significantly greaterimpact on our business, financial condition and results of operations than ifwe maintained and operated more diverse assets.

 

***Increased competition in the domestic tankvessel industry could result in reduced profitability and loss of market sharefor us.***

 

Contracts for our vessels are generally awarded on acompetitive basis, and competition in the markets we serve is intense. The mostimportant factors determining whether a contract will be awarded include:

 

•                  availability and capability of the vessels;

 

•                  ability to meet the customer’s schedule;

 

•                  price;

 

•                  safety record;

 

•                  ability to satisfy the customer’s vettingrequirements;

 

•                  reputation, including perceived quality ofthe vessel; and

 

•                  quality and experience of management.

 

Some of our competitors may have greater financialresources and larger operating staffs than we do. As a result, they may be ableto make vessels available more quickly and efficiently, transition to double-hulledvessels more rapidly and withstand the effects of declines in charter rates fora longer period of time. They may also be better able to address a downturn inthe domestic demand for refined petroleum, petrochemical or commodity chemicalproducts. As a result, we could lose customers and market share to thesecompetitors.

 

We also face competition from refined petroleumproduct pipelines. Long-haul transportation of refined petroleum products isgenerally less costly by pipeline than by tank vessel. The construction of newpipeline segments to carry petroleum products into our markets, includingpipeline segments that connect with existing pipeline systems, the expansion ofexisting pipelines and the conversion of existing non-refined petroleum productpipelines, could adversely affect our ability to compete in particularlocations.

 

Our transportation of petrochemical and commoditychemical products faces intense competition from railroads, which we estimatetransport approximately two-thirds of all petrochemical and commodity chemicalproducts. We believe the cost of transporting these products by rail isgenerally higher than the cost of marine transportation, and any decrease inrail rates could adversely affect the amount of petrochemical and commoditychemical products we carry.

 

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***Delays or cost overruns in the constructionof a new vessel or the retrofit or drydock maintenance of existing vesselscould adversely affect our business. Cash flows from new or retrofitted vesselsmay not be immediate or as high as expected.***

 

We anticipate retrofitting our ITBs with double-sidesin order to allow our ITBs to continue to transport refined petroleum productsfollowing their scheduled phase-out dates under OPA 90 or to replace such ITBswith newly built OPA 90 compliant tank vessels. We are also constructing threenew ATBs and exploring the possibility of constructing new product tankers. Inaddition, each of our vessels must undergo mandatory drydocking for majorrepair and maintenance—every five years, in the case of our ITBs, with amid-period underwater survey in lieu of drydocking, and twice every five years,in the case of our parcel tankers and the *Houston*.These projects will be subject to the risk of delay or cost overruns caused bythe following:

 

•                  unforeseen quality or engineering problems;

 

•                  work stoppages;

 

•                  weather interference;

 

•                  unanticipated cost increases;

 

•                  inability to have the work performed in theUnited States;

 

•                  delays in receipt of necessary equipment;

 

•                  inability to obtain the requisite permits,approvals or certifications from the U.S. Coast Guard and the American Bureauof Shipping upon completion of work; and

 

•                  weather related conditions, such as hurricanes.

 

Significant delays could have a material adverseeffect on expected contract commitments for new or modified vessels and ourfuture revenues and cash flows. In addition, significant delays could allow acharterer to cancel the charter or require us to charter additional vessels tomeet our contractual obligations. Furthermore, customer demand for new ormodified vessels may not be as high as we currently anticipate and, as aresult, our business, results of operations and financial condition and ourability to make cash distributions may be adversely affected. The first ATB weare having constructed will be delivered at least six months later thanscheduled and at a cost of no less than approximately $53.4 million.  SENESCO has indicated that it is experiencingcost overruns and further delays in completing the ATB.  As a result of the delay, we will have to useour *Sea Venture* parcel tanker toservice the contracts entered into for our first ATB until that ATB iscompleted, rather than new charters, which will adversely affect our results ofoperations and our ability to increase our distributions.

 

There is limited availability in U.S. shipyards fordrydocking a vessel. As a result, the costs of performing drydock maintenancein the United States are significantly higher than they are overseas.Furthermore, U.S. shipyards may not have available capacity to perform drydockmaintenance on our vessels at the times they require drydock maintenance,particularly in the event of an unscheduled drydock due to accident or otherdamage, in which event we will be required to have the work performed in anoverseas shipyard. This may result in the vessel being off-hire, and thereforenot earning any revenue, for a longer period of time because of the time requiredto travel to and from the overseas shipyard. In addition, we may be required to place a deposit in order to reserveshipyard slots for construction of new vessels, which may not be refundable ifwe elect not to proceed with such new construction.

 

***Our purchase of existing vessels involvesrisks that could adversely affect our results of operations.***

 

Our fleet renewal and expansion strategy includesthe acquisition of existing vessels as well as the construction of new vessels.Unlike newly built vessels, existing vessels typically do not carry warrantieswith respect to their condition. While we generally inspect any existing vesselprior to purchase, such an inspection would normally not provide us with asmuch knowledge of its condition as we would possess if the vessel had beenbuilt for us and operated by us during its life. Repairs and maintenance costsfor existing vessels are difficult to predict and may be more substantial thanfor vessels we have operated since they were built. These costs could have amaterial adverse effect on our business, results of operations and financialcondition and our ability to make cash distributions.

 

***We may not be able to grow or effectivelymanage our growth.***

 

A principal focus of our strategy is to continue togrow by expanding our business. Our future growth will depend upon a number offactors, some of which we can control and some of which we cannot. Thesefactors include our ability to:

 

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•                  identify businesses engaged in managing,operating or owning vessels for acquisitions or joint ventures;

 

•                  identify vessels for acquisition;

 

•                  consummate acquisitions or joint ventures;

 

•                  integrate any acquired businesses or vesselssuccessfully with our existing operations;

 

•                  hire, train and retain qualified personnel tomanage and operate our growing business and fleet;

 

•                  improve our operating and financial systemsand controls; and

 

•                  obtain required financing for our existingand new operations.

 

A deficiency in any of thesefactors would adversely affect our ability to achieve anticipated growth in thelevels of cash flows or realize other anticipated benefits. In addition,competition from other buyers could reduce our acquisition opportunities orcause us to pay a higher price than we might otherwise pay.

 

In addition, we have haddifficulty in finding good acquisition targets. In 2005 we incurredapproximately $0.4 million of expenses in pursuing acquisitions that ultimatelywere not consummated. These costs adversely affect our results of operationsand our ability to increase our distributions.

 

The process of integratingacquired vessels into our operations may result in unforeseen operatingdifficulties, may absorb significant management attention and may require significantfinancial resources that would otherwise be available for the ongoingdevelopment and expansion of our existing operations. Future acquisitions couldresult in the incurrence of additional indebtedness and liabilities that couldhave a material adverse effect on our financial condition and results ofoperations. Further, if we issue additional common units, your interest in thepartnership will be diluted and distributions to you may be reduced.

 

***We are subject to complex laws andregulations, including environmental regulations, which can adversely affectthe cost, manner or feasibility of doing business.***

 

Increasingly stringent federal, state and local lawsand regulations governing worker health and safety, insurance requirements andthe manning, construction and operation of vessels significantly affect ouroperations. Many aspects of the marine transportation industry are subject toextensive governmental regulation by the U.S. Coast Guard, the InternationalMaritime Organization, the National Transportation Safety Board, the U.S.Customs Service and the U.S. Maritime Administration, as well as to regulationby private industry organizations such as the American Bureau of Shipping. TheU.S. Coast Guard and the National Transportation Safety Board set safetystandards and are authorized to investigate vessel accidents and recommendimproved safety standards. The U.S. Coast Guard is authorized to inspectvessels at will.

 

Our operations are also subject to federal, state,local and international laws and regulations that control the discharge ofpollutants into the environment or otherwise relate to environmentalprotection. Compliance with such laws, regulations and standards may requireinstallation of costly equipment or operational changes. Failure to comply withapplicable laws and regulations may result in administrative and civilpenalties, criminal sanctions or the suspension or termination of ouroperations. Some environmental laws often impose strict liability forremediation of spills and releases of oil and hazardous substances, which couldsubject us to liability without regard to whether we were negligent or atfault. Under OPA 90, owners, operators and bareboat charterers are jointly andseverally strictly liable for the discharge of oil within the 200-mileexclusive economic zone around the United States. Additionally, an oil spillcould result in significant liability, including fines, penalties, criminalliability and costs for natural resource damages under other federal and statelaws or civil actions. The potential for these releases could increase as weincrease our fleet capacity. Most states bordering on a navigable waterway haveenacted legislation providing for potentially unlimited liability for thedischarge of pollutants within their waters. For more information, please read“Item 1. Business—Regulation.”

 

In order to maintain compliance with existing andfuture laws, we incur, and expect to continue to incur, substantial costs inmeeting maintenance and inspection requirements, developing and implementingemergency preparedness procedures, and obtaining insurance coverage or otherrequired evidence of financial ability sufficient to address pollutionincidents. These laws can:

 

•                  impair the economic value of our vessels;

 

•                  require a reduction in cargo carryingcapacity or other structural or operational changes;

 

•                  make our vessels less desirable to potentialcharterers;

 

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•                  lead to decreases in available insurancecoverage for affected vessels; or

 

•                  result in the denial of access to certainports.

 

Future environmentalrequirements may be adopted that could limit our ability to operate, require usto incur substantial additional costs or otherwise have a material adverse effecton our business, results of operations or financial condition and our abilityto make cash distributions.

 

***We depend upon unionized labor for theprovision of our services. Any work stoppages or labor disturbances coulddisrupt our business.***

 

All of our seagoing personnel, including ourcaptains, are employed under contracts with the Seafarers’ International Union,in the case of our non-officer personnel, and the American Maritime Officersunion, in the case of vessel officers, that expire in 2007. Any work stoppagesor other labor disturbances could have a material adverse effect on ourbusiness, results of operations and financial condition and our ability to makecash distributions.

 

***Our employees are covered by federal lawsthat may subject us to job-related claims in addition to those provided bystate laws.***

 

All of our seagoing employees are covered byprovisions of the Jones Act and general maritime law. These laws typicallyoperate to make liability limits established by state workers’ compensationlaws inapplicable to these employees and to permit these employees and theirrepresentatives to pursue actions against employers for job-related injuries infederal courts. Because we are not generally protected by the limits imposed bystate workers’ compensation statutes, we have greater exposure for claims madeby these employees as compared to employers whose employees are not covered bythese provisions.

 

***We depend on key personnel for the successof our business and some of those persons face conflicts in the allocation oftheir time to our business.***

 

We depend on the services of our senior managementteam and other key personnel. The loss of the services of any key employeecould have a material adverse effect on our business, financial condition andresults of operations. We may not be able to locate or employ on acceptableterms qualified replacements for senior management or key employees if theirservices were no longer available. We currently do not carry any key maninsurance on any of our employees.

 

The employment agreements of Messrs. CalvinChew, Paul Gridley and Jeff Miller, our executive vice president, chairman andchief executive officer and vice president—chartering, respectively, onlyrequire them to spend a majority of their business time in managing ouroperations. Messrs. Chew, Gridley and Miller currently own and operate twoJones Act barges that have been transporting caustic soda and calcium chlorideunder contracts with third parties, and are permitted to acquire and operate additionaltank barges of less than 15,000 deadweight tons under specified circumstancesin the transportation of chemical products other than petroleum or petroleumproducts. Messrs. Chew, Gridley and Miller may face conflicts regardingthe allocation of their time between our business and their barge business. Ifany of Messrs. Chew, Gridley and Miller were to spend less time inmanaging our business and affairs than they do currently, our business, resultsof operations and financial condition and our ability to make cashdistributions may be adversely affected. In addition, we sublease approximately 75% of our New York office spaceto companies affiliated with our Chairman and Chief Executive Officer.  Please read “—Risks Inherent in an Investmentin Us—The members of United States Shipping Master LLC, including our executiveofficers, and their affiliates may engage in activities that compete directlywith us,” “Item 11. Executive Compensation—Employment Agreements” and “Item 13.Certain Relationships and Related Party Transactions – New York Sublease.”

 

***Terrorist attacks have resulted inincreased costs and any new attacks could disrupt our business.***

 

Heightened awareness of security needs after theterrorist attacks of September 11, 2001 have caused the U.S. Coast Guard,the International Maritime Organization and the states and local ports to adoptheightened security procedures relating to ports and vessels. Complying withthese procedures, as well as the implementation of security plans for our vesselsrequired by the Maritime Transportation Security Act of 2002, have increasedour costs of security.

 

Any future terrorist attacks could disrupt harboroperations in the ports in which we operate, which would disrupt our operationsand result in lost revenue. The long-term impact that terrorist attacks and thethreat of terrorist attacks may have on the petroleum industry in general, andon us in particular, is not known at this time. Uncertainty surroundingcontinued hostilities in the Middle East or other sustained military campaignsmay affect our operations in unpredictable ways, including

 

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disruptions of petroleum supplies and markets, and the possibility thatinfrastructure facilities could be direct targets of, or indirect casualtiesof, an act of terror.

 

Changes in the insurance markets attributable toterrorist attacks may make certain types of insurance more difficult for us toobtain. Moreover, the insurance that may be available to us may be significantlymore expensive than our existing insurance coverage. Instability in thefinancial markets as a result of terrorism or war could also affect our abilityto raise capital.

 

***Changes in international trade agreementscould affect our ability to provide marine transportation services atcompetitive rates.***

 

Currently, vessel trade or marine transportationbetween two ports in the United States, generally known as maritime cabotage orcoastwise trade, is subject to U.S. laws, including the Jones Act, thatrestrict maritime cabotage to U.S. flag vessels qualified to engage in U.S.coastwise trade. Additionally, the Jones Act restrictions on the provision ofmaritime cabotage services are subject to certain exceptions under certaininternational trade agreements, including the General Agreement on Trade inServices and the North American Free Trade Agreement. If maritime cabotageservices were included in the General Agreement on Trade in Services, the NorthAmerican Free Trade Agreement or other international trade agreements, or ifthe restrictions contained in the Jones Act were otherwise altered, thetransportation of maritime cargo between U.S. ports could be opened toforeign-flag or foreign-manufactured vessels. Because foreign vessels mayhave lower construction costs and operate at significantly lower costs than wedo in U.S. markets, this could significantly increase competition in thecoastwise trade, which could have a material adverse effect on our business,results of operations and financial condition and our ability to make cashdistributions.

 

**Risks Inherent in an Investment in Us**

 

***Our general partner and its affiliates haveconflicts of interest and limited fiduciary duties, which may permit them tofavor their own interests to the detriment of our unitholders.***

 

United States Shipping Master LLC currentlyindirectly owns the 2% general partner interest and directly owns a 49% limitedpartner interest in us and owns and controls our general partner. Conflicts ofinterest may arise between our general partner and its affiliates, on the onehand, and us and our unitholders, on the other hand. As a result of theseconflicts, our general partner may favor its own interests and the interests ofits affiliates over the interests of our unitholders. These conflicts include,among others, the following situations:

 

•                  our general partner is allowed to take intoaccount the interests of parties other than us, such as United States ShippingMaster LLC and its members, in resolving conflicts of interest, which has theeffect of limiting its fiduciary duty to our unitholders;

 

•                  our general partner has limited its liabilityand reduced its fiduciary duties under the partnership agreement, while alsorestricting the remedies available to our unitholders for actions that, withoutthese limitations, might constitute breaches of fiduciary duty. As a result ofpurchasing common units, unitholders consent to some actions and conflicts ofinterest that might otherwise constitute a breach of fiduciary or other dutiesunder applicable state law;

 

•                  our general partner determines the amount andtiming of asset purchases and sales, capital expenditures, borrowings,issuances of additional partnership securities and reserves, each of which canaffect the amount of cash that is available for distribution to ourunitholders;

 

•                  in some instances, our general partner maycause us to borrow funds in order to permit the payment of cash distributions,even if the purpose or effect of the borrowing is to make a distribution on thesubordinated units, to make incentive distributions or to accelerate theexpiration of the subordination periods;

 

•                  our general partner determines which costsincurred by it and its affiliates are reimbursable by us;

 

•                  our partnership agreement does not restrictour general partner from causing us to pay it or its affiliates for anyservices rendered on terms that are fair and reasonable to us or entering intoadditional contractual arrangements with any of these entities on our behalf;

 

•                  our general partner controls the enforcementof obligations owed to us by it and its affiliates; and

 

•                  our general partner decides whether to retainseparate counsel, accountants or others to perform services for us.

 

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***Our partnership agreement limits ourgeneral partner’s fiduciary duties to unitholders and restricts the remediesavailable to unitholders for actions taken by our general partner that mightotherwise constitute breaches of fiduciary duty.***

 

Our partnership agreement contains provisions thatreduce the standards to which our general partner would otherwise be held bystate fiduciary duty law. For example, our partnership agreement:

 

•                  permits our general partner to make a numberof decisions in its individual capacity, as opposed to in its capacity as ourgeneral partner. This entitles our general partner to consider only theinterests and factors that it desires, and it has no duty or obligation to giveany consideration to any interest of, or factors affecting, us, our affiliatesor any limited partner;

 

•                  provides that our general partner is entitledto make other decisions in “good faith” if it reasonably believes that thedecision is in our best interests;

 

•                  generally provides that affiliatedtransactions and resolutions of conflicts of interest not approved by theconflicts committee of the board of directors of our general partner and notinvolving a vote of unitholders must be on terms no less favorable to us thanthose generally being provided to or available from unrelated third parties orbe “fair and reasonable” to us and that, in determining whether a transactionor resolution is “fair and reasonable,” our general partner may consider thetotality of the relationships between the parties involved, including othertransactions that may not be particularly advantageous or beneficial to us; and

 

•                  provides that our general partner and itsofficers and directors will not be liable for monetary damages to us, ourlimited partners or assignees for any acts or omissions unless there has been afinal and non-appealable judgment entered by a court of competent jurisdictiondetermining that the general partner or those other persons acted in bad faithor engaged in fraud, willful misconduct or gross negligence.

 

In order to become a limited partner of ourpartnership, a common unitholder is required to agree to be bound by theprovisions in the partnership agreement, including the provisions discussedabove.

 

***Even if unitholders are dissatisfied, theycannot initially remove our general partner without its consent.***

 

Unlike the holders of common stock in a corporation,unitholders have only limited voting rights on matters affecting our businessand, therefore, limited ability to influence management’s decisions regardingour business. Unitholders have no right to elect our general partner or itsboard of directors on an annual or other continuing basis. The board ofdirectors of our general partner is chosen by United States Shipping MasterLLC, which is controlled by Sterling/US Shipping L.P. Sterling/US Shipping L.P.has the right to designate a majority of the directors of United StatesShipping Master LLC and thus indirectly has the right to designate all thedirectors of our general partner. Please read “Item 13. Certain Relationshipsand Related Party Transactions—United States Shipping Master VotingArrangement.”

 

Furthermore, if the unitholders are dissatisfiedwith the performance of our general partner, they will have limited ability toremove our general partner. The vote of the holders of at least 662/3%of all outstanding common and subordinated units voting together as a singleclass is required to remove our general partner. Accordingly, the unitholdersare currently unable to remove our general partner without its consent becauseUnited States Shipping Master LLC owns sufficient units to be able to preventthe general partner’s removal. Also, if our general partner is removed withoutcause during the subordination periods and units held by our general partnerand its affiliates are not voted in favor of that removal, all remainingsubordinated units will automatically be converted into common units and anyexisting arrearages on the common units will be extinguished. A removal of ourgeneral partner under these circumstances would adversely affect the commonunits by prematurely eliminating their distribution and liquidation preferenceover the subordinated units, which would otherwise have continued until we hadmet certain distribution and performance tests.

 

Cause is narrowly defined in our partnershipagreement to mean that a court of competent jurisdiction has entered a final,non-appealable judgment finding our general partner liable for actual fraud,gross negligence or willful or wanton misconduct in its capacity as our generalpartner. Cause does not include most cases of charges of poor management of thebusiness, so the removal of our general partner during the subordinationperiods because of the unitholders’ dissatisfaction with our general partner’sperformance in managing our partnership will most likely result in thetermination of the subordination periods.

 

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***We may issue additional common unitswithout your approval, which would dilute your ownership interests.***

 

While any class A subordinated units remainoutstanding, without the approval of our unitholders, our general partner maycause us to issue up to 3,449,984 additional common units for any purpose and afurther 1,149,995 common units to fund the construction of capitalimprovements. Our general partner may also cause us to issue an unlimitednumber of additional common units or other equity securities of equal rank withthe common units, without unitholder approval, in a number of circumstancessuch as:

 

•                  the issuance of common units in connectionwith acquisitions or capital improvements that increase cash flow fromoperations per unit on an estimated pro forma basis;

 

•                  issuances of common units to repayindebtedness, the cost of which to service is greater than the distributionobligations associated with the units issued in connection with the repaymentof the indebtedness;

 

•                  the conversion of subordinated units intocommon units;

 

•                  the conversion of units of equal rank withthe common units into common units under some circumstances;

 

•                  issuances of common units under our employeebenefit plans; or

 

•                  the conversion of the general partnerinterest and the incentive distribution rights into common units as a result ofthe withdrawal or removal of our general partner.

 

In addition, while any class A subordinatedunits remain outstanding we can issue equity securities other than common unitsthat contain terms providing for the conversion of those securities into commonunits upon the receipt of unitholder approval. The terms of the securities mayentitle the holders to receive distributions in excess of the amountdistributed to each common unit if our unitholders do not approve theconversion by a certain date, thus providing incentive to our unitholders toapprove the conversion.

 

The issuance by us of additional common units orother equity securities of equal or senior rank will have the followingeffects:

 

•                  our unitholders’ proportionate ownershipinterest in us will decrease;

 

•                  the amount of cash available for distributionon each unit may decrease;

 

•                  because a lower percentage of totaloutstanding units will be subordinated units, the risk that a shortfall in thepayment of the minimum quarterly distribution will be borne by our commonunitholders will increase;

 

•                  the relative voting strength of eachpreviously outstanding unit may be diminished; and

 

•                  the market price of the common units maydecline.

 

Once no class A subordinated units remainoutstanding, we may issue an unlimited number of limited partner interests ofany type without the approval of our unitholders. Our partnership agreementdoes not give our unitholders the right to approve our issuance of equitysecurities ranking junior to the common units at any time.

 

***Our partnership agreement currently limitsthe ownership of our partnership interests by individuals or entities that arenot U.S. citizens. This restriction could limit the liquidity of our commonunits.***

 

In order to ensure compliance with Jones Act citizenshiprequirements, the board of directors of our general partner has adopted arequirement that at least 85% of our partnership interests must be held by U.S.citizens. This requirement may have an adverse impact on the liquidity ormarket value of our common units, because holders will be unable to sell unitsto non-U.S. citizens. Any purported transfer of common units in violation ofthese provisions will be ineffective to transfer the common units or anyvoting, dividend or other rights in respect of the common units.

 

***Our general partner has a limited callright that may require you to sell your common units at an undesirable time orprice.***

 

If at any time our general partner and itsaffiliates own more than 80% of the common units, our general partner will havethe right, but not the obligation, which it may assign to any of its affiliatesor to us, to acquire all, but not less than all, of the common units held byunaffiliated persons at a price not less than their then-current market price.As a result, you may be required to sell your common units at an undesirabletime or price and may not receive any return on your investment. You may alsoincur a tax liability upon a sale of your units. Our general partner is notobligated to obtain a fairness opinion regarding the

 

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value of the common units to be repurchased by it upon exercise of thelimited call right. There is no restriction in our partnership agreement thatprevents our general partner from issuing additional common units andexercising its call right. If our general partner exercised its limited callright, the effect would be to take us private and, if the units weresubsequently deregistered, we would no longer be subject to the reportingrequirements of the Securities Exchange Act of 1934.

 

***Our partnership agreement restricts thevoting rights of unitholders owning 20% or more of our common units.***

 

Our partnership agreement restricts unitholders’voting rights by providing that any units held by a person that owns 20% ormore of any class of units then outstanding, other than our general partner,its affiliates, their transferees and persons who acquired such units with theprior approval of the board of directors of our general partner, cannot vote onany matter. The partnership agreement also contains provisions limiting theability of unitholders to call meetings or to acquire information about ouroperations, as well as other provisions limiting the unitholders’ ability toinfluence the manner or direction of management.

 

***Our debt levels may limit our flexibilityin obtaining additional financing and in pursuing other business opportunities.***

 

We have a significant amount of debt. At December31, 2005, our consolidated indebtedness was $128.0 million, consisting ofterm loan obligations under our credit facility. In addition, we have capacityto borrow an additional $109.4 million under our credit facility,including $50.0 million under our revolving credit facility.  We have the ability to incur additional debt,subject to limitations in our credit facility. Our level of indebtedness couldhave important consequences to us, including the following:

 

•         our ability to obtain additional financing,if necessary, for working capital, capital expenditures, acquisitions or otherpurposes may be impaired or such financing may not be available on favorableterms;

 

•         we will need a substantial portion of ourcash flow to make principal and interest payments on our indebtedness, reducingthe funds that would otherwise be available for operations, future businessopportunities and distributions to unitholders;

 

•         our debt level will make us more vulnerablethan our competitors with less debt to competitive pressures or a downturn inour business or the economy generally;

 

•         our debt level may limit our flexibility inresponding to changing business and economic conditions; and

 

•         substantially all of our debt has a variablerate of interest, which increases our vulnerability to interest ratefluctuations.

 

Our ability to service our indebtedness will dependupon, among other things, our future financial and operating performance, whichwill be affected by prevailing economic conditions and financial, business,regulatory and other factors, some of which are beyond our control. If ouroperating results are not sufficient to service our current or futureindebtedness, we will be forced to take actions such as reducing distributions,reducing or delaying our business activities, acquisitions, investments and/orcapital expenditures, selling assets, restructuring or refinancing ourindebtedness, or seeking additional equity capital or bankruptcy protection. Wemay not be able to effect any of these remedies on satisfactory terms, or atall.

 

***Our credit facility contains operating andfinancial restrictions which may restrict our business and financingactivities.***

 

The operating and financial restrictions andcovenants in our credit facility and any future financing agreements couldadversely affect our ability to finance future operations or capital needs orto engage, expand or pursue our business activities. For example, our creditfacility restricts our ability to:

 

•                  incur or guarantee indebtedness;

 

•                  change ownership or structure, includingconsolidations, liquidations and dissolutions;

 

•                  make distributions or repurchase or redeemunits;

 

•                  make capital expenditures in excess ofspecified levels;

 

•                  make certain negative pledges and grantcertain liens;

 

•                  sell, transfer, assign or convey assets;

 

•                  make certain loans and investments; and

 

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•                  enter into a new line of business.

 

Our ability to comply with the covenants andrestrictions contained in our debt instruments may be affected by events beyondour control, including prevailing economic, financial and industry conditions.If market or other economic conditions deteriorate, our ability to comply withthese covenants may be impaired. If we breach any of the restrictions,covenants, ratios or tests in our debt agreements, a significant portion of ourindebtedness may become immediately due and payable, and our lenders’commitment to make further loans to us may terminate. We might not have, or beable to obtain, sufficient funds to make these accelerated payments. Inaddition, our obligations under our credit facility are secured bysubstantially all of our assets, and if we are unable to repay our indebtednessunder our credit facility, the lenders could seek to foreclose on such assets.

 

***Restrictions in our credit facility limitour ability to pay distributions upon the occurrence of certain events.***

 

Our payment of principal and interest on our debtwill reduce cash available for distribution on our units.  Our credit facility limits our ability to paydistributions upon the occurrence of the following events, among others:

 

•                  failure to pay any principal, interest, fees,expenses or other amounts when due;

 

•                  any loan document or lien securing the creditfacility ceases to be effective;

 

•                  the Hess support agreement terminates orceases to be effective (other than in accordance with its terms);

 

•                  breach of certain financial covenants;

 

•                  failure to observe any other agreement,security instrument, obligation or covenant beyond specified cure periods incertain cases;

 

•                  default under other indebtedness of ouroperating company or any of our subsidiaries above specified amounts;

 

•                  bankruptcy or insolvency events involving us,our general partner or any of our subsidiaries;

 

•                  failure of any representation or warranty tobe materially correct;

 

•                  a change of control, as defined in our creditagreement;

 

•                  a material adverse effect, as defined in ourcredit agreement, occurs relating to us or our business; and

 

•                  judgments against us or any of oursubsidiaries in excess of certain allowances.

 

Any subsequent refinancing of our current debt orany new debt could have similar restrictions. For more information regardingour debt agreements, please read “Item 7. Management’s Discussion and Analysisof Financial Conditions and Results of Operations—Liquidity and CapitalResources—Second Amended and Restated Credit Facility.”

 

***We can borrow money under our amended andrestated credit facility to pay distributions, which would reduce the amount ofrevolving credit available to operate our business.***

 

Our partnership agreement allows us to make workingcapital borrowings under our amended and restated credit facility to paydistributions. Accordingly, we can make distributions on all our units eventhough cash generated by our operations may not be sufficient to pay suchdistributions. We are required to reduce all working capital borrowings underthe credit agreement to zero for a period of at least 15 consecutive days onceeach 12 month period. Any working capital borrowings by us to makedistributions will reduce the amount of working capital borrowings we can makefor operating our business. For more information, please read “Item 7.Management’s Discussion and Analysis of Financial Condition and Results ofOperations—Liquidity and Capital Resources—Second Amended and Restated CreditFacility.”

 

***Costs due our general partner and itsaffiliates will reduce available cash for distribution to you.***

 

Prior to making any distribution on the commonunits, we will reimburse our general partner and its affiliates for allexpenses they incur on our behalf, which will be determined by our generalpartner in its sole discretion. These expenses will include all costs incurredby the general partner and its affiliates in managing and operating us,including costs for rendering corporate staff and support services to us. Allof our employees, including vessel crews, are employees of subsidiaries of ourgeneral partner. On an adjusted basis as if our initial public offering and therelated transactions had been completed on January 1, 2003, we would havereimbursed our general partner $33.3 million and $25.3 million for theyears ended December 31, 2004 and 2003, respectively.  We reimbursed our general partner$37.7 million in the year ended December 31, 2005.

 

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The reimbursement of expenses and payment of fees, if any, to ourgeneral partner and its affiliates could adversely affect our ability to paycash distributions to you.

 

***You may not have limited liability if acourt finds that unitholder action constitutes control of our business.***

 

As a limited partner in a partnership organizedunder Delaware law, you could be held liable for our obligations to the sameextent as a general partner if you participate in the “control” of ourbusiness. Our general partner generally has unlimited liability for theobligations of the Partnership, such as its debts and environmentalliabilities, except for those contractual obligations of the partnership thatare expressly made without recourse to our general partner. In addition,Section 17-607 of the Delaware Revised Uniform Limited Partnership Actprovides that, under some circumstances, a unitholder may be liable to us forthe amount of a distribution for a period of three years from the date of thedistribution. The limitations on the liability of holders of limited partnerinterests for the obligations of a limited partnership have not been clearlyestablished in some of the other states in which we do business.

 

***The control of our general partner may betransferred to a third party without unitholder consent.***

 

Our general partner may transfer its general partnerinterest to a third party in a merger or in a sale of all or substantially allof its assets without the consent of the unitholders so long as the third partysatisfies the citizenship requirements of the Jones Act. Furthermore, there isno restriction in the partnership agreement on the ability of the members ofour general partner from transferring their respective membership interests inour general partner to a third party that satisfies the citizenshiprequirements of the Jones Act. The new members of our general partner wouldthen be in a position to replace the board of directors and officers of ourgeneral partner with their own choices and to control the decisions taken bythe board of directors and officers of our general partner.

 

***The members of United States ShippingMaster LLC, including our executive officers, and their affiliates may engagein activities that compete directly with us.***

 

Sterling/US Shipping L.P., the principal member ofUnited States Shipping Master LLC, the other members of United States ShippingMaster and their respective partners, affiliates and the funds they manage ormay manage, or management, are not prohibited from owning assets or engaging inbusinesses that compete directly or indirectly with us. Only United StatesShipping Master and its controlled affiliates are subject to certain noncompeteprovisions. In addition, Calvin Chew, Paul Gridley and Jeff Miller, ourexecutive vice president, chairman and chief executive officer and vicepresident—chartering, respectively, own and operate two barges engaged in thetransportation of chemical products. Under their employment agreements,Messrs. Chew, Gridley and Miller are not prohibited from acquiring andoperating additional tank barges of less than 15,000 deadweight tons underspecified circumstances. Please read “—Risks Inherent in Our Business—We dependon key personnel for the success of our business and some of those persons faceconflicts in the allocation of their time to our business,” “Item 11. ExecutiveCompensation—Employment Agreements” and “Item 13. Certain Relationships andRelated Party Transactions—Omnibus Agreement—Noncompetition.”

 

***The price of our units may fluctuatesignificantly, and you could lose all or part of your investment.***

 

There are only 6,899,968 publicly traded commonunits. We do not know how liquid the trading market for our common units willcontinue to be.  Additionally, the lackof liquidity may result in wide bid-ask spreads, contribute to significantfluctuations in the market price of the common units and limit the number ofinvestors who are able to buy the common units. The market price of our common units may also be influenced by manyfactors, some of which are beyond our control, including:

 

•                  our quarterly distributions;

 

•                  our quarterly or annual earnings or those ofother companies in our industry;

 

•                  loss of a large customer;

 

•                  announcements by us or our competitors ofsignificant contracts or acquisitions;

 

•                  changes in accounting standards, policies,guidance, interpretations or principles;

 

•                  general economic conditions;

 

•                  the failure of securities analysts to coverour common units after this offering or changes in financial estimates byanalysts;

 

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•                  future sales of our common units; and

 

•                  the other factors described in these “RiskFactors.”

 

In addition, our stock price will fluctuate withchanges in interest rates, as investors compare the yield (as determined by thequarterly distribution) on our units to yields they could achieve in the debtmarkets. Accordingly, unless we can raise our quarterly cash distribution, ourstock price is likely to decline in periods of rising interest rates.

 

***We will incur increased costs as a resultof being a public partnership.***

 

We became a publicly traded partnership in November2004 and have a limited history operating as a public partnership. As a publicpartnership, we are incurring significant legal, accounting and other expensesthat we did not incur as a private company. In addition, the Sarbanes-OxleyAct of 2002, as well as new rules subsequently implemented by the Securitiesand Exchange Commission and the New York Stock Exchange, has required changesin corporate governance practices of public companies. These new rules andregulations have increased our legal and financial compliance costs and madeactivities more time-consuming and costly. For example, as a result of becominga public partnership, we are required to have three independent directors,create additional board committees and adopt policies regarding internalcontrols and disclosure controls and procedures. In addition, we incuradditional costs associated with our public partnership reporting requirements.These new rules and regulations make it more difficult and more expensive forour general partner to obtain director and officer liability insurance and itmay be required to accept reduced policy limits and coverage or incursubstantially higher costs to obtain the same or similar coverage. As a result,it may be more difficult for our general partner to attract and retainqualified persons to serve on its board of directors or as executive officers.We are currently evaluating and monitoring developments with respect to thesenew rules, and we cannot predict or estimate the amount of additional costs wemay incur or the timing of such costs. We incurred approximately $1.8 million of costs in 2005 directlyassociated with being a publicly traded partnership.

 

**Tax Risks**

 

***Our tax treatment depends on our status asa partnership for federal income tax purposes, as well as our not being subjectto entity-level taxation by states. If the IRS were to treat us as acorporation or if we were to become subject to entity-level taxation forstate tax purposes, then our cash available for distribution to you would besubstantially reduced.***

 

The anticipated after-tax benefit of an investmentin the common units depends largely on our being treated as a partnership forfederal income tax purposes. We have not requested, and do not plan to request,a ruling from the IRS on this or any other matter affecting us.

 

If we were treated as a corporation for federalincome tax purposes, we would pay federal income tax on our income at thecorporate tax rate, which is currently a maximum of 35%. Distributions to youwould generally be taxed again as corporate distributions, and no income,gains, losses, deductions or credits would flow through to you. Because a taxwould be imposed upon us as a corporation, our cash available for distributionto you would be substantially reduced. Thus, treatment of us as a corporationwould result in a material reduction in the cash available for distribution andafter-tax return to you, likely causing a substantial reduction in the value ofthe common units.

 

Current law may change, causing us to be treated asa corporation for federal income tax purposes or otherwise subjecting us toentity-level taxation. For example, because of widespread state budgetdeficits, several states are evaluating ways to subject partnerships to entity-leveltaxation through the imposition of state income, franchise or other forms oftaxation. If any state were to impose a tax upon us as an entity, the cashavailable for distribution to you would be reduced. The partnership agreementprovides that if a law is enacted or existing law is modified or interpreted ina manner that subjects us to taxation as a corporation or otherwise subjects usto entity-level taxation for federal, state or local income tax purposes,then the minimum quarterly distribution amount and the target distributionamounts will be adjusted to reflect the impact of that law on us.

 

***We have a subsidiary that will be treatedas a corporation for federal income tax purposes and subject to corporate-levelincome taxes.***

 

We will conduct the operations of the *Chemical Pioneer* through a subsidiary thatis organized as a corporation. We may elect to conduct additional operationsthrough this corporate subsidiary in the future. This corporate subsidiary willbe subject to corporate-level tax, which will reduce the cash availablefor distribution to us and, in turn, to you. If the IRS were to

 

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successfully assert that this corporation has more tax liability thanwe anticipate or legislation was enacted that increased the corporate tax rate,our cash available for distribution to you would be further reduced.

 

***If the IRS or a state tax authoritycontests the tax positions we take, the market for our common units may beadversely impacted, and the costs of any contest will be borne by ourunitholders and our general partner.***

 

We have not requested any ruling from the IRS or anystate tax authorities with respect to our treatment as a partnership for taxpurposes or any other matter affecting us. It may be necessary to resort toadministrative or court proceedings to sustain some or all of the positions wetake. A court may not agree with some or all of the positions we take. Anycontest with the IRS or a state tax authority may materially and adverselyimpact the market for our common units and the price at which they trade. Inaddition, the costs of any contest with the IRS or a state tax authority willresult in a reduction in cash available for distribution to our unitholders andour general partner and thus will be borne indirectly by our unitholders andour general partner.

 

***You may be required to pay taxes on yourshare of our income even if you do not receive any cash distributions from us.***

 

You will be required to pay federal income taxesand, in some cases, state and local income taxes on your share of our taxableincome, whether or not you receive cash distributions from us. You may notreceive cash distributions from us equal to your share of our taxable income oreven equal to the actual tax liability that result from your share of ourtaxable income.

 

***Tax gain or loss on the disposition of ourcommon units could be different than expected.***

 

If you sell your common units, you will recognizegain or loss equal to the difference between the amount realized and your taxbasis in those common units. Prior distributions to you in excess of the totalnet taxable income you were allocated for a common unit, which decreased yourtax basis in that common unit, will, in effect, become taxable income to you ifthe common unit is sold at a price greater than your tax basis in that commonunit, even if the price you receive is less than your original cost. Asubstantial portion of the amount realized, whether or not representing gain,may be ordinary income to you.

 

***Tax-exempt entities, regulated investmentcompanies and foreign persons face unique tax issues from owning common unitsthat may result in adverse tax consequences to them.***

 

Investment in common units by tax-exempt entities,such as individual retirement accounts (known as IRAs), regulated investmentcompanies (known as mutual funds), and non-U.S. persons raises issues unique tothem. For example, virtually all of our income allocated to organizationsexempt from federal income tax, including individual retirement accounts andother retirement plans, will be unrelated business taxable income and will betaxable to them. Recent legislation treats net income derived from theownership of certain publicly traded partnerships (including us) as qualifyingincome to a regulated investment company. However, this legislation is onlyeffective for taxable years beginning after October 22, 2004, the date ofenactment. For taxable years beginning prior to the date of enactment, verylittle of our income will be qualifying income to a regulated investmentcompany. Distributions to non-U.S. persons will be reduced by withholding taxesat the highest applicable effective tax rate, and non-U.S. persons will berequired to file United States federal income tax returns and pay tax on theirshare of our taxable income.

 

***We will treat each purchaser of units ashaving the same tax benefits without regard to the units purchased. The IRS maychallenge this treatment, which could adversely affect the value of the commonunits.***

 

Because we cannot match transferors and transfereesof common units, we will adopt depreciation and amortization positions that maynot conform to all aspects of existing Treasury regulations. A successful IRSchallenge to those positions could adversely affect the amount of tax benefitsavailable to you. It also could affect the timing of these tax benefits or theamount of gain from your sale of common units and could have a negative impacton the value of our common units or result in audit adjustments to your taxreturns.

 

***You will likely be subject to state and localtaxes and return filing requirements as a result of investing in our commonunits.***

 

In addition to federal income taxes, you will likelybe subject to other taxes, such as state and local income taxes, unincorporatedbusiness taxes and estate, inheritance or intangible taxes that are imposed bythe various jurisdictions in which we do business or own property. You willlikely be required to file state and local income tax returns and pay state andlocal income taxes in some or all of these various jurisdictions. Further, youmay be subject to penalties for failure to comply with

 

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those requirements. We conduct business in California, New Jersey andNew York, which impose state income taxes. We may own property or conductbusiness in other states or foreign countries in the future. It is yourresponsibility to file all federal, state and local tax returns.

 

***The sale or exchange of 50% or more of ourcapital and profits interests will result in the termination of our partnershipfor federal income tax purposes.***

 

We will be considered to have terminated for federalincome tax purposes if there is a sale or exchange of 50% or more of the totalinterests in our capital and profits within a 12-month period. Our terminationwould, among other things, result in the closing of our taxable year for allunitholders and could result in a deferral of depreciation deductions allowablein computing our taxable income.

 

**ITEM1B.  UNRESOLVED STAFF COMMENTS**

 

None.

 

**ITEM 2.  PROPERTIES**

 

Our general partner leases approximately 12,700square feet of office space for our principal executive office in Edison, NewJersey. The lease expires in May 2009. Our general partner also has theoption to renew the lease for an additional five-year period.  Additionally, commencing on January 1, 2006,we lease office space in New York City for use by our Chairman and ChiefExecutive Officer and other personnel.  Wesublease 75% of the leased space to certain companies affiliated with the Chairmanand Chief Executive Officer of the Partnership. The lease expires on December 31, 2015. See “Item 13. Certain Relationships and Related Party Transactions – NewYork Sublease.”

 

**ITEM3.  LEGAL PROCEEDINGS**

 

We are a party to routine, marine-related claims,lawsuits and labor arbitrations arising in the ordinary course ofbusiness.  All of these claims against usare substantially mitigated by insurance, subject to deductibles ranging up to$150,000 per claim.  On a current basis,we provide for amounts we expect to pay.

 

**ITEM 4.  SUBMISSION OFMATTERS TO A VOTE OF SECURITY HOLDERS**

 

None.

 

**PART II.**

 

**ITEM 5.  MARKET FORPARTNERSHIP’S COMMON EQUITY, RELATED SECURITY HOLDER MATTERS, AND ISSUERPURCHASES OF EQUITY SECURITIES**

 

**MarketPrice of Common Units, Distributions and Related Unitholder Matters**

 

Our common units were listed on the New York StockExchange under the symbol “USS” beginning on October 29, 2004.  Prior to October 29, 2004, our equitysecurities were not publicly traded.  Asof February 28, 2006, there were 6,899,968 outstanding publicly-traded commonunits, representing an aggregate 49% limited partner interest in us.  As of February 28, 2006, there were 7 holdersof record of our common units, representing approximately 5,000 beneficial owners.  The following table sets forth, for theperiods indicated, the high and low sales prices per common unit, as reportedon the New York Stock Exchange, and the amount of cash distributions declaredper common unit:

 

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| ** **                                  | ** ** | **Price Range** | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|-----------------|------------|------------|------------|
| ** **                                  | ** ** | **High**        | ** ** | **Low**    | ** ** | **Cash Distribution (1)** | ** ** |
| ***2005***                                  |       |            |       |       |       |   |   |
| Fourth  Quarter Ended December 31, 2005     |       | $               | 25.40      |       | $          | 20.97 |   | $ | 0.45 |   |
| Third  Quarter Ended September 30, 2005     |       | $               | 27.40      |       | $          | 24.35 |   | $ | 0.45 |   |
| Second  Quarter Ended June 30, 2005         |       | $               | 25.85      |       | $          | 23.00 |   | $ | 0.45 |   |
| First  Quarter Ended March 31, 2005         |       | $               | 28.00      |       | $          | 24.10 |   | $ | 0.45 |   |
|                                        |       |            |       |       |       |   |   |
| ***2004***                                  |       |            |       |       |       |   |   |
| Fourth  Quarter Ended December 31, 2004 (2) |       | $               | 27.30      |       | $          | 22.25 |   | $ | 0.2885 |   |

 

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(1)                                  Distributions are shown for the quarter withrespect to which they were declared.  Foreach of the quarters for which distributions have been made, an identical perunit cash distribution was paid on the subordinated units.

 

(2)                                  For the period from November 3, 2004, thedate of completion of our initial public offering, through December 31, 2004.

 

The aggregate amount of distributions declared in respect of the yearsended December 31, 2005 and 2004 on common units, the general partnerinterests, and subordinated units totaled $25.3 million and $4.1 million,respectively.

 

Section 7704of the Internal Revenue Code provides that publicly traded partnerships will,as a general rule, be taxed as corporations. However, an exception, referred toas the “Qualifying Income Exception,” exists with respect to publicly tradedpartnerships that generates 90% or more of their gross income for every taxableyear from “qualifying income.” Qualifying income includes income and gainsderived from the transportation, storage and processing of crude oil, natural gasand products thereof. Other types of qualifying income include interest (otherthan from a financial business), dividends, gains from the sale of realproperty and gains from the sale or other disposition of capital assets heldfor the production of income that otherwise constitutes qualifying income. The *Charleston* is currently and is expected tocontinue to transport specialty refined petroleum products and related productsthat generally generate qualifying income for federal income tax purposes. The *Sea Venture*, when it enters operationalservice in mid-2006 may transport either specialty refined petroleum productsand related products that generally generate qualifying income for federalincome tax purposes or chemical products that generally generate non-qualifyingincome. We are operating the *ChemicalPioneer* in a corporate subsidiary because it primarily will conductoperations that do not generate qualifying income. Dividends received from ourcorporate subsidiary will constitute qualifying income.  We estimate that less than 3% of our currentincome is not qualifying income; however, this estimate could change from timeto time.

 

**CASH DISTRIBUTION POLICY**

 

**Distributionsof Available Cash**

 

*General.*   Approximately 45 daysafter the end of each quarter, beginning with the quarter endingDecember 31, 2004, we distribute available cash to unitholders of recordon the applicable record date.

* *

*Definition of Available Cash.* Available cash generally means, for each fiscal quarter, all cash onhand at the end of the quarter:

 

•                  less the amount of cash reserves establishedby our general partner to:

 

•                  provide for the proper conduct of ourbusiness (including reserves for future capital expenditures and for ouranticipated credit needs);

 

•                  comply with applicable law, any of our debtinstruments or other agreements; or

 

•                  provide funds for distributions to ourunitholders and to our general partner for any one or more of the next fourquarters;

 

•                  plus all cash on hand on the date ofdetermination of available cash for the quarter resulting from working capitalborrowings made after the end of the quarter for which the determination isbeing made. Working capital borrowings are generally borrowings that will bemade under our credit facility and in all cases are used solely for workingcapital purposes or to pay distributions to partners.

 

We currently expect that our estimated maintenancecapital expenditures will be $19.6 million per year, up from $17.2 millionin 2005, which is comprised of approximately $12.6 million per year formandatory drydocking costs for all of our vessels and approximately$7.0 million per year for retrofitting our ITBs to make them OPA 90compliant. The amount of estimated maintenance capital expendituresattributable to future drydocking expenses is based on the anticipated costs ofdrydockings over our next five-year drydocking cycle. Please read “Item 7. -Management’s Discussion and Analysis of Financial Condition and Results ofOperations—Liquidity and Capital Resources—Ongoing Capital Expenditures.”

 

**SubordinationPeriods**

 

*General.*  During the subordinationperiods, which we define below, the common units will have the right to receivedistributions of available cash from basic surplus, as defined below, in anamount equal to the minimum quarterly distribution of $0.45 per quarter, plusany arrearages in the payment of the minimum quarterly distribution on thecommon units from prior quarters, before any distributions of available cashfrom basic surplus may be made on any subordinated units. Disribution

 

41

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arrearages do not accrue on either class of the subordinated units. Thepurpose of the subordinated units is to increase the likelihood that during thesubordination periods there will be available cash from basic surplus to bedistributed on the common units. Our subordinated units are owned by UnitedStates Shipping Master LLC.  Only thenon-management members of United States Shipping Master LLC will be entitled toreceive distributions of or attributable to the class A subordinatedunits. The members of United States Shipping Master LLC that serve as ourexecutive officers will not be entitled to receive distributions of orattributable to the class A subordinated units; the management memberswill only be entitled to receive distributions of or attributable to theclass B subordinated units.

* *

*Definitionof Subordination Periods.*  The class A subordinationperiod will extend until the first day of any quarter, beginning after December 31,2009, and the class B subordination period will extend until the first dayof any quarter, beginning after December 31, 2010, that each of thefollowing tests are met:

 

•                  distributions of available cash from “basicsurplus” (as defined in our partnership agreement) on each of the outstandingcommon units and subordinated units equaled or exceeded the minimum quarterlydistribution for each of the three consecutive, non-overlapping four-quarterperiods immediately preceding that date;

 

•                  the “adjusted basic surplus” (as defined inour partnership agreement) generated during each of the three consecutive,non-overlapping four-quarter periods immediately preceding that date equaled orexceeded the sum of the minimum quarterly distributions on all of theoutstanding common units and subordinated units during those periods on a fullydiluted basis and the related distribution on the 2% general partner interestduring those periods; and

 

•                  there are no arrearages in payment of theminimum quarterly distribution on the common units.

 

If the unitholders removethe general partner without cause, the subordination periods may end early.

* *

*EarlyConversion of Class A Subordinated Units.* Before the end of the class A subordination period, up to 50% ofthe class A subordinated units, or up to 2,636,171 class Asubordinated units, may convert into common units on a one-for-one basisimmediately after the distribution of available cash to the partners in respectof any quarter ending on or after:

 

•                                       December 31, 2007 with respect to 25% ofthe class A subordinated units; and

 

•                                       December 31, 2008 with respect to afurther 25% of the class A subordinated units (based on the total amountof class A subordinated units initially issued).

 

The early conversions of the class Asubordinated units will occur if at the end of the applicable quarter each ofthe following three tests is met:

 

•                  distributions of available cash from basicsurplus on each of the outstanding common units and subordinated units equaledor exceeded the minimum quarterly distribution for each of the threeconsecutive, non-overlapping four-quarter periods immediatelypreceding that date;

 

•                  the adjusted basic surplus generated duringeach of the three consecutive, non-overlapping four-quarter periodsimmediately preceding that date equaled or exceeded the sum of the minimumquarterly distributions on all of the outstanding common units and subordinatedunits during those periods on a fully diluted basis and the relateddistribution on the 2% general partner interest during those periods; and

 

•                  there are no arrearages in payment of theminimum quarterly distribution on the common units.

 

However, the early conversion of the second 25% ofthe class A subordinated units may not occur until at least one year followingthe early conversion of the first 25% of the class A subordinated units.

 

*Early Conversion of Class B Subordinated Units.* Before the end of the class B subordination period, up to 50% ofthe class B subordinated units, or up to 813,814 class B subordinatedunits, may convert into common units on a one-for-one basis immediately afterthe distribution of available cash to the partners in respect of any quarterending on or after:

 

•                                       December 31, 2008 with respect to 25% ofthe class B subordinated units; and

•                                       December 31, 2009 with respect to afurther 25% of the class B subordinated units (based on the total amountof class B subordinated units initially issued).

 

42

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Each early conversion of the class Bsubordinated units will occur if at the end of the applicable quarter each ofthe following three tests is met:

 

•                  distributions of available cash from basicsurplus on each of the outstanding common units and subordinated units equaledor exceeded the minimum quarterly distribution for (1) each of the fourconsecutive, non-overlapping four-quarter periods immediately preceding thedate of the early conversion of the first 25% of class B subordinatedunits and (2) each of the three consecutive, non-overlapping four-quarterperiods immediately preceding the date of the early conversion of the second25% of the class B subordinated units;

 

•                  the adjusted basic surplus generated during(1) each of the four consecutive, non-overlapping four-quarter periods immediatelypreceding the date of the early conversion of the first 25% of class Bsubordinated units or (2) each of the three consecutive, non-overlappingfour-quarter periods immediately preceding the date of the earlyconversion of the second 25% of the class B subordinated units, equaled orexceeded the sum of the minimum quarterly distributions on all of theoutstanding common units and subordinated units during those periods on a fullydiluted basis and the related distribution on the 2% general partner interestduring those periods; and

 

•                  there are no arrearages in payment of theminimum quarterly distribution on the common units.

 

However, the early conversion of the second 25% ofthe class B subordinated units may not occur until at least one year followingthe early conversion of the first 25% of the class B subordinated units.

* *

*AcceleratedEarly Conversion of Class B Subordinated Units.* Notwithstanding the foregoing, 25% of the class B subordinatedunits may convert into common units on a one-for-one basis immediately afterthe distribution of available cash to the partners in respect of any quarterending on or after December 31, 2007 if:

 

•                  each of the three tests set forth in thebullet points under the caption “Early Conversion of Class A SubordinatedUnits” above is met as of such date; and

 

•                  the adjusted basic surplus generated duringthe four-quarter period immediately preceding that date equaled or exceeded thesum of $2.43 on each of the outstanding common units and subordinated unitsduring that period on a fully diluted basis and the related distribution on the2% general partner interest during that period.

 

In addition, a further 25% of the class Bsubordinated units may convert into common units on a one-for-one basisimmediately after the distribution of available cash to the partners in respectof any quarter ending on or after December 31, 2008 if each of the testsin the two bullet points immediately set forth above are met. Finally, if thetest set forth in the second bullet immediately set forth above is met for anyfour-quarter period ending on or after December 31, 2009 and allclass A subordinated units have been converted into common units, then theremaining class B subordinated units will convert into common units.

 

**Incentive DistributionRights**

 

Incentive distribution rights represent the right toreceive an increasing percentage of quarterly distributions of available cashfrom basic surplus after the minimum quarterly distribution and the targetdistribution levels have been achieved. Our general partner currently holds theincentive distribution rights, but may transfer these rights separately fromits general partner interest, subject to restrictions in the partnershipagreement.

 

If for any quarter:

 

•                  we have distributed available cash from basicsurplus to the common and subordinated unitholders in an amount equal to theminimum quarterly distribution; and

 

•                  we have distributed available cash from basicsurplus on outstanding common units in an amount necessary to eliminate anycumulative arrearages in payment of the minimum quarterly distribution;

 

then, we will distribute anyadditional available cash from basic surplus for that quarter among theunitholders and our general partner in the following manner:

 

•                  first, 98% to all unitholders, pro rata, and2% to our general partner, until each unitholder receives a total of $0.50 perunit for that quarter (the “first target distribution”);

 

43

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•                  second, 85% to all unitholders, pro rata, and15% to our general partner, until each unitholder receives a total of $0.575per unit for that quarter (the “second target distribution”);

 

•                  third, 75% to all unitholders, pro rata, and25% to our general partner, until each unitholder receives a total of $0.70 perunit for that quarter (the “third target distribution”); and

 

•                  thereafter, 50% to all unitholders, pro rata,and 50% to our general partner.

 

In each case, the amount of the target distributionset forth above is exclusive of any distributions to common unitholders toeliminate any cumulative arrearages in payment of the minimum quarterlydistribution. The percentage interests set forth above for our general partnerinclude its 2% general partner interest and assume the general partner has nottransferred the incentive distribution rights.

 

**ITEM6.  SELECTED FINANCIAL DATA**

 

The following table sets forth selected historicalfinancial data and operating data of U.S. Shipping Partners L.P. and itspredecessors.  On November 3, 2004, UnitedStates Shipping Master LLC (“Master”) contributed substantially all its assetsand liabilities constituting its business to us in connection with our initialpublic offering of common units. Therefore, our historical financial and operating data presented beloware for Master for the period July 16, 2002 through November 3, 2004 and forthe Catug Group of Amerada Hess Corporation for 2001 and for the period January1, 2002 through September 12, 2002, which was acquired by the predecessor toMaster on September 13, 2002.  Thefollowing table should be read in conjunction with the consolidated financialstatements, including notes thereto, in Item 8 of this report, and“Management’s Discussion and Analysis of Financial Condition and Results ofOperations” in Item 7 of this report.

 

The following table presents a non-GAAP financialmeasure, EBITDA, which we use in our business. This measure is not calculated or presented in accordance with UnitedStates Generally Accepted Accounting Principles (“GAAP”).  We explain this measure below and reconcileit to its most directly comparable financial measure calculated and presentedin accordance with GAAP in “Non-GAAP Financial Measure” below.

 

The following tablesummarizes our results of operations for the periods presented (in thousands,except per unit and operating data):

 

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| ** **                                                           | ** ** | ** **                      | ** ** | ** **                   | ** ** | ** **       | ** ** | ** **          | ** ** | **Catug Group of**   | ** ** |
|----------------------------------------------------------------------|------------|---------------------------------|------------|------------------------------|------------|------------------|------------|---------------------|------------|----------------------|------------|
| ** **                                                           | ** ** | **U.S. Shipping Partners L.P.** | ** ** | **Amerada Hess Corporation** | ** ** |
| ** **                                                           | ** ** | ** **                      | ** ** | ** **                   | ** ** | ** **       | ** ** | **Period from**     | ** ** | **Period from**      | ** ** | ** ** | ** ** |
| ** **                                                           | ** ** | **Year Ended**                  | ** ** | **Year Ended**               | ** ** | **Year Ended**   | ** ** | **July 16, 2002**   | ** ** | **January 1, 2002**  | ** ** | **Year Ended** | ** ** |
| ** **                                                           | ** ** | **December 31,**                | ** ** | **December 31,**             | ** ** | **December 31,** | ** ** | **to December 31,** | ** ** | **to September 12,** | ** ** | **December 31,** | ** ** |
| ** **                                                           | ** ** | **2005**                        | ** ** | **2004**                     | ** ** | **2003**         | ** ** | **2002 (1)**        | ** ** | **2002**             | ** ** | **2001** | ** ** |
| ** **                                                           | ** ** | ** **                      | ** ** | ** **                   | ** ** | ** **       | ** ** | ** **          | ** ** | ** **           | ** ** | ** ** | ** ** |
| Voyage revenue                                                       |       | $                               | 131,534    |                         | $          | 122,355          |       | $                   | 80,514     |                 | $          | 19,713 |   | $ | 44,796 |   | $ | 53,250 |   |
| Vessel operating expenses                                            |       | 47,986                          |       | 47,119                       |       | 33,143           |       | 7,766               |       | 28,368               |       | 39,834 |   |
| Voyage expenses                                                      |       | 24,203                          |       | 20,415                       |       | 9,889            |       | 2,386               |       | 2,717                |       | 4,110 |   |
| General and administrative expenses                                  |       | 10,826                          |       | 10,321                       |       | 7,153            |       | 2,184               |       | 2,676                |       | 3,669 |   |
| Depreciation and amortization                                        |       | 25,704                          |       | 23,945                       |       | 17,921           |       | 5,070               |       | 2,683                |       | 3,422 |   |
| **Operating income**                                                 |       | 22,815                          |       | 20,555                       |       | 12,408           |       | 2,307               |       | 8,352                |       | 2,215 |   |
| Interest expense                                                     |       | 6,407                           |       | 9,960                        |       | 10,039           |       | 2,978               |       | —               |       | — |   |
| Loss on debt extinguishment                                          |       | —                          |       | 6,397                        |       | —           |       | —              |       | —               |       | — |   |
| Other income                                                         |       | (1,031                          | )          | (369                         | )          | (136             | )          | (25                 | )          | —               |       | — |   |
| **Income (loss) before (benefit) provision  for income taxes**       |       | 17,439                          |       | 4,567                        |       | 2,505            |       | (646                | )          | 8,352                |       | 2,215 |   |
| (Benefit) provision for income taxes                                 |       | (640                            | )          | 3,119                        |       | 72               |       | 18                  |       | 2,931                |       | 784 |   |
| **Net income (loss)**                                                |       | $                               | 18,079     |                         | $          | 1,448            |       | $                   | 2,433      |                 | $          | (664 | ) | $ | 5,421 |   | $ | 1,431 |   |
|                                                                 |       |                            |       |                         |       |             |       |                |       |                 |       |   |   |
| Net income (loss) per unit - basic and  diluted                      |       | $                               | 1.28       |                         | $          | 0.18             |       | $                   | 0.31       |                 | $          | (0.09 | ) | $ | 0.70 |   | $ | 0.18 |   |
|                                                                 |       |                            |       |                         |       |             |       |                |       |                 |       |   |   |
| **Balance Sheet Data**                                               |       |                            |       |                         |       |             |       |                |       |                 |       |   |   |
| Vessels and equipment, net                                           |       | $                               | 245,062    |                         | $          | 201,923          |       | $                   | 187,321    |                 | $          | 186,912 |   | $ | 45,003 |   | $ | 29,493 |   |
| Total assets                                                         |       | $                               | 276,222    |                         | $          | 248,606          |       | $                   | 207,070    |                 | $          | 199,308 |   | $ | 68,351 |   | $ | 55,707 |   |
| Total debt                                                           |       | $                               | 128,037    |                         | $          | 99,625           |       | $                   | 144,375    |                 | $          | 153,750 |   | $ | — |   | $ | — |   |
| Partners’ capital/members’ equity                          |       | $                               | 119,868    |                         | $          | 122,786          |       | $                   | 47,724     |                 | $          | 39,078 |   | $ | 48,852 |   | $ | 34,096 |   |
|                                                                 |       |                            |       |                         |       |             |       |                |       |                 |       |   |   |
| **Cash Flow Data**                                                   |       |                            |       |                         |       |             |       |                |       |                 |       |   |   |
| Net cash provided by (used in):                                      |       |                            |       |                         |       |             |       |                |       |                 |       |   |   |
| Operating activities                                                 |       | $                               | 30,609     |                         | $          | 27,184           |       | $                   | 10,615     |                 | $          | 1,821 |   | $ | 8,858 |   | $ | 5,950 |   |
| Investing activities                                                 |       | $                               | (56,052    | )                            | $          | (34,541          | )          | $                   | (1,057     | )                    | $          | (160,928 | ) | $ | (18,193 | ) | $ | — |   |
| Financing activities                                                 |       | $                               | 5,185      |                         | $          | 29,050           |       | $                   | (4,219     | )                    | $          | 162,333 |   | $ | 9,335 |   | $ | (5,950 | ) |
|                                                                 |       |                            |       |                         |       |             |       |                |       |                 |       |   |   |
| **Other Financial Data**                                             |       |                            |       |                         |       |             |       |                |       |                 |       |   |   |
| EBITDA (2)                                                           |       | $                               | 48,519     |                         | $          | 38,103           |       | $                   | 30,329     |                 | $          | 7,377 |   | $ | 11,035 |   | $ | 5,637 |   |
| Capital expenditures (3)                                             |       |                            |       |                         |       |             |       |                |       |                 |       |   |   |
| Maintenance                                                          |       | $                               | 45,133     |                         | $          | —           |       | $                   | 12,448     |                 | $          | — |   | $ | — |   | $ | — |   |
| Expansion                                                            |       | 23,710                          |       | 40,930                       |       | 5,881            |       | 191,982             |       | 18,193               |       | — |   |
| Total                                                                |       | $                               | 68,843     |                         | $          | 40,930           |       | $                   | 18,329     |                 | $          | 191,982 |   | $ | 18,193 |   | $ | — |   |
|                                                                 |       |                            |       |                         |       |             |       |                |       |                 |       |   |   |
| Distributions declared per common unit in  respect of the period (4) |       | $                               | 1.80       |                         | $          | 0.2885           |       | $                   | —     |                 | $          | — |   | $ | — |   | $ | — |   |
|                                                                 |       |                            |       |                         |       |             |       |                |       |                 |       |   |   |
| **Operating Data**                                                   |       |                            |       |                         |       |             |       |                |       |                 |       |   |   |
| Number of vessels (5)                                                |       | 9                               |       | 8                            |       | 7                |       | 6                   |       | 6                    |       | 6 |   |
| Total barrel carrying capacity (in thousands  at period end)         |       | 2,974                           |       | 2,735                        |       | 2,375            |       | 2,160               |       | 2,160                |       | 2,160 |   |
| Total vessel days                                                    |       | 2,999                           |       | 2,810                        |       | 2,430            |       | 660                 |       | 1,530                |       | 2,190 |   |
| Days worked                                                          |       | 2,852                           |       | 2,776                        |       | 2,237            |       | 587                 |       | 1,488                |       | 2,040 |   |
| Drydocking days                                                      |       | 132                             |       | —                       |       | 122              |       | 73                  |       | 42                   |       | 139 |   |
| Net utilization (6)                                                  |       | 95                              | %          | 99                           | %          | 92               | %          | 89                  | %          | 97                   | %          | 93 | % |
| Average Daily Time Charter Equivalent Rate  (7) (8) (9)              |       | $                               | 37,631     |                         | $          | 35,500           |       | $                   | 31,444     |                 | $          | 29,520 |   | $ | 29,740 |   | $ | 24,090 |   |

 

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(1)          Althoughthe predecessor of U.S. Shipping Partners L.P. was formed on July 16,2002, it did not commence operations until it acquired the six ITBs from Hesson September 13, 2002.

 

(2)          See“—Non-GAAP Financial Measure” below.

 

(3)          Wedefine maintenance capital expenditures as capital expenditures required tomaintain, over the long term, the operating capacity of our fleet, andexpansion capital expenditures as those capital expenditures that increase,over the long term, the operating capacity of our fleet. Examples ofmaintenance capital expenditures include costs related to drydocking a vessel,retrofitting an existing vessel or acquiring a new vessel to the extent suchexpenditures maintain the operating capacity of our fleet. Expenditures made inconnection with the acquisition of the *Houston* and the *Sea Venture*were considered maintenancecapital expenditures as they were made to replace capacity scheduled to phaseout under OPA 90. Generally, expenditures for construction of tank vessels inprogress are not included as capital expenditures until such vessels arecompleted. Capital expenditures associated with constructing or acquiring a newvessel, which increase the operating capacity of our fleet over the long term,whether through increasing our aggregate barrel-carrying capacity, improvingthe operational performance of a vessel or otherwise, are classified asexpansion capital expenditures. Drydocking expenditures are more extensive innature than normal routine maintenance and, therefore, are capitalized andamortized over three years. For more information regarding our accountingtreatment of drydocking expenditures, please read “Management’s Discussion andAnalysis of Financial Condition and Results of Operations—Critical AccountingPolicies—Depreciation and Amortization” in Item 7 of this report.

 

(4)          For2004, represents distributions made in respect of the period from November 3, 2004,the date we closed our initial public offering, through December 31, 2004.

 

(5)          For2005, operating data excludes the *SeaVenture*, as the vessel was acquired on November 28, 2005 but willnot be placed in operation until mid-2006 due to drydocking requirements.

 

(6)          “Netutilization” is a percentage equal to the total number of days actually workedby a group of vessels during a defined period, divided by the number ofcalendar days in the period multiplied by the number of vessels operating inthe period.

 

(7)          “AverageDaily Time Charter Equivalent,” or TCE, equals the net voyage revenue earned bya vessel or group of vessels during a defined period, divided by the totalnumber of days actually worked by that vessel or group of vessels during thatperiod. We principally use net voyage revenue, rather than voyage revenue, whencomparing performance in different periods. We derive our voyage revenue fromtime charters, contracts of affreightment, consecutive voyage charters and spotcharters, which are described in more detail in Item 7. “Management’sDiscussion and Analysis of Financial Condition and Results of Operations.” Oneof the principal distinctions among these types of contracts is whether thevessel operator or the customer pays for voyage expenses, which include fuel,port charges, pilot fees, tank cleaning costs and canal tolls. Some voyageexpenses are fixed, and the remainder can be estimated. If we, as the vesseloperator, pay the voyage expenses, we typically pass these expenses on to our customersby charging higher rates under the contract. As a result, although voyagerevenue from different types of contracts may vary, the net revenue thatremains after subtracting voyage expenses, which we call net voyage revenue, iscomparable across the different types of contracts.

 

(8)          For  2001 and the period from January 1, 2002through September 12, 2002, does not include the one ITB that the Catug Groupchartered to another division of Hess at a rate less than the market rate.

 

(9)          SinceNovember 6, 2003 for the *ChemicalPioneer.*From May 6, 2003, the date we acquired the vessel,until July 5, 2003, the *ChemicalPioneer*was bareboat chartered to a third party and fromJuly 6, 2003 to November 5, 2003 the *ChemicalPioneer*was in drydock. The 2003 operating data excludes thebareboat charter revenue.  SinceApril 28, 2004, the date of acquisition, for the *Charleston*.  Since September 9, 2005 the date ofacquisition for the *Houston.*

 

**Non-GAAPFinancial Measure**

 

EBITDA is used as a supplemental financial measureby management and by external users of our financial statements, such asinvestors and our banks, to assess:

 

•                  the financial performance of our assetswithout regard to financing methods, capital structures or historical costbasis;

 

•                  the ability of our assets to generate cashsufficient to pay interest on our indebtedness and to make distributions to ourpartners;

 

•                  our operating performance and return oninvested capital as compared to those of other companies in the marinetransportation business, without regard to financing methods and capitalstructure; and

 

•                  our compliance with certain financialcovenants included in our debt agreements.

 

EBITDA should not be considered an alternative tonet income, operating income, cash flow from operating activities or any othermeasure of financial performance or liquidity presented in accordance withGAAP. EBITDA excludes some, but not all, items that affect net income andoperating income, and these measures may vary among other companies. Therefore,EBITDA as presented below may not be comparable to similarly titled measures ofother companies.

 

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| ** **                                                                                        | ** **   | ** **                      | ** **   | ** **                   | ** **   | ** **     | ** **   | ** **        | ** **   | **Catug Group of** | ** **   |
|---------------------------------------------------------------------------------------------------|--------------|---------------------------------|--------------|------------------------------|--------------|----------------|--------------|-------------------|--------------|--------------------|--------------|
| ** **                                                                                        | ** **   | **U.S. Shipping Partners L.P.** | ** **   | **Amerada Hess Corporation** | ** **   |
| ** **                                                                                        | ** **   | ** **                      | ** **   | ** **                   | ** **   | ** **     | ** **   | **Period from**   | ** **   | **Period from**    | ** **   | ** ** | ** ** |
| ** **                                                                                        | ** **   | **Year Ended**                  | ** **   | **Year Ended**               | ** **   | **Year Ended** | ** **   | **July 16, 2002** | ** **   | **Jan. 1, 2002**   | ** **   | **Year Ended** | ** ** |
| ** **                                                                                        | ** **   | **Dec. 31,**                    | ** **   | **Dec. 31,**                 | ** **   | **Dec. 31,**   | ** **   | **to Dec. 31,**   | ** **   | **to Sept. 12,**   | ** **   | **Dec. 31,** | ** ** |
| ** **                                                                                        | ** **   | **2005**                        | ** **   | **2004**                     | ** **   | **2003**       | ** **   | **2002 (1)**      | ** **   | **2002**           | ** **   | **2001** | ** ** |
| ** **                                                                                        | ** **   | ** **                      | ** **   | ** **                   | ** **   | ** **     | ** **   | ** **        | ** **   | ** **         | ** **   | ** ** | ** ** |
| *Reconciliation of “EBITDA” to “Net income”:*                                 | *** *** | *** ***                    | *** *** | *** ***                 | *** *** | *** ***   | *** *** | *** ***      | *** *** | *** ***       | *** *** | *** *** | *** *** |
| ** **                                                                                        | ** **   | ** **                      | ** **   | ** **                   | ** **   | ** **     | ** **   | ** **        | ** **   | ** **         | ** **   | ** ** | ** ** |
| Net income (loss)                                                                                 |         | $                               | 18,079       |                         | $            | 1,448          |         | $                 | 2,433        |               | $            | (664 | ) | $ | 5,421 |   | $ | 1,431 |   |
| Depreciation and amortization                                                                     |         | 25,704                          |         | 23,945                       |         | 17,921         |         | 5,070             |         | 2,683              |         | 3,422 |   |
| Interest expense                                                                                  |         | 6,407                           |         | 9,960                        |         | 10,039         |         | 2,978             |         | —             |         | — |   |
| (Benefit) provision for income taxes                                                              |         | (640                            | )            | 3,119                        |         | 72             |         | 18                |         | 2,931              |         | 784 |   |
| Interest income                                                                                   |         | (1,031                          | )            | (369                         | )            | (136           | )            | (25               | )            | —             |         | — |   |
| EBITDA                                                                                            |         | $                               | 48,519       |                         | $            | 38,103         |         | $                 | 30,329       |               | $            | 7,377 |   | $ | 11,035 |   | $ | 5,637 |   |
| *Reconciliation of “EBITDA” to “Net cash  provided by operating activities”:* |         |                            |         |                         |         |           |         |              |         |               |         |   |   |
| Net cash provided by operating activities                                                         |         | $                               | 30,609       |                         | $            | 27,184         |         | $                 | 10,615       |               | $            | 1,821 |   | $ | 8,858 |   | $ | 5,950 |   |
| Payment of drydocking expenditures                                                                |         | 8,930                           |         | —                       |         | 12,448         |         | —            |         | 3,586              |         | 5,206 |   |
| Interest expense paid                                                                             |         | 5,477                           |         | 9,160                        |         | 9,472          |         | 2,815             |         | —             |         | — |   |
| Increase (decrease) in working capital                                                            |         | 2,646                           |         | 8,139                        |         | (2,212         | )            | 2,739             |         | (4,340             | )            | (6,303 | ) |
| Loss on debt extinguishment                                                                       |         | —                          |         | (6,397                       | )            | —         |         | —            |         | —             |         | — |   |
| Income taxes paid                                                                                 |         | 857                             |         | 17                           |         | 6              |         | 2                 |         | 2,931              |         | 784 |   |
| EBITDA                                                                                            |         | $                               | 48,519       |                         | $            | 38,103         |         | $                 | 30,329       |               | $            | 7,377 |   | $ | 11,035 |   | $ | 5,637 |   |

 

•                  EBITDAdoes not reflect our capital expenditures or future requirements for capitalexpenditures or contractual commitments;

•                  EBITDAdoes not reflect changes in, or cash requirements for, our working capitalneeds;

•                  EBITDAdoes not reflect the significant interest expense, or the cash requirementnecessary to service interest or principal payments, on our debts;

•                  Althoughdepreciation and amortization are non-cash charges, the assets beingdepreciated and amortized will often have to be replaced in the future, andEBITDA does not reflect any cash requirements for such replacements; and

•                  Othercompanies in our industry may calculate EBITDA differently than we do, limitingits usefulness as a comparative measure.

 

**ITEM7.  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

The following is a discussion of the historicalconsolidated financial condition and results of operations of U.S. ShippingPartners L.P. and, prior to our November 3, 2004 initial public offering, ofour predecessor company, United States Shipping Master LLC and itspredecessors, and should be read in conjunction with our historicalconsolidated financial statements and notes thereto included elsewhere in thisreport.

 

**Overview**

 

We are a leading provider of long-haul marinetransportation services, principally for refined petroleum products, in theU.S. domestic “coastwise” trade. We are also involved in the coastwise transportationof petrochemical and commodity chemical products. Marine transportation is avital link in the distribution of refined petroleum, petrochemical andcommodity chemical products in the United States, with approximately 28% ofdomestic refined petroleum products being transported by water in 2004. Ourfleet consists of ten tank vessels: six integrated tug barge units, or ITBs,one product tanker, and three specialty refined petroleum and chemical product,or parcel, tankers. Our primary customers are major oil and chemical companies.A significant portion of our fleet capacity is currently committed to thesecompanies pursuant to contracts with initial terms of one year or more, whichprovides us with a relatively predictable level of cash flow. We do not assumeownership of any of the products that we transport on our vessels.

 

Our market is largely insulated from direct foreigncompetition because the Merchant Marine Act of 1920, commonly referred to asthe Jones Act, restricts U.S. point-to-point maritime shipping to vesselsoperating under the U.S. flag, built in the United States, at least 75% ownedand operated by U.S. citizens and manned by U.S. crews. All of our vessels arequalified to transport cargo between U.S. ports under the Jones Act.

 

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We began operations in September 2002 when weacquired our six ITBs from a division of Amerada Hess Corporation (“Hess”) thatwas managed by several executive officers of our general partner. Our six ITBsprimarily transport clean refined petroleum products, such as gasoline, dieselfuel, heating oil, jet fuel and lubricants, from refineries and storagefacilities to a variety of destinations, including other refineries anddistribution terminals. Four of our ITBs are currently operating undercontracts with Hess, BP and Shell, one of which expires in December 2006,two expire in December 2007, and the remaining one expires in January 2008. Ourremaining two ITBs are currently operating in the spot market. Regardless ofour contract rates and rates in the spot market, we are assured specifiedminimum charter rates for our ITBs through September 13, 2007, subject tocertain limited exceptions, pursuant to a support agreement we entered intowith Hess in connection with our acquisition of the six ITBs.

 

In December 2005, we signeda multi-year time charter for the *Houston*with Morgan Stanley Capital Group Inc. through mid 2011. The vessel will betrading in clean petroleum products in the coastwise Jones Act trade. Since itentered service on October 13, 2005, the vessel has operated in the spot marketand will continue to do so until its multi-year time charter with MorganStanley, which will account for 100% of the usable capacity of the *Houston*, begins in mid-2006.

 

Our three parcel tankers, the *Chemical Pioneer*, the *Charleston*, and the *Sea Venture,*which we acquired inMay 2003, April 2004, and November 2005, respectively, primarilytransport specialty refined petroleum, petrochemical and commodity chemical products,such as lubricants, paraxylene, caustic soda and glycols, from refineries andpetrochemical manufacturing facilities to other manufacturing facilities ordistribution terminals. We have contracts with Dow Chemical, ExxonMobil, KochIndustries, Lyondell Chemical and Shell with specified minimum volumes thatwill, in aggregate, account for approximately 74% of the anticipated usablecapacity of the *Charleston*through July 2007 and 75% of the anticipated usable capacity of the *Chemical Pioneer* throughFebruary 2007. In addition, these customers are required to ship on ourparcel tankers any additional volume of these products stipulated in thecontracts. As a result, we expect these companies will utilize substantiallyall of the non-committed capacity of these vessels during those periods.  The *SeaVenture* will supplement the *ChemicalPioneer* in delivering non-petroleum based product. With the futurereduction in chemical ship capacity we do not believe that we will encounter aproblem in fully utilizing the capacity of the *SeaVenture*.

 

In August 2004, we signed a contract forconstruction of a 19,999 ton articulated tug barge unit, or ATB, which isscheduled to be delivered in late 2006 but could be delayed into 2007. We haveentered into contracts to carry commodity chemical products with specifiedminimum cargo volumes that will utilize approximately 77% of this ATB’santicipated capacity through September 2007 and approximately 67% of this ATB’santicipated capacity thereafter through June 2010. Due to the delay in deliveryof this ATB, we will be using the *SeaVenture*to meet our contractual obligations pending delivery of thisATB.

 

On February 16, 2006, we entered into a contractwith Manitowoc Marine Group (“MMG”) for the construction of two barges, whichare specified to have a carrying capacity of approximately 160,000 barrels at98% of capacity. The contract with MMG includes options to construct twoadditional barges.  On the same date, weentered into a contract for the construction of two tugs with EasternShipbuilding Group, Inc. (“Eastern”), which will be joined with the barges tocomplete the two ATB units. The contract with Eastern also includes options toconstruct and deliver up to four additional ATB tugs on the basis that eachsuch option shall cover an order for two tugs. The total construction price forthe two ATBs is anticipated to be approximately $130 million, or $65 millionper unit.  We intend to finance the purchase price with borrowings underour credit facility and operating cash. Additionally, we intend to obtain additional debt financing facilities,as necessary, to cover the costs of this project.  We expect the two ATBs will be completed inAugust 2008 and November 2008, respectively, and we have options to buildanother two ATBs at a cost per unit of approximately $66 million.  The options for the tugs must be exercised byAugust 2006 and February 2007, and the options for the barges must be exercisedby April 2006 and June 2006.

 

We generate revenue by charging customers for thetransportation and distribution of their products utilizing our vessels. Theseservices are generally provided under the following four basic types ofcontractual relationships:

 

•                  time charters, which are contracts to chartera vessel for a fixed period of time, generally one year or more, at a set dailyrate;

 

•                  contracts of affreightment, which arecontracts to provide transportation services for products over a specific traderoute, generally for one or more years, at a negotiated rate per ton;

 

•                  consecutive voyage charters, which arecharters for a specified period of time at a negotiated rate per ton; and

 

•                  spot charters, which are charters for shorterintervals, usually a single round-trip, that are made on either a currentmarket rate or lump sum contractual basis.

 

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The principal difference between contracts ofaffreightment and consecutive voyage charters is that in contracts ofaffreightment the customer is obligated to transport a specified minimum amountof product on our vessel during the contract period, while in a consecutivevoyage charter the customer is obligated to fill the contracted portion of thevessel with its product every time the vessel calls at its facility during the contractperiod and, if the customer does not have product ready to ship, it must pay usfor idle time.

 

The table below illustrates the primary distinctionsamong these types of contracts:

 
| ** **                 | ** ** | **Time Charter**                                             | ** ** | **Contract of  Affreightment** | ** ** | **Consecutive  Voyage  Charter**  | ** ** | **Spot Charter**       | ** ** |
|----------------------------|------------|--------------------------------------------------------------|------------|--------------------------------|------------|-----------------------------------|------------|------------------------|------------|
| Typical  contract length   |       | One year or  more                                            |       | One year or  more              |       | Multiple  voyages                 |       | Single  voyage         |       |
| Rate basis                 |       | Daily                                                        |       | Per ton                        |       | Per ton                           |       | Varies                 |       |
| Voyage  expenses           |       | Customer  pays                                               |       | We pay                         |       | We pay                            |       | We pay                 |       |
| Vessel  operating expenses |       | We pay                                                       |       | We pay                         |       | We pay                            |       | We pay                 |       |
| Idle time                  |       | Customer  pays as long as vessel is available for operations |       | Customer  does not pay         |       | Customer  pays if cargo not ready |       | Customer  does not pay |       |

 

For the years ended December 31, 2005 and 2004, wederived approximately 85% and 82%, respectively, of our revenue under timecharters, consecutive voyage charters and contracts of affreightment, andapproximately 15% and 18%, respectively, of our revenue from spot charters.

 

The amounts received from or paid to Hess pursuantto the Hess support agreement are not recognized as revenue or expense but aredeferred for accounting purposes and will be reflected as an adjustment to thepurchase price relating to the acquisition of the ITBs in accordance withgenerally accepted accounting principles.

 

**SIGNIFICANTEVENTS DURING 2005**

 

***Houston*****Acquisition**

 

In September 2005, we acquired the *Houston,* formerly the *Gus W. Darnell,*at a cost of $25.1million.  The vessel was immediatelyplaced in drydock at a cost of $3.1 million and was placed in service onOctober 13, 2005.  The *Houston*is a Jones Act qualifieddouble-hulled product tanker, built in 1985, capable of carrying approximately240,000 barrels. In December 2005, we signed a multi-year time charter for thevessel, which, when the time charter begins in mid-2006, will be trading inclean petroleum products in the coastwise Jones Act trade and will account for100% of its usable capacity.

 

***Sea Venture*****Acquisition**

 

In November 2005, we acquired the *Sea Venture* at a cost of $4.1million.  The *Sea Venture*is a 19,000 dwt double-bottomedchemical/product, or parcel tanker, from Marine Transport Corporation. Thevessel was re-built in 1983 and is capable of carrying twenty-one differentgrades of product in independent cargo tanks. We placed the vessel in drydockupon acquisition at an estimated cost of $8.9 million and expect the vessel tobe placed in service in May 2006, covering the contracts of our SENESCO-builtATB until it is delivered in December 2006 or early 2007. In 2007, the vesselmay trade in either petroleum products or chemical products for thePartnership.

 

**SENESCO ATBContract Renegotiation**

 

InAugust 2004, we entered into a contract with Southern New England ShipyardCompany (“SENESCO”) to build a 19,999 dwt articulated tug barge (“ATB”) for usat a fixed price of $45.4 million to be delivered in early 2006. The agreementalso provided for options to build up to an additional three ATB’s. In November2005, SENESCO indicated that they were not able to complete the first ATB onthe contract terms due to infrastructure problems and production line issues,and that the completion of the barge will be delayed. We have entered into arevised agreement with SENESCO regarding completion of the ATB at anotherfacility which SENESCO will operate. The total cost of completion of the ATBpursuant to the revised

 

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agreement is currently expected to be approximately $53.4 million, witha contracted delivery date of December 2006.  SENESCO has indicated that it is experiencingcost overruns and further delays in completing the ATB. The revised agreementprovides for substantial penalties for late delivery of the ATB. There is riskthat the cost of the ATB could be higher and that the ATB may not be completedin a timely manner, which could have a material adverse effect on our resultsof operations. We and SENESCO have mutually agreed to cancel the options tohave SENESCO build up to three additional ATBs at a fixed price. The depositswe had made related to the additional vessels will be applied to the totalpurchase price of the SENESCO ATB.

 

**Amendmentsto our Credit Facility**

 

In September 2005, we borrowed an additional $30.0million on our existing credit facility to finance the purchase and drydock ofthe *Houston*.   The loan matures on April 30, 2010, bearsinterest at LIBOR plus 2.00%, and is amortized, on a pro-rated basis, inaccordance with the existing debt repayment schedule.   In connection with this borrowing, we incurredand capitalized $0.2 million of bank fees.

 

In October 2005, we amended our Second Amended andRestated Credit Agreement principally to allow for additional payments, not toexceed $7.5 million, to be made by us to SENESCO for construction of the ATB.

 

We allowed the delayed draw term loan of $30.0million to expire on November 2, 2005.

 

See “-Second Amended and Restated Credit Facility”for additional information on our credit facility.

 

**SubsequentEvents**

 

On February 16, 2006, we entered into a contractwith Manitowoc Marine Group (“MMG”) of Marinette, WI for the construction oftwo barges, each of which has a carrying capacity of 156,000 barrels. Thecontract with MMG includes options to construct two additional barges.  On the same date, we entered into a contractfor the construction of two tugs with Eastern Shipbuilding Group, Inc.(“Eastern”), which will be joined with the barges to complete the two ATBunits. The contract with Eastern also includes options to construct and deliverup to four additional ATB tugs on the basis that each such option will be fortwo tugs.  The total construction pricefor the two ATBs is anticipated to be approximately $130 million, or $65million per unit. We intend to finance the purchase price with borrowingsunder our credit facility and cash from operations. Additionally, we also mayneed to obtain other sources of financing to cover the cost of thisproject.  The first ATB is scheduled toenter service in August 2008 with the second unit following approximately threemonths later.  These ATB units will be built to similar specifications asthe ATB currently under construction with SENESCO. We intend to employ thisseries of ATBs in our Jones Act trade and are in discussions with potentialcustomers regarding charters for these units upon their delivery.  Additionally, we have committed to purchaseadditional owner-furnished items related to two option vessels totaling $17.5million. We have entered into a foreign currency forward contract to hedge thevariability of cash flows associated with our liability related to one of thesecommitments totaling $13.9 million. We have options to build another two ATBsat a cost per unit of approximately $66 million.  The options for the tugs must be exercised byAugust 2006 and February 2007, and the options for the barges must be exercisedby April 2006 and June 2006.

 

On March 15, 2006, we made a $5.0 million deposit toreserve shipyard slots for the building of new vessels, of which $4.6 millionis refundable if we elect by May 26, 2006 not to proceed with the building ofthe new vessels.

 

**Definitions**

 

In order to understand our discussion of our resultsof operations, it is important to understand the meaning of the following termsused in our analysis and the factors that influence our results of operations:

 

•                  *Voyage revenue*. Voyage revenue includes revenue from timecharters, contracts of affreightment, consecutive voyage charters and spotcharters. Voyage revenue is impacted by changes in charter and utilizationrates and by the mix of business among the types of contracts described in thepreceding sentence.

 

•                  *Voyage expenses*. Voyage expenses include items such as fuel,port charges, pilot fees, tank cleaning costs, canal tolls and other costswhich are unique to a particular voyage. These costs can vary significantlydepending on the voyage trade route. Depending on the form of contract, eitherwe or our customer is responsible for these expenses. If we pay voyageexpenses, they are included in our results of operations when they areincurred. Typically, our freight rates are higher when we pay voyage expenses.Our contracts of affreightment and consecutive voyage charters generallycontain escalation clauses whereby certain cost increases, including labor andfuel, can be passed on to our customers.

 

•                  *Net voyage revenue*. Net voyage revenue is equal to voyagerevenue less voyage expenses. As explained above, the amount of voyage expenseswe incur for a particular voyage depends upon the form of the contract.Therefore,

 

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in comparing revenues between reporting periods, we use net voyagerevenue to improve the comparability of reported revenues that are generated bythe different forms of contracts.

 

•                  *Vessel operating expenses*. We pay the vessel operating expensesregardless of whether we are operating under a time charter, contract ofaffreightment, consecutive voyage charter or spot charter. The most significantdirect vessel operating expenses are crewing costs, vessel maintenance andrepairs, bunkers and lube oils and marine insurance.

 

•                  *Depreciation andamortization*. We incur fixedcharges related to the depreciation of the historical cost of our fleet tosalvage value and the amortization of expenditures for drydockings. Theaggregate number of drydockings undertaken in a given period and the nature ofthe work performed determine the level of drydocking expenditures.

 

•                  *General and administrativeexpenses*. General andadministrative expenses consist of employment costs for shoreside staff andcost of facilities, as well as legal, audit and other administrative costs.

 

•                  *Total vessel days*. Total vessel days are equal to the numberof calendar days in the period multiplied by the total number of vesselsoperating or in drydock during that period.

 

•                  *Days worked.* Days worked are equal to total vessel daysless drydocking days and days off-hire.

 

•                  *Drydocking days*. Drydocking days are days designated for theinspection and survey of vessels, and resulting maintenance work, as requiredby the U.S. Coast Guard and the American Bureau of Shipping to maintain thevessels’ qualification to work in the U.S. coastwise trade. Both domestic (U.S.Coast Guard) and international (International Maritime Organization) regulatorybodies require that our ITBs be drydocked for major repair and maintenanceevery five years, with a mid-period underwater survey in lieu of drydocking,and our parcel tankers and *Houston*bedrydocked twice every five years. Drydocking days also include unscheduled instanceswhere vessels may have to be drydocked in the event of accidents or otherunforeseen damage.

 

•                  *Net utilization*. Net utilization is a primary measure ofoperating performance in our business. Net utilization is a percentage equal tothe total number of days worked by a vessel or group of vessels during adefined period, divided by total vessel days for that vessel or group ofvessels. Net utilization is adversely impacted by drydocking, scheduled andunscheduled maintenance and idle time not paid for by the customer.

 

•                  *Time charter equivalent*. Time charter equivalent, another keymeasure of our operating performance, is equal to the net voyage revenue earnedby a vessel during a defined period, divided by the total number of actual daysworked by that vessel during that period. Fluctuations in time charterequivalent result not only from changes in charter rates charged to ourcustomers, but from external factors such as weather or other delays.

 

**CriticalAccounting Policies**

 

Our discussion and analysis of our financialcondition and results of operations are based upon our consolidated financialstatements, which have been prepared in conformity with U.S. generally acceptedaccounting principles, or GAAP. In preparing these financial statements, we arerequired to make certain estimates, judgments and assumptions. These estimates,judgments and assumptions affect the reported amounts of our assets andliabilities, including the disclosure of contingent assets and liabilities, atthe date of the financial statements and the reported amounts of our revenuesand expenses during the periods presented. We evaluate these estimates andassumptions on an ongoing basis. We base our estimates and assumptions onhistorical experience and on various other factors that we believe to bereasonable at the time the estimates and assumptions are made. However, futureevents and their effects cannot be predicted with absolute certainty.Therefore, the determination of estimates requires the exercise of judgment.Actual results inevitably will differ from these estimates and assumptionsunder different circumstances or conditions, and such differences may bematerial to the financial statements. We believe that, of our significantaccounting policies discussed in Note 3 to our consolidated financialstatements, the following policies might involve a higher degree of judgment.

 

***Revenue Recognition***

 

We earn revenue under contracts of affreightment,spot charters, consecutive voyage charters and time charters. For contracts ofaffreightment, spot charters and consecutive voyage charters, revenue andvoyage expenses are recognized based upon the relative transit time in eachperiod compared to the total estimated transit time for each voyage. Althoughcontracts of affreightment, consecutive voyage charters and certain contractsfor spot charters may be effective for a period in excess of one year, revenueis recognized on the basis of individual voyages, which are generally less than15 days in duration. For time charters, revenue is recognized on a dailybasis over the contract period, with expenses recognized as incurred.

 

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***Depreciation and Amortization***

 

Vessels and equipment are recorded at cost,including transaction fees where appropriate, and depreciated to estimatedsalvage value using the straight-line method as follows: ITBs to theirmandatory retirement as required by OPA 90, between 2012 and 2014; and 10 yearsfor parcel tankers and the *Houston*.We capitalize expenditures incurred for drydocking and amortize theseexpenditures over 60 months for our ITBs and 30 months for our parceltankers and the *Houston*. Theaggregate number of drydockings undertaken in a given period and the nature ofthe work performed determine the level of drydocking expenditures. Maintenanceand repairs that do not improve or extend the useful lives of the assets areexpensed.

 

The book values of our vessels may not representtheir fair market value at any point in time since the market prices ofsecond-hand vessels tend to fluctuate with changes in charter rates and thecost of new buildings. Historically, both charter rates and vessel values tendto be cyclical. The net book value of vessels held and used by us is reviewedfor potential impairment whenever events or changes in circumstances indicatethat the carrying amount of a particular vessel may not be fully recoverable.In such instances, an impairment charge would be recognized if the estimatedfair value of the vessel is less than the vessel’s net book value.

 

In developing estimates of future cash flows, wemust make assumptions about future charter rates, vessel operating expenses andthe estimated remaining useful lives of the vessels. These assumptions arebased on historical trends as well as future expectations. Although managementbelieves that the assumptions used to evaluate potential impairment arereasonable and appropriate, there may be events or changes in circumstancesthat could indicate that the recoverability of the carrying amount of a vesselmight not be possible.  Examples ofevents or changes in circumstances that could indicate that the recoverabilityof a vessel’s carrying amount should be assessed might include a change inregulations such as OPA 90, or continued operating losses, or projectionsthereof, associated with a vessel or vessels. If events or changes in circumstances as set forth above indicate that avessel’s carrying amount may not be recoverable, we would then be required toestimate the undiscounted cash flows, which are based on additional assumptionssuch as asset utilization, length of service of the asset, and estimatedsalvage values.  Although we believe ourassumptions and estimates are reasonable, deviations from the assumptions andestimates could produce a materially different result.

 

***Accounts Receivable***

 

We extend credit to our customers in the normalcourse of business. We regularly review our accounts, estimate the amount ofuncollectible receivables each period and establish an allowance foruncollectible amounts. The amount of the allowance is based on the age ofunpaid amounts, information about the current financial strength of customersand other relevant known information. Historically, credit risk with respect toour trade receivables has generally been considered minimal because of thefinancial strength of our customers.

 

***Deferred Income Taxes***

 

We provide deferred taxes for the tax effects ofdifferences between the financial reporting and tax bases of assets andliabilities of our corporate subsidiary, which are recorded at enacted taxrates in effect for the years in which the differences are projected toreverse. A valuation allowance is provided, if necessary, for deferred taxassets that are not expected to be realized.

 

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**Results ofOperations**

 

The following table summarizes our results ofoperations (dollars in thousands, except for operating data):

 

| ** **                                              | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------------------|------------|------------------------------|------------|
| ** **                                              | ** ** | **2005**                     | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                    |       |                         |       |   |   |   |   |
| Voyage revenue                                          |       | $                            | 131,534    |   | $ | 122,355 |   | $ | 80,514 |   |
| Vessel operating expenses                               |       | 47,986                       |       | 47,119 |   | 33,143 |   |
| % of voyage revenue                                     |       | 36.5                         | %          | 38.5 | % | 41.2 | % |
| Voyage expenses                                         |       | 24,203                       |       | 20,415 |   | 9,889 |   |
| % of voyage revenue                                     |       | 18.4                         | %          | 16.7 | % | 12.3 | % |
| General and administrative expenses                     |       | 10,826                       |       | 10,321 |   | 7,153 |   |
| % of voyage revenue                                     |       | 8.2                          | %          | 8.4 | % | 8.9 | % |
| Depreciation and amortization                           |       | 25,704                       |       | 23,945 |   | 17,921 |   |
| **Operating income**                                    |       | 22,815                       |       | 20,555 |   | 12,408 |   |
| % of voyage revenue                                     |       | 17.3                         | %          | 16.8 | % | 15.4 | % |
| Interest expense                                        |       | 6,407                        |       | 9,960 |   | 10,039 |   |
| Loss on debt extinguishment                             |       | —                       |       | 6,397 |   | — |   |
| Other income                                            |       | (1,031                       | )          | (369 | ) | (136 | ) |
| **Income before (benefit) provision for  income taxes** |       | 17,439                       |       | 4,567 |   | 2,505 |   |
| (Benefit) provision for income taxes                    |       | (640                         | )          | 3,119 |   | 72 |   |
| **Net income**                                          |       | $                            | 18,079     |   | $ | 1,448 |   | $ | 2,433 |   |
|                                                    |       |                         |       |   |   |   |   |
| **Operating Data (1)**                                  |       |                         |       |   |   |   |   |
| Number of vessels (2)                                   |       | 9                            |       | 8 |   | 7 |   |
| Total vessel days                                       |       | 2,999                        |       | 2,810 |   | 2,430 |   |
| Days worked                                             |       | 2,852                        |       | 2,776 |   | 2,237 |   |
| Drydocking days                                         |       | 132                          |       | — |   | 122 |   |
| Net utilization                                         |       | 95                           | %          | 99 | % | 92 | % |
| Average daily time charter equivalent rate              |       | $                            | 37,631     |   | $ | 35,500 |   | $ | 31,444 |   |

 

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(1)   Since November 6, 2003 for the *Chemical Pioneer*. From May 6, 2003,the date we acquired the vessel, until July 5, 2003, the *Chemical Pioneer* was bareboat chartered toa third party and from July 6, 2003 to November 5, 2003 the *Chemical Pioneer* was in drydock. The 2003operating data excludes bareboat charter data. Since April 28, 2004, the date of acquisition, for the *Charleston.*

(2)   Does not reflect the *Sea Venture*as vessel will not becomeoperational until the completion of its drydock, estimated to be mid-2006.

 

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***Year Ended December 31, 2005 Comparedto Year Ended December 31, 2004***

 

*VoyageRevenue.*   Revenues were $131.5 million for the yearended December 31, 2005, an increase of $9.2 million, or 8%, from the yearended December 31, 2004.  The increase isattributable to $9.8 million, $3.8 million, and $1.8 million of increases forthe *Charleston*,*Houston*, and*Chemical Pioneer*, respectively.  The *Charleston*experienced a full year of operation in 2005 compared to eight months in 2004,coupled with a 9% increase in rates.  The*Houston* was purchased inSeptember 2005, and began trading in October 2005.   The *ChemicalPioneer* benefited from an increase in rates, however, most of itsincrease was attributable to increased voyage expenses, which are passedthrough in the form of increased revenue rates. These revenue increases were partially offset by decreased ITB revenuesof $1.7 million and charter-in revenue of $4.5 million.  The ITB revenue decrease was principallyrelated to the drydocking of the *New York*and the *Jacksonville*for acollective 132 days. Charter-in revenue was non-recurring in 2005.  During 2004, we chartered-in a vessel tofulfill a contractual obligation to a customer.

 

*Vessel Operating Expenses.*Vessel operating expenses were $48.0 millionfor the year ended December 31, 2005, compared to $47.1 million for the yearended December 31, 2004.  The increase of$0.9 million is attributable to the addition of the *Houston*, which contributed $1.6 million, a full year ofoperation of the *Charleston*,which added $2.1 million, offset by a $3.9 million decrease in charter-inexpense related to the charter-in of a vessel in 2004 to fulfill a contractualobligation to a customer.   The remainingincrease of $1.1 million is attributable to increases in crew wages, benefitsand crew costs, principally as a result of contracted wage increases coupledwith increases in insurance, as a result of rate increases, and uninsureddamages related to the *Mobile*.

*Voyage Expenses.* Voyage expenses increased to $24.2 millionfor the year ended December 31, 2005 from $20.4 million for the year endedDecember 31, 2004.  The $3.8 million, or19% increase, was attributable to the *Houston*,which contributed $1.2 million, and the full year of operation of the *Charleston*, which contributed anadditional $2.8 million.  These amountswere partially offset by a decrease in voyage expenses from 2004 related to achartered-in vessel of $1.1 million.  Theremaining increase is attributable to increases in bunker expense due to therising cost of fuel prices.

 

*General and Administrative Expenses.* General and administrative expenses were $10.8 million for the yearended December 31, 2005, an increase of $0.5 million, or 5%, compared to theyear ended December 31, 2004.  Theincrease was principally the result of increases in wages and professional feesoffset by a decrease in bonus expense. Certain members of executive managementreceived wage increases totaling $0.3 million in November 2004, effective uponour initial public offering. Professional fees increased due to additional costs associated withcomplying with the Sarbanes Oxley Act of 2002.    Bonus expense decreased $1.1 millionprincipally due to the nonrecurring aggregate $1.0 million bonus to two membersof the executive management in 2004 in connection with our initial publicoffering.  In addition, in 2005, weincurred approximately $0.4 million in pursuing acquisitions that ultimatelywere not consummated.

 

*Depreciation and Amortization.* Depreciation and amortization was $25.7 million, an increase of $1.8million, or 7%, during the year ended December 31, 2005 as a result of theaddition of the *Houston*, whichwas placed in service in October 2005, a full year of depreciation on the *Charleston*, and the commencement ofamortization of the *Houston* and *New York* drydocks, which were completed inthe fourth quarter of 2005.

 

*Interest Expense.*  Interest expense was $6.4million for the year ended December 31, 2005, a decrease of $3.6 millioncompared to $10.0 million for the year ended December 31, 2004.  The decrease is a result of average lowerdebt balances, principally as a result of our November 2004 refinancing, whichresulted in the repayment of $93.8 million of long-term debt.  The decrease was partially offset by anincrease in interest rates, as it related to our non-fixed rate debt.

 

*Loss on Debt Extinguishment.*  During the year ended December 31, 2004, we refinanced our creditfacility in April and November, resulting in a loss on debt extinguishmenttotaling $6.4 million.  There were norefinancings during the year ended December 31, 2005.

 

*(Benefit)/Provision for Income Taxes.* Duringthe year ended December 31, 2004, we incurred a $3.2 million one-time incometax expense relating to the conversion of one of our subsidiaries from alimited liability company to a corporation. The benefit for income taxes incurred during the year ended December 31,2005 is attributable to a pre-tax operating loss in the aforementionedcorporate subsidiary principally arising from differences between book and taxdepreciation methods.

 

*Net Income.*  Netincome was $18.1 million for the year ended December 31, 2005, an increaseof $16.6 million, as compared to $1.4 million for the year ended December31, 2004. This increase is the result of the 2004 nonrecurring charges for losson debt extinguishment of $6.4 million and a $3.1 million provision for incometaxes resulting primarily from a change

 

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in the structure of one of our subsidiaries to a corporation.  Additionally, operating income increased $2.3million, other income, which is principally interest income, increased $0.7million and interest expense decreased $3.6 million for the year ended December31, 2005.

 

***Year Ended December 31, 2004 Comparedto Year Ended December 31, 2003***

 

*VoyageRevenue.*  Voyage revenue was $122.4 million for theyear ended December 31, 2004, an increase of $41.8 million, or 52%,as compared to voyage revenue of $80.5 million for the year ended December31, 2003. Voyage revenue excluding voyage expenses was $101.9 million for theyear ended December 31, 2004, an increase of $31.3 million, or 44%, as comparedto the year ended December 31, 2003.  The*Chemical Pioneer*, which wepurchased in May 2003, contributed $2.4 million of voyage revenue,including $0.3 million under a bareboat charter in the year ending December 31,2003, and contributed $16.6 million of voyage revenue in 2004. The *Charleston*, which we purchased inApril 2004, contributed $12.5 million of voyage revenue.  In August 2004, we time chartered a parceltanker, which contributed $4.5 million of voyage revenue, to fulfill ourobligations under contracts of affreightment. The remaining increase in 2004 isprimarily a result of more of our vessels operating under contracts where wepaid the voyage expenses but received higher freight rates to compensate us forbearing these expenses.

 

*Vessel Operating Expenses.* Vessel operating expenses were $47.1 million for the year endedDecember 31, 2004, an increase of $14.0 million, or 42%, as compared to$33.1 million for the year ended December 31, 2003. The *Chemical Pioneer,* which was purchased inMay 2003, was in drydock until November 2003 and the *Charleston*, which we did not own in 2003, accounted for$10.3 million, or 74%, of the increase in vessel operating expenses forthe year ended December 31, 2004. In August 2004, we time chartered a parceltanker to fulfill our obligations under contracts of affreightment resulting inincreased vessel operating expenses of $4.0 million for the year ended December31, 2004.

 

*Voyage Expenses.*  Voyage expenses were $20.4million for the year ended December 31, 2004, an increase of$10.5 million, or 106%, as compared to voyage expenses of$9.9 million for the year ended December 31, 2003. Voyage expenses as apercentage of voyage revenue increased from 12.3% in the year ended December31, 2003 to 16.7% in the year ended December 31, 2004.  In August 2004, we time chartered a parceltanker to fulfill our obligations under contracts of affreightment resulting inincreased voyage expenses of $1.1 million for the year ended December 31,2004.  The remaining increase in voyageexpenses, both in dollars and as a percentage of voyage revenue, was the resultof one additional ITB being employed in the spot market during 2004, where wepaid voyage expenses and received higher freight rates to compensate us forbearing these expenses.

 

*General and Administrative Expenses.* General and administrative expenses were $10.3 million for the yearended December 31, 2004, an increase of $3.2 million, or 44%, compared to$7.2 million for the year ended December 31, 2003.   In November 2004 we paid a $2.3 millionbonus to management and staff in connection with the closing of our publicoffering and in April 2004 we paid a $0.4 million bonus to management inconnection with the purchase of the *Charleston*.Additionally, incremental costs of $1.0 million associated with being a publicentity, including quarterly and annual reporting requirements, tax returns andSchedule K-1 preparation were incurred for the year ended December 31, 2004.For the first 38 days of 2003, we utilized office space and otheradministrative services at Amerada Hess’ New Jersey headquarters at nocharge.  General and administrativeexpenses include management fees of $0.6 million paid to an affiliate ofSterling Investment Partners, L.P. in the years ended December 31, 2004 and2003.

 

*Depreciation and Amortization.* Depreciation and amortization was $23.9 million for the year endedDecember 31, 2004, an increase of $6.0 million, or 34%, as compared to$17.9 million for the year ended December 31, 2003. This increase is dueto the amortization of the capitalized drydock expenditures for, anddepreciation of, the *Chemical Pioneer*,which we acquired in May 2003 and drydocked in July 2003, anddepreciation of the *Charleston*,which we acquired in April 2004.

 

*Interest Expense.*  Interest expense was$10.0 million for the year ended December 31, 2004, a decrease of $79thousand, or 1%, as compared to $10.0 million for the year ended December31, 2003. Although we increased our borrowings in July 2003 to finance thedrydocking, pay a portion of the purchase price and provide working capital forthe operation of the *Chemical Pioneer*in 2003, we had lower outstanding loan balances during the first quarter of2004 due to scheduled amortization of debt during 2003 and lower interestrates. In April 2004, we amended our then existing credit facility andincreased our debt outstanding to purchase the *Charleston*but at lower interest rates. Additionally, in November 2004 we amended our then existing creditfacility in connection with the closing of our initial public offering andutilized proceeds to

 

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reduce our debt balance by $93.8 million, resulting in reduced interestexpense.

 

*Loss on Debt Extinguishment.*  During 2004, we refinanced our credit facility in April and Novemberresulting in a $6.4 million loss on debt extinguishment.  This represents a write-off of certaintransaction fees associated with the debt that was repaid as well as certainother costs incurred in the transaction. In April 2004, we amended and restatedour then existing credit facility, resulting in a $3.2 million charge, and usedthe proceeds to repay higher interest rate debt.   In November 2004, we amended and restatedour then existing credit facility, resulting in a $3.2 million charge, inconnection with the closing of our initial public offering.

 

*Provision for Income Taxes.* In2004, we recorded a provision of $3.2 million principally from the recording ofdeferred taxes relating to the change in the structure of one of oursubsidiaries to a corporation.  Thecorporate subsidiary consists of the *ChemicalPioneer* and its results of operations.  This subsidiary is subject to federal andstate income taxes.  This provision waspartially offset by a net benefit of $0.1 million that arose from operatingresults of our corporate subsidiaries.

 

*Net Income.*  Netincome was $1.4 million for the year ended December 31, 2004, a decreaseof $1.0 million, or 40%, as compared to $2.4 million for the yearended December 31, 2003. This decrease is the result of the $3.1 millionprovision for income taxes resulting primarily from a change in the structureof one of our subsidiaries to a corporation, a loss on debt extinguishment of$6.4 million, coupled with increased general and administrative, vesseloperating and voyage expenses.  Thisdecrease is partially offset by increased operating income as the result of theinclusion of the *Chemical Pioneer*and*Charleston* in 2004, as well ashigher charter rates under certain of our contracts in 2004.

 

**Liquidityand Capital Resources**

 

***Operating Cash Flows***

 

Net cash provided by operating activities was $30.6 millionfor the year ended December 31, 2005, compared to $27.2 million for theyear ended December 31, 2004.  Theincrease is primarily the result of a $4.0 million increase in operatingresults, after adjusting for non-cash expenses such as depreciation andamortization, a $5.1 million favorable working capital fluctuation, a $3.7million decrease in cash interest expense due to reduced debt levels, a $0.7million increase in other income, offset by increases in drydockingexpenditures of $8.9 million and income taxes paid of $0.8 million. Net cashprovided by operating activities was $10.6 million for the year endedDecember 31, 2003. The increase of $16.6 million in 2004 resultedprimarily from increased voyage revenue, partially offset by increases invessel operating and general and administrative expenses.

 

***Investing Cash Flows***

 

Net cash used in investing activities totaled $56.1million, $34.5 million and $1.1 million for the years ended December 31, 2005,2004, and 2003.  In September 2005, weacquired the *Houston*for $25.4million and in November 2005, we acquired the *SeaVenture* for $4.1 million, including transaction fees.  During 2005 and 2004, we made progresspayments toward the construction of a new ATB of $23.6 million and $7.9million, respectively.  This vessel isscheduled for completion in December 2006. In December 2005, we made a deposit of $3.8 million to secure shipyardslots for two new build ATBs.  Additionally,we purchased computer equipment totaling $0.1 million during 2005. InJanuary 2004, we sold the *Stolt Spirit*,a damaged vessel purchased in May 2003 for a possible reconstruction, asscrap for $2.0 million.  Wepurchased the *Charleston* for$33.0 million in April 2004 rather than reconstruct the *Stolt Spirit*.  In May 2003, we purchased the *Chemical Pioneer* and *Stolt Spirit* for $5.5 millionincluding transaction fees.  We purchasedadditional office furniture for $0.4 million prior to moving into our newoffices in February 2003.

 

The amounts received from or paid to Hess pursuantto the Hess support agreement are not recognized as revenue or expense but aredeferred for accounting purposes and will be reflected as an adjustment to thepurchase price relating to the acquisition of the ITBs from Hess at the end ofthe Hess support agreement. Pending such adjustment, they are included in cashflows from investing activities as advances from Hess. Payments by Hess to usunder the support agreement were $1.0 million, $4.0 million, and$5.3 million, net of payments to Hess of $2.7 million, $0.7 million, and$0.5 million, respectively, for the years ended December 31, 2005, 2004and 2003, respectively. For the years ended December 31, 2005 and 2004five ITBs were covered by the support agreement. For the year ended December31, 2003, four ITBs were covered by the support agreement.  One ITB is under contract with Hess at acharter rate less than the support rate; this vessel will be covered by thesupport agreement upon any termination of that contract. If the rate for an ITBexceeds the support rate set forth in the support agreement, we must pay theexcess to Hess to reimburse Hess for any payments made to us by Hess under thesupport agreement and, once Hess has been fully reimbursed for all paymentsmade under the support agreement, we must pay Hess 50% of any remaining excess.Our obligation to reimburse Hess for these payments terminates upon expirationof the support

 

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agreement in September 2007.

 

***Financing Cash Flows***

 

Net cash provided by financing activities was $5.2million and $29.1 million for the years ended December 31, 2005 and 2004,respectively, and net cash used in financing activities was $4.2 millionfor the year ended December 31, 2003. In September 2005, we borrowed $30.0 million from our existing creditfacility to finance the purchase and drydock of the *Houston*.  During 2005,we paid $23.1 million of distributions to our investors and repaid $1.6 millionof debt in accordance with scheduled debt amortization.

 

 In April2004, we obtained $202.5 million of new financing from our amended and restatedcredit facility and used it to finance the $33.0 million purchase of the *Charleston*, refinance $108.2 millionof term loans, repay $29.0 million of subordinated debt, distribute $15.0million to the members of United States Shipping Master LLC, pay $6.6 millionof transaction costs, pay a $0.4 million bonus to our management and provide$10.1 million of working capital. In November 2004, we used the gross proceedsfrom our initial public offering to pay down term debt of $93.8 million, payfinancing costs, underwriting fees, professional fees and other offeringexpenses, and to redeem the 899,968 common units received by United StatesShipping Master LLC in connection with the transfer of net assets to us.  In addition, for the year ended December 31,2004, we repaid $16.3 million of debt in accordance with scheduled debtamortization.  Upon completion of the initialpublic offering, $23.0 million of cash was retained by Master and not contributedto the Partnership.

 

In 2003, we received additional member contributionsof $5.9 million to purchase the *ChemicalPioneer* and *Stolt Spirit,*incurred additional debt of $15.0 million to finance the drydocking of theChemical Pioneer and repaid $24.4 million of debt.

 

***Oil Pollution Act of 1990***

 

Tank vessels are subject to the requirements of OPA90, which mandates that all non-double-hulled tank vessels operating inU.S. waters be removed from petroleum and petroleum-based producttransportation services at various times by January 1, 2015, and providesa schedule for the phase-out of the non-double-hulled vessels based ontheir age and size. Under OPA 90, the phase-out dates for our vessels are asfollows: *Groton* and *Jacksonville* (2012), *Baltimore, Charleston, Chemical Pioneer,*and *New York* (2013) and *Mobile* and *Philadelphia* (2014). As a result of these requirements,these vessels will be prohibited from transporting crude oil and petroleum-basedproducts in U.S. waters after these dates unless they are retrofitted to complywith OPA 90.  The *Houston* is a double-hulled vessel andtherefore does not phase-out.

 

We are currently exploring several “end-of-life”options for our ITBs as they reach their OPA 90 phase-out dates, includingretrofitting our ITBs with an internal double hull or constructing new vessels.A retrofit would involve installing double-sides internally in theexisting forebody, rearranging ballast tanks and installing coating systems toprotect all newly installed steel surfaces. This retrofit will result in afully conforming double-hull vessel since the existing double-bottom ofthe ITB is fully conforming; however, the capacity of the vessel will decreaseby approximately 5%. We estimate the current cost of this retrofit to be approximately$25 million per vessel, and will require an off-hire period ofapproximately 180 days.  Certain ofour customers have indicated that they are not currently interested inchartering a retrofitted ITB.   Weestimate the current cost of constructing a series of new product tank vesselswould average approximately $120 million per vessel and may be financed usingoff-balance sheet financing.

 

At the time we make these expenditures, the actualcost could be higher due to inflation and other factors. Depending on the costof the plan that we ultimately adopt to comply with OPA 90 phase-outrequirements, the board of directors of our general partner, with approval bythe conflicts committee, may elect to increase our estimated maintenancecapital expenditures, which would reduce our basic surplus and our cashavailable for distribution. In addition, if charter rates decline, it may notbe economical for us to retrofit one or more ITBs, in which event we would haveto take them out of service, which would also reduce cash available fordistribution.

 

We do not expect to incur significant capitalexpenditures in order to bring our parcel tankers into compliance with OPA 90.Although the *Chemical Pioneer* isdouble-hulled, it is not OPA 90 compliant; however, we believe that aminor modification, which must be made by 2013, will bring the *Chemical Pioneer* into compliance with OPA90. Although the *Charleston* isalso not OPA 90 compliant, our intent is to seek a waiver allowing us to carryrefined petroleum products in the vessel’s center tanks and non-petroleum-basedproducts in the other tanks rather than retrofit the vessel. If the waiver isnot obtained, or under certain circumstances even if the waiver is obtained, wemay not be able to transport a sufficient quantity of products that generatequalifying income, in which event we would be required to place the *Charleston* in a corporate

 

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subsidiary to limit the amount of non-qualifying income we generate,which could reduce cash available for distribution.  The *SeaVenture*is not OPA 90 compliant and cannot carry petroleum productsbeyond 2013.  At this time, we intend tooperate the *Sea Venture*beyondits OPA 90 phase out date in the chemical trade.

 

***Ongoing Capital Expenditures***

 

Marine transportation of refined petroleum,petrochemical and commodity chemical products is a capital intensive business,requiring significant investment to maintain an efficient fleet and to stay inregulatory compliance. Both domestic (U.S. Coast Guard) and international(International Maritime Organization) regulatory bodies require that our ITBsbe drydocked for major repairs and maintenance every five years and that weconduct a mid-period underwater survey in lieu of drydocking, and that ourparcel tankers and the *Houston*bedrydocked twice every five years. In addition, vessels may have to be drydockedin the event of accidents or other unforeseen damage. Periodically, we alsomake expenditures to acquire or construct additional tank vessel capacityand/or to upgrade our overall fleet efficiency.

 

During 2005, we placed three vessels, the newlypurchased *Houston*, the *New York* and the *Jacksonville* in drydock.  The *Houston*drydock was completed in October at a cost of $3.1 million.  The ITB *NewYork* drydock was completed in November at a cost of $6.1 million andthe ITB Jacksonville was completed in December at a cost of $6.0 million.During 2006, the parcel tankers, *Charleston,Chemical Pioneer*, and *Sea Venture*,and the ITBs*Groton* and *Mobile* will be placed in drydock with atotal estimated cost of $27.9 million. The *Baltimore* and *Philadelphia* are scheduled for drydock in2007.  For future drydockings, weestimate that drydocking the ITBs will cost approximately $6.0 million pervessel, the parcel tanker drydocks will cost approximately $3.0 million to $5.0million per vessel, and the *Houston*drydock will cost approximately $3.0 million. When drydocked, each of our ITBs will be out of service forapproximately 50 to 60 days and each parcel tanker and the *Houston* will be out of service forapproximately 35 to 50 days. At the time we drydock these vessels, theactual cost of drydocking may be higher due to inflation and otherfactors.  In addition, vessels in drydockwill not generate any income, which will reduce our revenue and cash availablefor distribution.

 

The following table summarizes total maintenancecapital expenditures, consisting of drydocking expenditures, and expansioncapital expenditures for the periods presented (in thousands):

 

| ** **                        | ** ** | **Year Ended**   | ** ** | **Year Ended**   | ** ** | **Year Ended**   | ** ** |
|-----------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                        | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
| ** **                        | ** ** | **2005**         | ** ** | **2004**         | ** ** | **2003**         | ** ** |
| ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
| Maintenance  capital expenditures |       | $                | 45,133     |             | $          | —           |       | $ | 12,448 |   |
|                              |       |             |       |             |       |             |       |
| Expansion  capital expenditures   |       | 23,710           |       | 40,930           |       | 5,881            |       |
|                              |       |             |       |             |       |             |       |
| Total capital expenditures        |       | $                | 68,843     |             | $          | 40,930           |       | $ | 18,329 |   |

 

***Liquidity Needs***

 

Our primary short-term liquidity needs are to makescheduled debt payments, pay our quarterly distributions and to fund generalworking capital requirements and drydocking expenditures while our long-termliquidity needs are primarily associated with expansion and other maintenancecapital expenditures. Expansion capital expenditures are primarily for thepurchase or construction of vessels, while maintenance capital expendituresinclude drydocking expenditures and the cost of bringing our vessels intocompliance with OPA 90. Our primary sources of funds for our short-termliquidity needs will be cash flows from operations and borrowings under ourcredit facility, while our long-term sources of funds will be from cash fromoperations, long-term bank borrowings and other debt or equity financings.

 

***Second Amended and Restated Credit Facility***

 

On November 3, 2004, inconnection with the closing of our initial public offering, we amended andrestated our April 2004 credit facility with Canadian Imperial Bank ofCommerce, as administrative agent, to provide us with a:

 

•   $130 million senior secured term facility, of which$100 million was drawn at closing that was used to refinance existingindebtedness and/or to finance the acquisition or construction of additionalvessels and a $30 million

 

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delayed draw term loan, which expired unexercised on November 2, 2005;and

•   $50 million senior secured revolving working capital creditfacility that will be used for ongoing working capital needs, letters ofcredit, distributions and general partnership purposes, including futureacquisitions and expansions.

 

In addition, until November3, 2006, we have the option to increase, up to an additional amount not toexceed $90.0 million in the aggregate, in the maximum amount available tous under the credit agreement through increases in either the term facility,revolving credit facility or both. Our exercise of this option is at thediscretion of CIBC World Markets Corp., as the sole lead arranger, and iscontingent upon, among other things:

 

•    no event of default having occurred and continuing, and

•    the proceeds being used to construct or acquire new vessels.

 

In September 2005, we borrowed $30.0 million of the$90.0 million aggregate additional borrowings on our existing credit facilityto finance the purchase and drydock of the *Houston*.  The loan matures on April 30, 2010, bears interestat LIBOR plus 2.00%, and is amortized, on a pro-rated basis, in accordance withthe existing debt repayment schedule.  In connection with this borrowing, we incurred and capitalized $0.2million of bank fees.

 

In October 2005, we amended our Second Amended andRestated Credit Agreement principally to allow for additional payments, not toexceed $7.5 million, to be made by us to the shipyard for construction of theSENESCO ATB.

 

Our obligations under the credit facility aresecured by a first priority security interest, subject to permitted liens, onall our assets.

 

Borrowings under our revolving credit facility aredue and payable on the earlier of November 2, 2009 or the date the termfacility is repaid. The term loan matures April 30, 2010, and is required to beamortized quarterly.  See Note 6 to thefinancial statements for additional information regarding the credit facility.

 

We can prepay all loans under our credit facility atany time without premium or penalty (other than customary LIBOR breakagecosts). We are required to reduce all working capital borrowings under thecredit agreement to zero for a period of at least fifteen consecutive days onceeach twelve-month period prior to the maturity date of the revolving creditfacility.

 

Our credit agreement prevents us from declaringdividends or distributions if any event of default, as defined in the creditagreement, occurs or would result from such declaration. In addition, thecredit agreement contains covenants requiring us to adhere to certain financialcovenants and limiting the ability of our operating company and itssubsidiaries to, among other things:

 

•   incur or guarantee indebtedness;

•   change ownership or structure, including consolidations, liquidationsand dissolutions;

•   make distributions or repurchase or redeem units;

•   make capital expenditures in excess of specified levels;

•   make certain negative pledges and grant certain liens;

•   sell, transfer, assign or convey assets;

•   make certain loans and investments;

•   enter into a new line of business;

•   transact business with affiliates;

•   amend, modify or terminate specified contracts;

•   enter into agreements restricting loans ordistributions made by our operating company’s subsidiaries to us or ouroperating company; or

•   participate in certain hedging and derivative activities.

 

If an event of default exists under the creditagreement, the lenders will be able to terminate the revolving credit

 

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facility and accelerate the maturity of all outstanding loans, as wellas exercise other rights and remedies. Each of the following is an event ofdefault under our credit facility:

 

•   failure to pay any principal, interest, fees, expenses or other amountswhen due;

•   any loan document or lien securing the credit facility ceases to beeffective;

•   the Hess support agreement terminates or ceases to be effective (otherthan in accordance with its terms);

•   breach of certain financial covenants;

•   failure to observe any other agreement, securityinstrument, obligation or covenant beyond specified cure periods in certaincases;

•   default under other indebtedness of any of our subsidiaries in excessof $1.0 million;

•   bankruptcy or insolvency events involving us, our general partner orany of our subsidiaries;

•   failure of any representation or warranty to be materially correct;

•   a change of control, which includes the following events:

•   any transaction that results in SterlingInvestment Partners L.P., management and their affiliates beneficially owningless than 51% of the total voting power entitled to vote for the election ofdirectors of the Partnership’s general partner;

•   US Shipping General Partner LLC ceases to beour sole general partner;

•   we or our general partner liquidate or dissolve;

•   we sell or otherwise dispose of all orsubstantially all our assets; and

•   we cease to own 100% of our subsidiaries freeof any liens;

•   a material adverse effect occurs relating to the Partnership or itsbusiness;

•   our general partner defaults under thepartnership agreement and such default could reasonably be anticipated to havea material adverse effect on us or our business; and

•   judgments against us or any of our subsidiaries in excess of certainallowances.

 

***Contractual Obligations and Contingencies***

 

Our contractual obligations at December 31,2005 consisted of the following (in thousands):

 
| ** **                       | ** ** | **Payments Due by Period** | ** ** |
|----------------------------------|------------|----------------------------|------------|
| ** **                       | ** ** | ** **                 | ** ** | **Less than** | ** ** | ** ** | ** ** | ** ** | ** ** | **After** | ** ** |
| ** **                       | ** ** | **Total**                  | ** ** | **1 Year** | ** ** | **1-3 Years** | ** ** | **4-5 Years** | ** ** | **5 Years** | ** ** |
| ** **                       | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Long-term  debt (1)              |       | $                          | 128,037    |   | $ | 1,850 |   | $ | 16,613 |   | $ | 109,574 |   | $ | — |   |
|                             |       |                       |       |   |   |   |   |   |   |   |   |
| ATB  commitments                 |       | 26,557                     |       | 26,152 |   | 405 |   | — |   | — |   |
|                             |       |                       |       |   |   |   |   |   |   |   |   |
| Non-cancelable  operating leases |       | 5,355                      |       | 634 |   | 1,578 |   | 908 |   | 2,235 |   |
|                             |       |                       |       |   |   |   |   |   |   |   |   |
| Total contractual obligations    |       | $                          | 159,949    |   | $ | 28,636 |   | $ | 18,596 |   | $ | 110,482 |   | $ | 2,235 |   |
| Less:  sublease rent (2)         |       | 3,112                      |       | 197 |   | 609 |   | 630 |   | 1,676 |   |
|                             |       | $                          | 156,837    |   | $ | 28,439 |   | $ | 17,987 |   | $ | 109,852 |   | $ | 559 |   |

 

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(1)  Long-term debt excludes interest payments as interest on our term loanis variable (LIBOR (4.20% at December 31, 2005) plus 2.00%) or the prime rate(7.25% at December 31, 2005) plus an applicable margin.

(2)  We sublease approximately 75% of our leased New York office space tocertain companies affiliated with the Chairman and Chief Executive Officer ofthe Partnership.  See “Item 13. CertainRelationships and Related Party Transactions – New York Sublease.”

 

The executive officers of U.S. Shipping GeneralPartner LLC have entered into employment agreements with USS Vessel ManagementLLC, a wholly-owned subsidiary of our general partner.  The employment agreements with each ofMessrs. Gridley, Gehegan, Colletti, Miller, Bergeron and Chew provide foran initial term expiring in October 2007. Each of the employment agreementsreferred to above will thereafter automatically renew for successive one-yearterms unless either party to such employment agreement furnishes the other60 days prior written notice of its intent not to renew the agreement.

 

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The employment agreements currently provide for an aggregate baseannual salary of $1.8 million.  Inaddition, each employee will be entitled to receive an annual bonus award basedupon our consolidated financial performance.  If the employee’s employment is terminated without cause or if theemployee resigns for good reason, the employee will be entitled to:

 

•      monthly payments equal to one-twelfth of his then annual salary andtarget bonus for a period of two years (such period the “severance period”);and

 

•      continue to participate, at our expense, in our health insurance anddisability insurance programs, to the extent permitted under such programs,until the earlier of the end of the severance period or the date the executivebegins employment with another entity which provides substantially similarbenefits.

 

See “Item 11. Executive Compensation – Employment Agreements” foradditional information on the employment agreements.

 

In August 2004, we entered into a contract with Southern New England ShipyardCompany (“SENESCO”) to build a 19,999 dwt articulated tug barge (“ATB”) for usat a price of $45.4 million to be delivered in early 2006. In November 2005,SENESCO indicated that they are not able to complete the first ATB on thecontract terms due to infrastructure problems and production line issues, andthat the completion of the barge will be delayed. We have entered into arevised agreement with SENESCO regarding completion of the ATB at anotherfacility which SENESCO will operate. The total cost of completion of the ATBpursuant to the revised agreement is currently expected to be approximately$53.4 million with a contracted delivery date of December 2006. SENESCO hasindicated that it is experiencing cost overruns and further delays in completingthe ATB.  The revised agreement providesfor substantial penalties for late delivery of the ATB.

 

In November 2005, we purchased the *SeaVentur**e,* a 19,000 dwt double-bottomedchemical/product tanker for a purchase price of $4.1 million, including certaintransaction costs.  This vessel wasre-built in 1983 and is capable of carrying twenty-one different grades ofproduct in independent cargo tanks. The vessel was placed in drydock in January2006.  The Partnership estimates that thetotal cost to drydock the vessel will be approximately $8.9 million.  The vessel is expected to join thePartnership’s fleet in mid-2006.  ThePartnership believes that the *Sea Venture*will provide valuable flexibility to its current and future customer base.  With the addition of the *Sea Venture*to its fleet, the Partnershipwill own three of the five Jones Act parcel tankers with over twentyindependent tank segregations and will further reinforce its position as theleading U.S. Jones Act owner of chemical-capable specialized tankers.  

 

On February 16, 2006, we entered into contracts to construct twoadditional ATBs with Manitowoc Marine Group (“MMG”) for the construction of twobarges, and with Eastern Shipbuilding Group, Inc. (“Eastern”) for theconstruction of two tugs. The contract with MMG includes options to constructtwo additional barges.  The contract withEastern also includes options to construct and deliver up to four additionalATB tugs on the basis that each such option shall cover two option tugs.   The total construction price for the twoATBs is anticipated to be approximately $130.0 million, or $65.0 million perunit, including owner furnished items.  Weexpect the two ATBs will be completed in August 2008 and November 2008,respectively, and we have options to build another two ATBs at a cost per unitof approximately $66 million.  Theoptions for the tugs must be exercised by August 2006 and February 2007, andthe options for the barges must be exercised by April 2006 and June 2006.  Weintend to finance the purchase price with borrowings under our credit facilityand cash from operations.  Additionally,we have committed to purchase additional items related to two option vesselstotaling $17.5 million.  We estimate thatbuilding two additional ATBs will cost approximately $66 million each.

 

We also have funding commitments that could potentially requireperformance in the event of demands by third parties or contingent events underletters of credit totaling $0.6 million at December 31, 2005.  The letters of credit are primarily extendedto secure final payments associated with the building of the ATB engines andthe New York office lease.  There havebeen no claims against either letter of credit.

 

We sometimes are required to make deposits, which may or may not berefundable, to reserve berths at shipyards for drydocks or newconstruction.  At March 15, 2006, we haddeposits of $5 million outstanding, of which $0.4 million is non-refundable.

 

We are a party to routine, marine-related claims, lawsuits and laborarbitrations arising in the ordinary course of business. All of these claimsagainst us are substantially mitigated by insurance, subject to deductiblesranging up to $150,000 per claim. We provide on a current basis for amounts weexpect to pay.

 

**Inflation**

 

During the last three years, inflation has had a relatively minoreffect on our financial results. Our contracts of affreightment and consecutivevoyage charters generally contain escalation clauses whereby certain costincreases, including labor and fuel, can be passed through to our customers.

 

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**Seasonality**

 

We operate our tank vessels in some markets that have historicallyexhibited seasonal variations in demand and, as a result, in charter rates.Movements of clean oil products, such as motor fuels, generally increase duringthe summer driving season. Movements of dirty oil products and distillates,such as heating oil, generally increase during the winter months, whilemovements of asphalt products generally increase in the spring through fallmonths. Only our vessels operating in the spot market are subject to the effectof seasonal variations in demand.

 

**NewAccounting Pronouncements**

 

On April 4, 2005, the Financial Accounting Standards Board (“FASB”)issued Interpretation No. 47, “Accounting for Conditional Asset RetirementObligations, an interpretation of FASB Statement No. 143” (“FIN 47”).  This interpretation clarifies that an entityis required to recognize a liability for the fair value of a conditional assetretirement obligation when incurred if the liability’s fair value can bereasonably estimated.  It also clarifieswhen an entity would have sufficient information to reasonably estimate thefair value of an asset retirement obligation. We adopted FIN 47 in 2005, which had no impact on our consolidatedfinancial statements.

 

On June 2, 2005, the FASB issued FASB Statement No. 154, “AccountingChanges and Error Corrections-a replacement of APB No. 20 and FAS No. 3” (“FAS154”).  FAS 154 replaces APB Opinion No.20, “Accounting Changes” (“APB 20”) and FASB Statement No. 3 “ReportingAccounting Changes in Interim Financial Statements” (“FAS 3”) and changes therequirements for the accounting for and reporting of a change in accounting principle.  It also applies to changes required by anaccounting pronouncement in the unusual instance that the pronouncement doesnot include specific transition provisions. When a pronouncement includes specific transition provisions, thoseprovisions should be followed.  Weadopted FAS 154 in 2005, which had no impact on our consolidated financialstatements.

 

**ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

Our market risk is affected primarily by changes in interest rates. Weare exposed to the impact of interest rate changes primarily through ourvariable-rate borrowings under our credit facility. Significant increases ininterest rates could adversely affect our profit margins, results of operationsand our ability to service our indebtedness. Based on our average variableinterest rate debt outstanding during 2005, a 1% change in our variableinterest rates would have increased our interest expense by $0.1 million,after taking into effect the interest rate swap agreement we had in effectduring 2005 as described below.

 

We utilize interest rate swaps to reduce our exposure to market riskfrom changes in interest rates. The principal objective of such contracts is tominimize the risks and/or costs associated with our variable rate debt. Allderivative instruments held by us are designated as hedges and, accordingly,the gains and losses from changes in derivative fair values are recognized ascomprehensive income as required by SFAS 133. Gains and losses uponsettlement are recognized in the statement of operations or recorded as part ofthe underlying asset or liability as appropriate. We are exposed to credit-relatedlosses in the event of nonperformance by counterparties to these financialinstruments; however, counterparties to these agreements are major financialinstitutions, and the risk of loss due to nonperformance is considered bymanagement to be minimal. We do not hold or issue interest rate swaps fortrading purposes.

 

We had two open interest rate swap agreements as of December 31,2005.  The intent of these agreements isto reduce interest rate risk by swapping an unknown variable interest rate fora fixed rate. The following is a summary of the economic terms of theseagreements at December 31, 2005:

 

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| Notional amount         |   | $        | 25,125,000 |   |
|-------------------------|--------|----------|------------|--------|
| Fixed rate  paid        |   | 3.15     | %          |
| Variable  rate received |   | 4.5269   | %          |
| Effective  date         |   | 12/31/02 |       |
| Expiration  date        |   | 12/29/06 |       |
|                    |   |     |       |
| Notional  amount        |   | $        | 60,812,500 |   |
| Fixed rate  paid        |   | 3.9075   | %          |
| Variable rate  received |   | 4.5269   | %          |
| Effective  date         |   | 4/19/04  |       |
| Expiration  date        |   | 12/31/08 |       |

 

**ITEM 8. FINANCIAL INFORMATION AND SUPPLEMENTARY DATA**

 

The financial statements set forth on pages F-1 to F-19 of this reportare incorporated herein by reference.

 

**ITEM 9.  CHANGES IN ANDDISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING FINANCIAL DISCLOSURE**

 

None.

 

**ITEM 9A.  CONTROLS ANDPROCEDURES**

 

***Evaluation of Disclosure Controlsand Procedures***

 

Inaccordance with Securities Exchange Act Rules 13a-15 and 15d-15, wecarried out an evaluation, under the supervision and with the participation ofmanagement, including our Chief Executive Officer and Chief Financial Officer,of the effectiveness of our disclosure controls and procedures as of the end ofthe period covered by this report. Based on that evaluation, our ChiefExecutive Officer and Chief Financial Officer concluded that our disclosurecontrols and procedures were effective as of December 31, 2005 to providereasonable assurance that information required to be disclosed in the reportsthat we file or submit under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in the Securities andExchange Commission’s rules and forms and such information is accumulatedand communicated to management as appropriate to make timely decisionsregarding required disclosures. 

 

***Changes in Internal Control OverFinancial Reporting***

 

Therehas been no change in our internal control over financial reporting thatoccurred during the three months ended December 31, 2005 that has materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial reporting.

 

***Management’s Report on InternalControl Over Financial Reporting***

 

Ourmanagement is responsible for establishing and maintaining adequate internalcontrol over financial reporting. Our internal control over financial reportingis a process designed under the supervision of our Chief Executive Officer andChief Financial Officer to provide reasonable assurance regarding thereliability of financial reporting and the preparation of our financialstatements for external purposes in accordance with generally acceptedaccounting principles.

 

AtDecember 31, 2005, management assessed the effectiveness of our internal controlover financial reporting based on the framework in “Internal Control—IntegratedFramework,” issued by the Committee of Sponsoring Organizations of the TreadwayCommission. Based on that assessment, management concluded that our internalcontrol over financial reporting was effective as of December 31, 2005, basedon those criteria.

 

Ourmanagement’s assessment of the effectiveness of our internal control overfinancial reporting as of December 31, 2005 has been audited byPricewaterhouseCoopers LLP, an independent registered public accounting firm,as stated in their report which is included under the heading “Report ofIndependent Registered Public Accounting Firm” on page F-2 herein.

** **

**ITEM 9B.  OTHERINFORMATION**

 

None.

 

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**PART III**

 

**ITEM 10.  DIRECTORS ANDEXECUTIVE OFFICERS OF THE PARTNERSHIP**

 

US Shipping General Partner LLC, as the general partner of U.S.Shipping Partners L.P., manages our operations and activities. Our generalpartner is not elected by our unitholders and will not be subject tore-election on a regular basis in the future. Unitholders will not be entitledto elect the directors of our general partner or directly or indirectlyparticipate in our management or operation.

 

Because we are a limited partnership, the listing standards of the NewYork Stock Exchange do not require our general partner to have a majority ofindependent directors or a nominating/corporate governance or compensationcommittee.

 

We are managed and operated by the directors and officers of ourgeneral partner. All of our operating personnel are employees of an affiliateof our general partner. Messrs. Gridley, Chew and Miller, our chairman andchief executive officer, executive vice president and vice president-chartering,respectively, will devote a majority of their time to managing our business andaffairs. Our remaining officers will spend all of their business time managingour business and affairs.

 

The following table shows information regarding the directors andexecutive officers of our general partner. Directors are elected for one-yearterms.

 
| **Name**                 | ** ** | **Age** | ** ** | **Position with US Shipping General Partner LLC**   | ** ** |
|--------------------------|------------|---------|------------|-----------------------------------------------------|------------|
| Paul B.  Gridley         |       | 53      |       | Chairman,  Chief Executive Officer and Director     |       |
| Joseph P.  Gehegan       |       | 60      |       | President  and Chief Operating Officer and Director |       |
| Albert E.  Bergeron      |       | 39      |       | Vice  President - Chief Financial Officer           |       |
| Calvin G.  Chew          |       | 61      |       | Executive  Vice President                           |       |
| Alan E.  Colletti        |       | 60      |       | Vice  President - Operations                        |       |
| Jeffrey M.  Miller       |       | 51      |       | Vice  President - Chartering                        |       |
| Bryan S.  Ganz           |       | 47      |       | Director                                            |       |
| William M.  Kearns, Jr.  |       | 70      |       | Director                                            |       |
| M. William  Macey, Jr.   |       | 52      |       | Director                                            |       |
| Douglas L.  Newhouse     |       | 52      |       | Director                                            |       |
| Ronald L.  O’Kelley |       | 60      |       | Director                                            |       |

 

Our directors hold office until the earlier of their death,resignation, removal or disqualification or until their successors have beenelected and qualified. Officers serve at the discretion of the board ofdirectors. There are no family relationships among any of our directors orexecutive officers.

 

*Paul B. Gridley* is chairman of the board of directors of ourgeneral partner and chief executive officer of our general partner and hasserved as chairman and chief executive officer of United States Shipping MasterLLC since it was formed in July 2002. Since June 2001,Mr. Gridley has also served as managing member of three entities, or BargeCompanies, that own and operate two barges of less than 6,000 dwt thattransport non-petroleum products. From June 1998 to June 2001, he wasa private investor and a director of Marine Transport Corporation. From 1989until its sale in 1998, Mr. Gridley was principal owner, president andvice chairman of Marine Transport Lines, Inc., one of the largest U.S.-basedowners and operators of specialized chemical and petroleum tanker vessels.Prior to the purchase of MTL in 1989, Mr. Gridley was senior vicepresident in the investment banking division of Lehman Brothers, co-heading thetransportation banking practice.

 

*Joseph P. Gehegan* is president and chief operating officer anda director of our general partner and has served as president and chiefoperating officer of United States Shipping Master LLC since September 2002,which he joined in connection with our acquisition of six ITBs from Hess.Mr. Gehegan was employed in various capacities for Hess from 1979 to 2002,most recently serving as vice president of marine operations and commercialship utilization. From 1972 to 1979, Mr. Gehegan was employed in variouscapacities by Amoco, most recently as vice president of marine operations.Mr. Gehegan is a graduate of the U.S. Merchant Marine Academy andimmediately following graduation worked aboard Jones Act merchant ships as anofficer for three years.

 

*Albert E. Bergeron* is vice president-chief financial officer ofour general partner and has served as vice president-chief financialofficer of United States Shipping Master LLC since September 2002, which hejoined in connection with our acquisition of six ITBs from Hess.Mr. Bergeron served in various capacities for Hess from January 1996to

 

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September2002, including Divisional Controller of Domestic Shipping Accounting andSenior Accountant of International Exploration and Production. Prior to joiningHess, Mr. Bergeron was a senior accountant at Iroquois Gas, a natural gaspipeline company, from 1991 until December 1995. Prior to joiningIroquois, Mr. Bergeron worked for Coopers and Lybrand LLP from 1989 to1991. Mr. Bergeron is a certified public accountant.

 

*Calvin G. Chew* is executive vice president of our generalpartner and has served as vice chairman and executive vice president of UnitedStates Shipping Master LLC since it began operations in September 2002.Since June 2001, Mr. Chew has also served in various capacities withthe Barge Companies. Mr. Chew retired from Shell Oil Company inJune 1998 after serving in various capacities for over 28 years,including senior management positions in their supply trading and marineorganizations, most recently as vice president-Pecten Trading.

 

*Alan E. Colletti* is vice president-operations of our generalpartner and has served as vice president-operations of United StatesShipping Master LLC since September 2002, which he joined in connection withour acquisition of six ITBs from Hess. Prior to joining us, Mr. Collettiserved in various management capacities at Hess from 1988, including Manager ofthe Marine Department and Manager of Engineering. Prior to joining Hess,Mr. Colletti served as Vice President of Operations at UltramarineTransport Corporation (formerly Pittston Marine) for six years.Mr. Colletti has also served as a licensed power engineer for PublicService Electric and Gas Company, a project engineer and manager forStone & Webster, an engineering manager for the Power Authority of theState of New York and an attorney for Lamorte Burns. Mr. Colletti is agraduate of the U.S. Merchant Marine Academy and served for five years in theUnited States Merchant Marine as an engineer officer aboard Jones Act merchant vessels.Mr. Colletti is a graduate of St. John’s University School of Law and amember of the New York State Bar.

 

*Jeffrey M. Miller* is vice president-chartering of our generalpartner and has served as vice president-chartering of United StatesShipping Master LLC since September 2002. Prior to joining United StatesShipping Master LLC, Mr. Miller was employed in various capacities forMarine Transport Lines, Inc. from 1985 to 2002, most recently serving asVice President of Chartering. Mr. Miller is a graduate of the U.S.Merchant Marine Academy and worked aboard Jones Act merchant vessels in variouspositions for ten years. Mr. Miller also serves in various capacities withthe Barge Companies.

 

*Bryan S. Ganz*joined the board of directors of our generalpartner in February 2005.  Mr. Ganzhas been president and chief executive officer of Galaxy Tire & Wheel,Inc., a manufacturing company, since 2001 and served as chief operating officerfrom 1992 to 2000.  Mr. Ganz foundedParamount Capital Group, an investment advisory firm, in 1983 and served aspresident until 1990.  Mr. Ganz is agraduate of Columbia School of Law and Georgetown University.

 

*William M. Kearns, Jr.* is a member of the board of directors of ourgeneral partner and has been a director of United States Shipping Master LLCsince September 2002. Mr. Kearns has been President of W.M.Kearns & Co., Inc., a private investment company, since 1994,chairman and co-chief executive officer of Keefe Managers, LLC, a moneymanagement firm, since 2002, and vice chairman, Keefe Managers, Inc., amoney management firm, from 1998 to 2002. Mr. Kearns was a managingdirector of Lehman Brothers, an investment bank, and its predecessor firms from1962 to 1994. Mr. Kearns is a director of Selective InsuranceGroup, Inc. and Transistor Devices, Inc., a senior advisor toProudfoot Consulting, PLC, and a trustee of EQ Advisors Trust (AXA EquitableLife Insurance Company), and AXA Enterprise Funds Trust (AXA Financial).

 

*M. William Macey, Jr.*is a member of the board of directors of ourgeneral partner and has been a director of United States Shipping Master LLCsince July 2002 and is a co-founder and managing partner of SterlingInvestment Partners, L.P. and Sterling Investment Partners II, L.P. , privateequity funds investing in middle-market companies. Prior to co-foundingSterling Investment Partners, L.P. in December 1999, Mr. Macey was apartner and co-founder of Sterling Ventures Limited, or SVL, a company formedin 1991 to sponsor private equity investments. Prior to co-founding SVL,Mr. Macey was a managing director of Asian Oceanic Group, an internationalmerchant bank headquartered in Hong Kong, from 1990 to 1991. Previously,Mr. Macey was a managing director in the mergers and acquisitions group ofSmith Barney, Harris Upham & Co.

 

*Douglas L. Newhouse* is a member of the board of directors of ourgeneral partner and has been a director of United States Shipping Master LLCsince July 2002 and is co-founder and managing partner of SterlingInvestment Partners, L.P. and Sterling Investment Partners II, L.P.  Prior to co-founding Sterling InvestmentPartners, L.P. in December 1999, Mr. Newhouse was a partner andco-founder of SVL. Prior to co-founding SVL in 1991, Mr. Newhouse waspresident of Middex Capital Corp., which specialized in the acquisition ofmiddle market companies, from 1990 to 1991. Prior to his employment withMiddex, Mr. Newhouse was a senior vice president in the corporate financedepartment of Lehman Brothers.

 

*Ronald L. O’Kelley* joined the board of directors of our generalpartner in October 2004. Mr. O’Kelley has been chairman and chiefexecutive officer of Atlantic Coast Venture Investments Inc., a privateinvestment company, since 2002.

 

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Mr. O’Kelleyserved as executive vice president, chief financial officer and treasurer ofState Street Corporation from 1995 to 2002, as chief financial officer atDouglas Aircraft Company from 1991 to 1995 and as chief financial officer atRolls Royce Inc. from 1983 to 1991. He also served in senior financialpositions at Citicorp from 1975 to 1983 and at Texas Instruments Incorporatedfrom 1969 to 1975.  Mr. O’Kelley isalso a director of Selective Insurance Group, Inc.

 

**Meetingsand Committees of the Board of Directors**

 

US Shipping General Partner LLC’s board of directors held twelvemeetings during 2005.  Each directorattended at least 75% of the aggregate of both the total number of meetings ofthe board of directors of US Shipping General Partner LLC and the total numberof meetings held by all committees of such board on which he served.

 

***Audit Committee***

 

US Shipping General Partner LLC has a standing audit committeecomprising of Messrs. Kearns and O’Kelley. The board of directors of US Shipping General Partner LLC has determinedthat Messrs. Kearns and O’Kelley are independent within the meaning of thelisting standards of the New York Stock Exchange.  In compliance with these standards, the auditcommittee was required to have a third independent member by November 3, 2005at which time the Board determined that Mr. Ganz was no longer independentbecause of a change in circumstances. The New York Stock Exchange was notified on November 3, 2005 by us thatwe had failed to meet the listing standard requiring a third independent memberof the audit committee.  At the time ofthis filing, we are in the process of identifying a third candidate and arenon-compliant with this listing standard.  In addition, the board of directors has determined that Mr. O’Kelley is anaudit committee financial expert within the meaning of the regulations of theSecurities and Exchange Commission.

 

The primary responsibilities of the audit committee are to assist theboard of directors of our general partner in overseeing (1) the integrity ofour financial statements, (2) our independent auditor’s qualifications,independence, and performance, (3) reviewing procedures for internal auditingand the adequacy of our internal accounting controls, and (4) our compliancewith legal and regulatory requirements. The audit committee has the sole authority to appoint, retain, andterminate our independent auditor, which reports directly to the auditcommittee.

 

The audit committee has established procedures for the receipt,retention and treatment of complaints we receive regarding accounting, internalaccounting controls or auditing maters and the confidential, anonymoussubmission by our employees of our concerns regarding questionable accountingor auditing matters.

 

***Compensation Committee***

 

US Shipping General Partner LLC has a standing compensation committeeconsisting of Messrs. Kearns, Macey, and O’Kelley. The compensation committee,among other tasks, determines and approves the officers’ compensation andbenefits, and reviews from time to time the compensation and benefits ofnon-employee directors.

 

***Conflicts Committee***

 

US Shipping General Partner LLC has a standing conflicts committeeconsisting of Mr. O’Kelley and Mr. Kearns. The conflicts committee reviewsspecific matters that the board of directors of US Shipping General Partner LLCbelieves may involve conflicts of interest and takes such other action as maybe required under the terms of our partnership agreement.

 

***Nominating Committee***

 

Effective February 2006, US Shipping General Partner LLC elected anominating committee consisting of Messrs. Gridley, Kearns, and Macey. Thenominating committee, among other tasks, assists the Board in its selection ofindividuals to fill any vacancies or newly created directorships on the Board.   The charter of the committee has not beenfinalized at the time of this filing, however, will be posted on our websiteonce available.

 

**DirectorIndependence**

 

The board of directors of US Shipping General Partner LLC hasdetermined that Messrs. Kearns and O’Kelley are independent within the meaningof the listing standards for general independence of the New York StockExchange.  Under the listing standards,the audit committee was required to have a third independent member by November3, 2005, whom we are in the process of identifying.  The standards for audit committee membershipinclude additional requirements under SEC rules.

 

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The listing standards relating to general independence consist of botha requirement for a board determination that the director has no materialrelationship with the listed company and a listing of several specificrelationships that preclude independence.

 

**Code ofBusiness Conduct and Ethics**

 

The board of directors of US Shipping General Partner LLC, our generalpartner, has adopted a code of business conduct and ethics for all employees,including our principal executive officer and principal financial andaccounting officer.  If any amendmentsare made to the code or if our general partner grants any waiver, including anyimplicit waiver, from a provision of the code to any of our executive officers,we will disclose the nature of such amendment or waiver on our website or in acurrent report on Form 8-K.

 

**CorporateGovernance Guidelines**

 

The board of directors of our general partner has also adoptedcorporate governance guidelines in accordance with the New York Stock Exchangelisting requirements.

 

**Availabilityof Corporate Governance Documents**

 

Copies of our annual report, board committee charters, code of businessconduct and ethics and corporate governance guidelines are available, withoutcharge, on our website at www.usslp.com and in print upon written request tothe Secretary, US Shipping General Partner LLC, P.O. Box 2945, Edison, NJ08818.

 

**ExecutiveSessions of the Board of Directors**

 

Messrs. Ganz, Kearns, Macey, Newhouse and O’Kelley, who arenon-management directors of our general partner, meet at regularly scheduledexecutive sessions without management. These meetings are chaired by each of these directors on a rotatingbasis.  Persons wishing to communicatewith our non-management directors may do so by writing to them at US ShippingGeneral Partner LLC, c/o Board of Directors, P.O. Box 2945, Edison, NJ 08818.

 

Messrs. Kearns and O’Kelley, who are independent, non-managementdirectors of our general partner, meet at least annually in executive sessionswithout management and other directors. These meetings are chaired by Mr. O’Kelley. Persons wishing tocommunicate with our independent, non-management directors may do so by writingto them at US Shipping General Partner LLC, c/o Board of Directors, P.O. Box2945, Edison, NJ 08818.

 

**Reimbursementof Certain Expenses to our General Partner**

 

Our general partner does not receive any management fee or othercompensation for its management of U.S. Shipping Partners L.P. Our generalpartner and its affiliates are reimbursed for expenses incurred on our behalf,including crew wages and benefits, general and administrative expenses, and thecompensation of employees of affiliates of our general partner that performservices on our behalf. These expenses include all expenses necessary orappropriate to the conduct of the business of, and allocable to, U.S. ShippingPartners L.P. Our partnership agreement provides that our general partnerdetermine in good faith the expenses that are allocable to U.S. ShippingPartners L.P.  For the year endedDecember 31, 2005 these reimbursed expenses totaled approximately $37.7million. From November 3, 2004, the date of our initial public offering, toDecember 31, 2004, these reimbursed expenses totaled approximately $6.7million.

 

**Compliancewith Section 16(a) of the Securities Exchange Act**

 

Section 16(a) of the Securities Exchange Act of 1934 requires ourofficers and directors, and persons who own more than 10% of a registered classof our equity securities, to file reports of beneficial ownership and changesin beneficial ownership with the SEC. Officers, directors and greater than 10% unitholders are required by SECregulations to furnish us with copies of all Section 16(a) forms.

 

Based solely on our review of the copies of such forms we received, orrepresentations from certain reporting persons that no Form 4s were required bythose persons, we believe that during the year ending December 31, 2005, all ofour officers, directors, and greater than 10% beneficial owners complied on atimely basis with all applicable filing requirements under Section 16(a) of theSecurities Exchange Act of 1934.

 

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***Compensation of Directors***

 

Messrs. Ganz, Kearns, and O’Kelley receive a quarterly fee of $12,500in consideration of their services as director of our general partner. Inaddition, for each telephonic board call that Messrs. Ganz, Kearns, andO’Kelley participate in they receive a fee of $1,000. Furthermore, Mr. Kearns,as a member of the audit committee, receives a $5,000 annual retainer, and Mr.O’Kelley, as chairman of the audit committee, receives a $10,000 annualretainer. All directors of our general partner are reimbursed for theirout-of-pocket expenses in connection with their services on the board. Ourofficers or employees who also serve as directors and Messrs. Macey andNewhouse do not receive additional compensation.

 

**ITEM 11. EXECUTIVE COMPENSATION**

 

The following table sets forth all compensation to our chief executiveofficer and our four other most highly compensated executive officers by ouroperating entities. We refer to these executives as the “named executiveofficers” elsewhere in this filing.

 
| **Summary Compensation Table**           | ** ** |
|------------------------------------------|------------|
| ** **                               | ** ** | ** ** | ** ** | **Annual** | ** ** | ** ** | ** ** | **All Other** | ** ** |
| **Name  and Principal Position**         | ** ** | **Year** | ** ** | **Salary** | ** ** | **Bonus** | ** ** | **Compensation (1)** | ** ** |
| Paul B.  Gridley                         |       | 2005 |   | $ | 417,000 |   | $ | 240,000 |   | $ | — |   |
| Chairman and Chief Executive Officer     |       | 2004 |   | $ | 319,500 |   | $ | 353,334 |   | $ | — |   |
|                                     |       | 2003 |   | $ | 300,000 |   | $ | 350,000 |   | $ | — |   |
|                                     |       |   |   |   |   |   |   |   |   |
| Joseph P.  Gehegan                       |       | 2005 |   | $ | 389,000 |   | $ | 230,000 |   | $ | 10,500 |   |
| President and Chief Operating Officer    |       | 2004 |   | $ | 356,500 |   | $ | 313,334 |   | $ | 8,200 |   |
|                                     |       | 2003 |   | $ | 350,000 |   | $ | 350,000 |   | $ | 6,000 |   |
|                                     |       |   |   |   |   |   |   |   |   |
| Alan E.  Colletti                        |       | 2005 |   | $ | 295,500 |   | $ | 190,000 |   | $ | 10,500 |   |
| Vice President - Operations              |       | 2004 |   | $ | 253,417 |   | $ | 713,333 |   | $ | 8,200 |   |
|                                     |       | 2003 |   | $ | 245,000 |   | $ | 225,000 |   | $ | 6,000 |   |
|                                     |       |   |   |   |   |   |   |   |   |
| Jeffrey M.  Miller                       |       | 2005 |   | $ | 257,000 |   | $ | 190,000 |   | $ | 10,500 |   |
| Vice President - Chartering              |       | 2004 |   | $ | 209,500 |   | $ | 213,333 |   | $ | 8,200 |   |
|                                     |       | 2003 |   | $ | 200,000 |   | $ | 155,000 |   | $ | 6,000 |   |
|                                     |       |   |   |   |   |   |   |   |   |
| Albert E.  Bergeron                      |       | 2005 |   | $ | 249,500 |   | $ | 190,000 |   | $ | 10,500 |   |
| Vice President - Chief Financial Officer |       | 2004 |   | $ | 208,250 |   | $ | 693,333 |   | $ | 8,200 |   |
|                                     |       | 2003 |   | $ | 200,000 |   | $ | 100,000 |   | $ | 5,250 |   |

 

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(1)  Consists of matching contributions by our operating entities under a401(k) plan.

 

All matters concerning executive officer compensation for 2005 wereaddressed by the compensation committee of the board of directors of ourgeneral partner.   All matters concerningexecutive officer compensation for 2004 and 2003 were addressed by the Board ofDirectors of United States Shipping Master LLC (“Master”).  Mr. Gridley was a member of the Board ofDirectors of Master in 2004 and 2003 and Mr. Gehegan, although a member of theBoard of Directors of Master in 2004, was not a member when compensationdecisions were made.

 

None of our operating entities granted options to any of our officers,employees or managers.

 

**EmploymentAgreements**

 

In connection with our initial public offering, USS VesselManagement, Inc., a subsidiary of our general partner, entered intoamended and restated employment agreements with each of Messrs. Gridley,Gehegan, Colletti, Miller and Bergeron, as well as Mr. Chew, our executivevice president.  Each ofMessrs. Gehegan, Colletti and Bergeron is required to devote all of hisbusiness time to managing our business. Each of Messrs. Gridley, Millerand Chew are required to devote a majority of his time to managing ourbusiness.

 

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Under their respective employment agreements, Messrs. Gridley,Gehegan, Colletti, Bergeron, Miller, and Chew each is currently entitled toreceive annual salaries of $417,000, $389,000, $295,500, $261,000, $257,000 and$204,000, respectively. Each of the employment agreements provides for bonusesto be paid at the discretion of the board of directors.

 

The employment agreements with each of Messrs. Gridley, Gehegan,Colletti, Miller, Bergeron and Chew provide for an initial term expiring inOctober 2007. Each of the employment agreements will thereafter automaticallyrenew for successive one-year terms unless either party to such employmentagreement furnishes the other 60 days’ prior written notice of its intentnot to renew the agreement.

 

In the event we terminate the employment of any ofMessrs. Gridley, Gehegan, Colletti, Miller, Bergeron or Chew withoutjustifiable cause, as defined in the employment agreement, or we elect not torenew the employment agreement at the end of its term, or if any of themterminate their employment for good reason, as defined in the employmentagreement, he will be entitled to:

 

•      monthly payments equal to one-twelfth of his then annual salary andtarget bonus for a period of two years (such period the “severance period”);and

 

•      continue to participate, at our expense, in our health insurance anddisability insurance programs, to the extent permitted under such programs,until the earlier of the end of the severance period or the date the executivebegins employment with another entity which provides substantially similarbenefits.

 

If during negotiations regarding or within two yearsfollowing a change in control of our general partner or U.S. Shipping PartnersL.P. the employment of any of Messrs. Gridley, Gehegan, Colletti, Miller,Bergeron or Chew is terminated without justifiable cause, as defined in the employmentagreement, or we elect not to renew the employment agreement at the end of itsterm, or if any of them terminate their employment for good reason, as definedin the employment agreement, we will pay severance equal to three times histhen annual salary and target bonus.

 

Each of the employment agreements includes anon-competition provision for two years; however, if we fail to pay severanceor expense amounts to the executive as required by the employment agreement,the non-competition provision will no longer apply. The employment agreementsof Messrs. Chew, Gridley and Miller provide that their current engagementin the transportation of chemical products in two tank barges of less than20,000 deadweight tons, other than transportation of petroleum or petroleumproducts, is not a violation of the non-compete provisions of the employmentagreement as long as either (1) he engages in such business on acontinuous basis or (2) if he does not engage in such business on acontinuous basis, we are not engaged in such business at the time he decides toreenter such business. Pursuant to these provisions, Messrs. Chew, Gridleyand Miller currently own and operate two Jones Act barges that transportcaustic soda and calcium chloride under contracts with third parties. Inaddition, Messrs. Chew, Gridley and Miller are permitted under theiremployment agreements to acquire and operate additional tank barges of lessthan 15,000 deadweight tons in the transportation of chemical products, otherthan transportation of petroleum or petroleum products, provided that if at anytime more than 50% of the income to be generated by such barge in a six-monthperiod is expected to be “qualifying income,” then they must offer us theopportunity to acquire such tank barge.

 

**401(k) Plan**

 

US Shipping General Partner LLC maintains a 401(k)Plan. The plan permits eligible employees to make voluntary, pre-taxcontributions to the plan up to a specified percentage of compensation, subjectto applicable tax limitations. US Shipping General Partner LLC may make adiscretionary matching contribution to the plan for each eligible employeeequal to 5% of an employee’s pre-tax annual compensation up to $10,500 in2005 and $11,000 in 2006, subject to applicable tax limitations. Eligible employeeswho elect to participate in the plan are generally vested in any matchingcontribution after commencement of employment with the company. The plan isintended to be tax-qualified under Section 401(a) of the Internal RevenueCode so that contributions to the plan, and income earned on plancontributions, are not taxable to employees until withdrawn from the plan, andso that contributions, if any, will be deductible when made.

 

**Long-TermIncentive Plan**

 

US Shipping General Partner LLC adopted the U.S.Shipping Partners L.P. Long-Term Incentive Plan for employees, consultants anddirectors of US Shipping General Partner LLC and employees and consultants ofits affiliates who perform services for US Shipping General Partner LLC and itssubsidiaries. The long-term incentive plan provides for: restricted units,phantom units, unit options, unit appreciation rights and other unit-basedawards. The long-term incentive plan currently

 

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permits the issuance of an aggregate of 689,997 units. The plan isadministered by the compensation committee of the board of directors of USShipping General Partner LLC.

 

US Shipping General Partner LLC’s board of directorsin its discretion may terminate, suspend or discontinue the long-term incentiveplan at any time with respect to any award that has not yet been granted. USShipping General Partner LLC’s board of directors also has the right to alteror amend the long-term incentive plan or any part of the plan from time totime, including increasing the number of units that may be granted, subject tothe requirements of the exchange upon which the common units are listed at thattime. However, no change in any outstanding grant may be made that wouldmaterially reduce the benefits of the participant without the consent of theparticipant.

 

***Restricted Units and Phantom Units.***

 

A restricted unit is a common unit subject toforfeiture prior to the vesting of the award. A phantom unit is a notional unitthat entitles the grantee to receive a common unit upon the vesting of thephantom unit or, in the discretion of the compensation committee, cashequivalent to the value of a common unit. The compensation committee maydetermine to make grants under the plan of restricted units and phantom unitsto employees, consultants and directors containing such terms as thecompensation committee shall determine. The compensation committee willdetermine the period over which restricted units and phantom units granted toemployees, consultants and directors will vest. The committee may base itsdetermination upon the achievement of specified financial objectives.

 

If a grantee’s employment, service relationship ormembership on the board of directors terminates for any reason, the grantee’s restrictedunits and phantom units will be automatically forfeited unless, and to theextent, the compensation committee provides otherwise. Common units to bedelivered in connection with the grant of restricted units or upon the vestingof phantom units may be common units acquired by US Shipping General PartnerLLC on the open market, common units already owned by US Shipping GeneralPartner LLC, common units acquired by US Shipping General Partner LLC directlyfrom us or any other person or any combination of the foregoing. US ShippingGeneral Partner LLC will be entitled to reimbursement by us for the costincurred in acquiring common units. Thus, the cost of the restricted units anddelivery of common units upon the vesting of phantom units will be borne by us.If we issue new common units in connection with the grant of restricted unitsor upon vesting of the phantom units, the total number of common unitsoutstanding will increase. The compensation committee, in its discretion, maygrant tandem distribution rights with respect to restricted units and tandemdistribution equivalent rights with respect to phantom units.

 

We intend the issuance of restricted units andcommon units upon the vesting of the phantom units under the plan to serve as ameans of incentive compensation for performance and not primarily as anopportunity to participate in the equity appreciation of the common units.Therefore, at this time it is not contemplated that plan participants will payany consideration for restricted units or common units they receive, and atthis time we do not contemplate that we will receive any remuneration for therestricted units and common units.

 

***Unit Options, Unit Appreciation Rights andOther Unit-Based Rights.***

 

The long-term incentive plan permits the grant ofoptions covering common units, the grant of unit appreciation rights and otherawards based on common units. A unit appreciation right is an award that, uponexercise, entitles the participant to receive the excess of the fair marketvalue of a unit on the exercise date over the exercise price established forthe unit appreciation right. Such excess may be paid in common units, cash, ora combination thereof, as determined by the compensation committee in itsdiscretion. Other unit-based awards may be denominated or payable in,valued in whole or in part by reference to, or otherwise based on, or relatedto, common units or factors that may influence the value of common units,including convertible or exchangeable debt securities, other rights convertibleor exchangeable into common units, purchase rights for common units, awardswith value and payment contingent upon performance of U.S. ShippingPartners L.P. or business units thereof or any other factors designated bythe compensation committee, and awards valued by reference to value ofsecurities of or the performance of specified affiliates or other businessunits. Cash awards, as an element of or supplement to any other award under thelong term incentive plan, may also be granted. The compensation committee willbe able to make grants of unit options, unit appreciation rights and other unit-basedawards under the plan to employees, consultants and directors containing suchterms as the committee shall determine. Unit options and unit appreciationrights may have an exercise price that is equal to or greater than the fairmarket value of the common units on the date of grant. In general, unit optionsand unit appreciation rights granted will become exercisable over a perioddetermined by the compensation committee.

 

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Upon exercise of a unit option (or a unitappreciation right settled in common units) or settlement of an other unit-basedaward in common units, US Shipping General Partner LLC will acquire commonunits on the open market or directly from us or any other person or use commonunits already owned by US Shipping General Partner LLC, or any combination ofthe foregoing. US Shipping General Partner LLC will be entitled to reimbursementby us for the difference between the cost incurred by US Shipping GeneralPartner LLC in acquiring these common units and the proceeds received from aparticipant at the time of exercise. Thus, the cost of the unit options (or aunit appreciation right settled in common units) in connection with thesettlement of an other unit-based award will be borne by us. If we issuenew common units upon exercise of the unit options (or a unit appreciationright settled in common units) or settlement of an other unit-based awardin common units, the total number of common units outstanding will increase,and US Shipping General Partner LLC will pay us the proceeds it receives froman optionee upon exercise of a unit option in connection with the settlement ofan other unit-based award. The availability of unit options and unitappreciation rights is intended to furnish additional compensation toemployees, consultants and directors and to align their economic interests withthose of common unitholders.

 

**AnnualIncentive Plan**

 

US Shipping General Partner LLC has adopted the USShipping General Partner LLC Annual Incentive Compensation Plan. The annualincentive plan is designed to enhance the performance of our key employees byrewarding them with cash awards for achieving annual financial and operationalperformance objectives. The compensation committee in its discretion maydetermine individual participants and payments, if any, for each fiscal year. Aparticipant’s designated level of participation, or target bonus, will bedetermined under criteria established or approved by the compensation committeefor that fiscal year or designated performance period. Levels of participationmay vary according to a participant’s position and the relative impact suchparticipant can have on U.S. Shipping Partner L.P.’s and/or itsaffiliates’ operations. The amount of target bonus a participant may receivefor any fiscal year, if any, will depend upon the performance level achieved(unless waived) for that fiscal year. Awards typically will be determined afterthe end of the fiscal year or designated performance period. Awards will bepaid in cash annually, unless otherwise determined by the compensationcommittee. The compensation committee will have the discretion to reduce (butnot to increase) some or all of the amount of any award that otherwise would bepayable by reason of the satisfaction of the applicable performance targets;provided, however, that the exercise of such discretion with respect to oneparticipant may not be used to increase the amount of any award otherwisepayable to another participant. The termination of a participant’s employmentfor any reason prior to payout of an award under the annual incentive plan willresult in the participant’s forfeiture of any such award, unless and to theextent waived by the compensation committee. The board of directors of USShipping General Partner LLC may amend or terminate the annual incentive planat any time. We will reimburse US Shipping General Partner LLC for payments andcosts incurred under the plan.

 

**UnitPurchase Plan**

 

We have adopted a unit purchase plan for ouremployees. The number of common units initially available for purchase underthis plan is 250,000. The unit purchase plan is intended to serve as a means ofencouraging participants to invest in common units and to encourageparticipants to devote their best efforts to the business of the partnership.We will pay the brokerage commissions, transfer taxes and other costs andexpenses of the plan. All common units acquired under the plan will be subjectto a one-year holding period from the date of purchase. Notwithstanding theforegoing, participants may sell common units acquired under the unit purchaseplan at any time, subject to applicable law or contractual restriction.However, if a participant sells or otherwise disposes of his common unitsduring this one-year holding period, the participant will thereafter beprecluded from participating in the unit purchase plan until the first unitpurchase period following the first anniversary of the date of the pledge,transfer, sale or other distribution of common units. The plan is administeredby the compensation committee of the board of directors of our general partner.The plan may be terminated at any time by the board of directors of our generalpartner and will automatically terminate when all of the available common unitsunder the plan have been purchased. The plan may be amended from time to timeby the board of directors of our general partner, subject to unitholderapproval if required.

 

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**ITEM12.  SECURITY OWNERSHIP OF CERTAINBENEFICIAL OWNERS AND MANAGEMENT**

 

Thefollowing table sets forth the beneficial ownership of common units of U.S.Shipping Partners L.P. of (i) beneficial owners of 5% or more of such units,(ii) each director and named executive officer of US Shipping General PartnerLLC and (iii) all directors and executive officers as a group.  Unless otherwise indicated, the address ofall persons and entities listed below is c/o U.S. Shipping Partners L.P., 399Thornall Street, 8th Floor, Edison, New Jersey 08818.

 
| **Name  of Beneficial Owner**                                                                                          | ** ** | **Common  Units** | ** ** | **Percentage of  Common Units** | ** ** | **Subordinated  Units** | ** ** | **Percentage of Total   Subordinated Units** | ** ** | **Percentage of  Total Common and  Subordinated Units** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|---------------------------------|------------|-------------------------|------------|----------------------------------------------|------------|---------------------------------------------------------|------------|
| United States Shipping Master  LLC (1)                                                                                 |       | —            |       | —                          |       | 6,899,968               |       | 100                                          | %          | 50                                                      | %          |
| Sterling/US  Shipping L.P.  c/o Sterling Investment Partners L.P.

285  Riverside Avenue  Westport, CT  06880 (2) |       | —            |       | —                          |       | 6,899,968               |       | 100                                          | %          | 50                                                      | %          |
| Neuberger  Berman, Inc.  605 Third Avenue  New York, NY  10158 (3)                                                |       | 555,475           |       | 8.1                             | %          | —                  |       | —                                       |       | 4.0                                                     | %          |
| Kayne  Anderson Capital Advisors, L.P.

1800 Avenue  of the Stars  Second Floor  Los Angeles, CA  90067 (4)       |       | 857,700           |       | 12.4                            | %          | —                  |       | —                                       |       | 6.2                                                     | %          |
| Albert E.  Bergeron (5)                                                                                                |       | 7,783             |       |                            | *          | —                  |       | —                                       |       |                                                    | *          |
| Alan E.  Colletti (6)                                                                                                  |       | 16,000            |       |                            | *          | —                  |       | —                                       |       |                                                    | *          |
| Bryan Ganz                                                                                                             |       | 2,500             |       |                            | *          | —                  |       | —                                       |       |                                                    | *          |
| Joseph P.  Gehegan (7)                                                                                                 |       | 15,000            |       |                            | *          | —                  |       | —                                       |       |                                                    | *          |
| Paul B.  Gridley (8)                                                                                                   |       | 30,403            |       |                            | *          | —                  |       | —                                       |       |                                                    | *          |
| M. William  Kearns, Jr.                                                                                                |       | 10,000            |       |                            | *          | —                  |       | —                                       |       |                                                    | *          |
| M. William  Macey, Jr.  c/o Sterling Investment Partners L.P.

285  Riverside Avenue  Westport, CT  06880 (10)    |       | —            |       | —                          |       | —                  |       | —                                       |       | —                                                  |       |
| Jeffrey M.  Miller (11)                                                                                                |       | 4,000             |       |                            | *          | —                  |       | —                                       |       |                                                    | *          |
| Douglas  Newhouse  c/o Sterling Investment Partners L.P.

285  Riverside Avenue  Westport, CT  06880 (12)         |       | —            |       | —                          |       | —                  |       | —                                       |       | —                                                  |       |
| Ronald  O’Kelley                                                                                                  |       | 1,000             |       |                            | *          | —                  |       | —                                       |       |                                                    | *          |
| All directors and executive officers  as a group (11 persons) (13)                                                     |       | 86,686            |       | 1.3                             | %          | —                  |       | —                                       |       |                                                    | *          |

 

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*              Less than 1%.

 

USShipping General Partner LLC, a wholly owned subsidiary of US Shipping MasterLLC, owns a 2% general partner interest in us. The General Partner has incentive distribution rights which representthe right to receive an increasing quarterly percentage of quarterlydistributions in excess of specified amounts.

 

(1).          United States Shipping Master LLC (“ShippingMaster”) owns 100% of our general partner. Shipping Master is the indirect beneficial owner of the general partnerinterest in us and the incentive distribution rights owned by our generalpartner.  Of the subordinated units ownedby Shipping Master,

 

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5,272,341 units areclassified as class A subordinated units and 1,627,627 units are classified asclass B subordinated units.

 

(2).          Sterling/US Shipping L.P., by virtue of itsright to elect a majority of the Board of Shipping Master, may be deemed tobeneficially own the securities owned by Shipping Master.  Sterling/US Shipping L.P. disclaimsbeneficial ownership of the securities owned by Shipping Master other than thesecurities attributable to its membership in Shipping Master.  This shall not be deemed an admission thatSterling/US Shipping L.P. is the beneficial owner of the securities.

 

(3).          Information is based on the Schedule 13Gfiled by Neuberger Berman, Inc. and Neuberger Berman LLC (collectively“Neuberger Berman”) on February 15, 2006. The Schedule 13G notes that Neuberger Berman is deemed the beneficialowner of these common units because it has sole voting power with respect to478,025 common units and shared dispositive power with respect to 555,475common units.

 

(4).          Information is based on the Schedule 13Gfiled by Kayne Anderson Capital Advisors, L.P. and Richard A. Kayne(collectively “Kayne”) on February 9, 2006. Kayne has shared voting and shared dispositive power with respect tothose common units.

 

(5).          Under Shipping Master’s operating agreement,Mr. Bergeron owns a (a) 0.69% pecuniary interest in the general partnerinterest and incentive distribution rights indirectly owned by Shipping Master,and (b) 2.91% pecuniary interest in the class B subordinated units directlyowned by Shipping Master.  Mr. Bergeronwill have the right to receive 1.5% of the distributions received by ourgeneral partner attributable to (i) the incentive distribution rights and (ii)that portion of its 2% general partner interest attributable to distributionson the common units and subordinated units in excess of the minimum quarterlydistribution. Mr. Bergeron will only receive these amounts on conversion ofclass A subordinated units into common units, but upon such conversion he willalso be entitled to receive a “catch up” payment equal to the cumulative amounthe would have received if such payments had commenced at closing of our initialpublic offering. He will receive a pro rata share of such amounts if less thanall class A subordinated units convert into common units.

 

(6).          Under Shipping Master’s operating agreement,Mr. Colletti owns a (a) 0.84% pecuniary interest in the general partnerinterest and incentive distribution rights indirectly owned by Shipping Master,and (b) 3.54% pecuniary interest in the class B subordinated units directlyowned by Shipping Master. He will have the right to receive 1.5% of thedistributions received by our general partner attributable to (i) the incentivedistribution rights and (ii) that portion of its 2% general partner interestattributable to distributions on the common and subordinated units in excess ofthe minimum quarterly distribution.  Hewill only receive these amounts on the conversion of the class A subordinatedunits into common units, but upon such conversion he will also be entitled toreceive a “catch up” payment equal to the cumulative amount he would havereceived had the payments commenced at the closing of our initial publicoffering.  He will receive a pro ratashare of such amounts if less than all class A subordinated units convert intocommon units.

 

(7).          Under Shipping Master’s operating agreementMr. Gehegan owns a (a) 3.89% pecuniary interest in the general partner interestand incentive distribution rights indirectly owned by Shipping Master, and (b)16.51% pecuniary interest in the class B subordinated units directly owned byShipping Master. Mr. Gehegan will have the right to receive 2.5% of the distributionsreceived by our general partner attributable to (i) the incentive distributionrights and (ii) that portion of its 2% general partner interest attributable todistributions on the common and subordinated units in excess of the minimumquarterly distribution. He will only receive these amounts on the conversion ofthe class A subordinated units into common units, but upon such conversion hewill also be entitled to receive a “catch up” payment equal to the cumulativeamount he would have received had such payments commenced at the closing of ourinitial public offering.  He will receivea pro rata share of such amounts if less than all class A subordinated unitsconvert into common units.

 

(8).          18,679 of these units are held by Mr.Gridley’s spouse and 9,338 of these units are held by Mr. Gridley’s minorchildren.  Mr. Gridley disclaimsbeneficial ownership of the units beneficially owned by his children.  Pursuant to Shipping Master’s operatingagreement, Mr. Gridley owns a (a) 12.14% pecuniary interest in the generalpartner interest and incentive distribution rights indirectly owned by ShippingMaster, and (b) 51.47% pecuniary interest in the class B subordinated unitsdirectly owned by Shipping Master. Also, Mr. Gridley has the right to receive2.5% of the distributions received by our general partner attributable to (i)the incentive distribution rights and (ii) that portion of its 2% generalpartner interest attributable to distributions on the common units andsubordinated units in excess of the minimum quarterly distribution. Mr. Gridleywill only receive these amounts on the conversion of class A units into commonunits, but upon such conversion he will also be entitled to receive a “catchup” payment equal to the cumulative amount he would have received had suchpayments commenced as of the closing of our initial public offering. Mr.Gridley will receive a pro rata share of such amounts if less than all class Asubordinated units convert into common units.

 

(9).          Pursuant to Shipping Master’s operatingagreement, Mr. Kearns owns a (a) 0.53% pecuniary interest in the generalpartner interest and incentive distribution rights indirectly owned by ShippingMaster, and (b) a 0.70% pecuniary interest in the class A subordinated unitsdirectly owned by Shipping Master.

 

(10).        Sterling/US Shipping L.P., by virtue of itsright to elect a majority of the Board of Shipping Master, may be deemed tobeneficially own the securities owned by Shipping Master.  Sterling/US Shipping L.P. disclaims beneficialownership of the securities owned by Shipping Master other than securitiesattributable to its membership in Shipping Master.  As a member of the general partner ofSterling/US Shipping L.P., Mr. Macey has shared voting and investment powerwith respect to, and therefore may be deemed to beneficially own, thesecurities beneficially owned by Sterling/US Shipping L.P.  Mr. Macey disclaims beneficial ownership ofthe securities beneficially owned by Sterling/US Shipping L.P., other than thesecurities attributable to his limited and general partnership interesttherein. This report shall not be deemed an admission that Sterling/US ShippingL.P. or Mr. Macey is the beneficial owner of the securities.

 

(11).        Under Shipping Master’s operating agreement,Mr. Miller owns a (a) 4.35% pecuniary interest in the general partner interestand incentive distribution rights indirectly owned by Shipping Master, and (b)18.45% pecuniary interest in the class B subordinated units directly owned byShipping Master.  He will have the rightto receive 1.5% of the distributions received by our general partnerattributable to (i) the incentive distribution rights and (ii) that portion ofits 2% general partner interest attributable to distributions on common andsubordinated units in excess of the minimum quarterly distribution. He willonly receive such amounts on the conversion of the class A units into commonunits, but upon such conversion he will also be entitled to receive a “catchup” payment equal to the cumulative amount he would have received had suchpayments commenced at the closing of our initial public offering.  He will receive a pro rata share of suchamounts if less than all class A subordinated units convert into common units.

 

(12).        Sterling/US Shipping L.P., by virtue of itsright to elect a majority of the Board of Shipping Master, may be deemed tobeneficially own the securities owned by Shipping Master.  Sterling/US Shipping L.P. disclaimsbeneficial ownership of the securities owned by Shipping Master other than securitiesattributable to its membership in Shipping Master.  As a member of the general partner ofSterling/US Shipping, Mr. Newhouse has shared voting and investment power withrespect to, and therefore may be deemed to beneficially own, the securities beneficiallyowned by Sterling/US Shipping L.P.  Mr.Newhouse disclaims beneficial ownership of the securities beneficially owned bySterling/US Shipping L.P., other than securities attributable to his limitedand general partnership interest therein. This report shall not be deemed anadmission that Sterling/US Shipping L.P. or Mr. Newhouse is the beneficialowner of the securities.

 

(13).        See notes 5, 6, 7, 8, 9, 10, 11 and 12.  Under Shipping Master’s operating agreementMr. Chew owns a (a) 0.84% pecuniary interest in the general partner interestand incentive distribution rights indirectly owned by Shipping Master, and (b)3.54% pecuniary interest in the class B subordinated units directly owned byShipping Master.  Mr. Chew will have theright to receive 1.5% of the distributions received by our general partnerattributable to (i) the incentive distribution rights and (ii) that portion ofits 2% general partner interest attributable to distributions on the commonunits and subordinated units in excess of the minimum quarterlydistribution.  Mr. Chew will only receivethese amounts on the conversion of the class A subordinated units into common

 

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units, but upon suchconversion he will also be entitled to receive a “catch up” payment equal tothe cumulative amount he would have received had such payments commenced at theclosing of our initial public offering. Mr. Chew will receive a pro rata share of such amounts if less than allclass A subordinated units convert into common units.

 

**SecuritiesAuthorized for Issuance Under Equity Compensation Plans**

 
| ** **                                                  | ** ** | **Number of**         | ** ** | **Weighted**         | ** ** | **Number of Securities**    | ** ** |
|-------------------------------------------------------------|------------|-----------------------|------------|----------------------|------------|-----------------------------|------------|
| ** **                                                  | ** ** | **Securities to be**  | ** ** | **Average Exercise** | ** ** | **Remaining Available**     | ** ** |
| ** **                                                  | ** ** | **Issued upon**       | ** ** | **Price of**         | ** ** | **for Future Issuance**     | ** ** |
| ** **                                                  | ** ** | **Exercise of**       | ** ** | **Outstanding**      | ** ** | **under Equity**            | ** ** |
| ** **                                                  | ** ** | **Outstanding**       | ** ** | **Options,**         | ** ** | **Compensation Plans**      | ** ** |
| ** **                                                  | ** ** | **Options, Warrants** | ** ** | **Warrants and**     | ** ** | **(excluding Securities**   | ** ** |
| ** **                                                  | ** ** | **and Rights**        | ** ** | **Rights**           | ** ** | **reflected in column (a)** | ** ** |
| **Plan Category**                                           | ** ** | **(a)**               | ** ** | **(b)**              | ** ** | **(c)**                     | ** ** |
|                                                        |       |                  |       |                 |       |                        |       |
| Equity compensation plans approved by  security holders     |       | —                |       | —               |       | 939,997                     |       |
|                                                        |       |                  |       |                 |       |                        |       |
| Equity compensation plans not approved by  security holders |       | —                |       | —               |       | —                      |       |
|                                                        |       |                  |       |                 |       |                        |       |
| Total                                                       |       | —                |       | —               |       | 939,997                     |       |

 

**ITEM13.  CERTAIN RELATIONSHIPS AND RELATEDPARTY TRANSACTIONS**

 

United States Shipping Master LLC, the owner of ourgeneral partner, owns 6,899,968 subordinated units representing a direct 49%limited partner interest in us. In addition, our general partner owns a 2%general partner interest in us.

 

 

 

**Distributionsand Payments to Our General Partner and Its Affiliates**

 

We expect to distribute 98% of our available cash toour unitholders, including United States Shipping Master LLC as holder of anaggregate of 6,899,968 subordinated units, and the remaining 2% of ouravailable cash to our general partner, which is a wholly-owned subsidiary ofUnited States Shipping Master LLC.  Ifdistributions exceed the $0.45 per unit minimum quarterly distribution andother higher target levels, our general partner is entitled to increasingpercentages of the distributions, up to 50% of the distributions above thehighest target level.  We refer to therights to the increasing distributions as “incentive distribution rights”.  Please read “Cash Distribution Policy –IncentiveDistribution Rights” in Item 5 of this report. Assuming we have sufficient available cash to pay the full minimumquarterly distribution on all of our outstanding units, our general partnerwould receive an annual distribution of approximately $0.5 million on its 2%general partner interest and United States Shipping Master LLC would receive an annual distribution ofapproximately $12.4 million on its subordinated units.

 

Our general partner does not receive a managementfee or other compensation for the management of our partnership. Our generalpartner and its affiliates are reimbursed, however, for all direct and indirectexpenses incurred on our behalf.  Ourgeneral partner determines the amount of these expenses.  For the year ended December 31, 2005 andduring the period November 3, 2004 through December 31, 2004, these reimbursedexpenses totaled approximately $37.7 million and $6.7 million, respectively.

 

If our general partner withdraws or is removed, itsgeneral partner interest and its incentive distribution rights will either be soldto the new general partner for cash or converted into common units, in eachcase for an amount equal to the fair market value of those interests.

 

Upon our liquidation, the partners, including ourgeneral partner, will be entitled to receive liquidating distributionsaccording to their particular capital account balances.

 

**OmnibusAgreement**

 

At the closing of the initial public offering, weentered into an omnibus agreement with United States Shipping Master LLC, ourgeneral partner and our operating partnership.

 

***Noncompetition***

 

Under the omnibus agreement, U.S. Shipping PartnersL.P. agreed, and agreed to cause its controlled affiliates to agree, not toengage, either directly or indirectly, in the business of providing marinetransportation services or any activities that generate qualifying income forfederal income tax purposes.  SterlingInvestment Partners, L.P., non-management co-investors and theiraffiliates (other than United States Shipping Master LLC) are not prohibitedfrom engaging in activities in which they compete directly or indirectly withus or from owning assets or engaging in businesses that compete directly orindirectly with us.

 

***Indemnification***

 

Under the omnibus agreement, United States ShippingMaster LLC agreed to indemnify us after the closing of the initial publicoffering for a period of five years against certain environmental and toxictort liabilities in excess of $500,000 associated with the operation of theassets before the closing date of our initial public offering. Liabilitiesresulting from a change in law after the closing of our initial public offeringare excluded from the environmental indemnity. There is an

 

74

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aggregate cap of $10 million on the amount of indemnity coverageprovided by United States Shipping Master LLC for the environmental and toxictort liabilities.

 

United States Shipping Master LLC will alsoindemnify us for liabilities related to:

 

•      certain defects in title to the assets contributed to us and failure toobtain certain consents and permits necessary to conduct our business thatarise prior to November 3, 2006; and

 

•      certain income tax liabilities attributable to the operation of theassets contributed to us prior to the time they were contributed.

 

***Amendments***

 

The omnibus agreement may not be amended without the prior approval ofthe conflicts committee if the proposed amendment will, in the reasonablediscretion of our general partner, adversely affect holders of our commonunits.

 

**New York OfficeSublease**

 

On September 23, 2005, we entered into a ten-year lease for officespace to accommodate our New York office, commencing on January 1, 2006.  We, as the lessee, sublease 75% of the leasedspace to certain companies affiliated with our Chairman and Chief ExecutiveOfficer.  The total obligation of thelease over the ten-year period is $4.2 million; however, we are entitled tosublease income of $3.1 million from the affiliated companies.  Average annual rental expense, net ofsublease income of $0.3 million, for us will be $0.1 million.  The lease provides for additional payments ofreal estate taxes, insurance and other operating expenses applicable to theproperty.  Total rental expense excludessuch additional expense payments as part of the minimum rentals. We have beenreimbursed 75% of the cost of acquiring the letter of credit required by thelandlord and have received a guaranty from our Chairman in the event of anydefault of the lease, including that which would require drawdown of the letterof credit.

 

**UnitedStates Shipping Master Voting Arrangement**

 

The limited liability company agreement of United States ShippingMaster LLC requires its members to vote the membership interests held by themto elect the following persons, in addition to certain other nominees, to theboard of directors of United States Shipping Master LLC: (i) up to fourindividuals designated by Sterling/US Shipping L.P., (ii) Mr. Gridleyfor as long as he is employed by United States Shipping Master LLC as its chiefexecutive officer and (iii) up to two other persons nominated by the board whoare not affiliated with Sterling/US Shipping L.P. The limited liability companyagreement also provides that Mr. Gridley will serve as chairman of theboard as long as he remains an employee of United States Shipping Master LLC orone of its subsidiaries. During the term of the limited liability companyagreement, the holders of common membership interests of United States ShippingMaster LLC must vote the common membership interests held by them in the samemanner as Sterling/US Shipping L.P. votes its preferred membership interests.In addition, the limited liability company agreement requires that the personsserving as directors of United States Shipping Master LLC be appointed asdirectors of our general partner.  As aresult, United States Shipping Master LLC and indirectly Sterling/Sterling L.P.have the right to elect all the directors of our general partner.

 

**ManagementIncentive Interest in Our General Partner**

 

Our general partner is a wholly-owned subsidiary of United StatesShipping Master LLC. Accordingly, the owners of United States Shipping MasterLLC will receive all distributions made by us to our general partner in respectof the general partner interests and incentive distribution rights, subject tothe rights granted to the executive officers of our general partner describedbelow. The executive officers of our general partner will have the right toreceive 10% of the distributions received by our general partner attributableto (i) the incentive distribution rights and (ii) that portion of its2% general partner interest attributable to distributions on our common unitsand subordinated units in excess of the minimum quarterly distribution. Theexecutive officers will only receive these amounts upon conversion of theclass A subordinated units into common units, but upon such conversionthey will also be entitled to receive a “catch up” payment equal to thecumulative amount they would have received had such payments commenced inNovember 2004. The executive officers will receive a pro rata share of suchamounts to the extent that less than all the class A subordinated unitsconvert into common units.

 

75

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**ITEM 14.  PRINCIPALACCOUNTANT FEES AND SERVICES**

 

The following table presents fees and services rendered byPricewaterhouseCoopers LLP for the years ended December 31, 2005 and 2004.

 

| ** **              | ** ** | **Year ended December 31,** | ** ** |
|-------------------------|------------|-----------------------------|------------|
| ** **              | ** ** | **2005**                    | ** ** | **2004** | ** ** |
| ** **              | ** ** | **(dollars in thousands)**  | ** ** |
| Audit fees  (1)         |       | $                           | 595        |   | $ | 1,069 |   |
| Audit-related  fees (2) |       | 229                         |       | 105 |   |
| Tax fees (3)            |       | 490                         |       | 725 |   |
| All other  fees (4)     |       | 2                           |       | 2 |   |
| Total                   |       | $                           | 1,316      |   | $ | 1,901 |   |

 

----

(1)   Fees for audit of annual financial statements, reviews of the relatedquarterly financial statements, and reviews of documents filed with the SEC,including, in 2004, our initial public offering.

 

(2)   Fees for professional services for consultations related to financialaccounting and reporting standards and due diligence services.

 

(3)   Fees related to professional services for tax compliance, tax adviceand tax planning.

 

(4)   Fees for online research product.

 

**AuditCommittee Policies and Procedures for Pre-Approval of Audit and Non-AuditServices**

 

Consistent with SEC policies regarding auditor independence, followingour initial public offering, the audit committee is responsible forpreapproving all audit and non-audit services performed by the independentauditor.  In addition to its approval ofthe audit engagement, the audit committee takes action at least annually toauthorize the performance by the independent auditor of several specific typesof services within the categories of audit-related and tax services.  Audit-related services include assurance andrelated services that are reasonably related to the performance of the audit orreview of the financial statements. Authorized tax services include compliance-related services such asservices involving tax filings, as well as consulting services such as taxplanning, transaction analysis and opinions. Services are subject to pre-approval of the specific engagement if theyare outside the specific types of services included in the periodic approvalscovering service categories or if they are in excess of specified feelimitations.  The audit committee maydelegate pre-approval authority to subcommittees.  During 2005, no pre-approval requirementswere waived.

 

**PART IV.**

 

**ITEM 15.  EXHIBITS ANDFINANCIAL STATEMENT SCHEDULES.**

 

**(a) (1)****   ****Financial Statements**

 

See “Index to Financial Statements” set forthon page F-1.

 

**(a) (2)****    ****Financial Statement Schedules**

 

None.

 

76

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**(a) (3)****    ****Exhibits**

 
| **Exhibit Number** | ** ** | **Description** |
|-------------------------|------------|-----------------|
| 3.1                     |       |            | Certificate of Limited  Partnership of U.S. Shipping Partners L.P. (incorporated by reference to  Exhibit 3.1 to the Partnership’s Registration Statement on Form S-1  (Registration No. 333-118141 filed August 12, 2004). |
| 3.2                     |       |            | Amended and Restated  Agreement of Limited Partnership of U.S. Shipping Partners L.P. (incorporated  by reference to Exhibit 3.2 to the Partnership’s Quarterly Report on Form  10-Q for the period ended September 30, 2004) |
| 3.3                     |       |            | Certificate of Formation  of US Shipping General Partner LLC (incorporated by reference to Exhibit 3.3  to the Partnership’s Registration Statement on Form S-1 (Registration No.  333-118141 filed August 12, 2004). |
| 3.4                     | *          |            | First Amended and Restated  Limited Liability Company Agreement of US Shipping General Partner LLC.  (incorporated by reference to Exhibit 3.1 to the Partnership’s Quarterly  Report on Form 10-Q for the period ended June 30, 2005) |
| 10.1                    |       |            | Contribution, Conveyance  and Assumption Agreement by and among United States Shipping Master LLC, US  Shipping General Partner LLC, U.S. Shipping Partners L.P., U.S. Shipping  Operating LLC, United States Shipping LLC, United States Chemical Shipping  LLC, USCS Chemical Chartering LLC, USS Chartering LLC, ITB Baltimore LLC, ITB  Groton LLC, ITB Jacksonville LLC, ITB Mobile LLC, ITB New York LLC, ITB  Philadelphia LLC, USCS Charleston LLC, and USCS Chemical Pioneer LLC.  (incorporated by reference to Exhibit 10.1 to the Partnership’s Quarterly  Report on Form 10-Q for the period ended September 30, 2004) |
| 10.2                    | *          |            | U.S. Shipping Partners  L.P. Long-Term Incentive Plan. (incorporated by reference to Exhibit 10.2 to  the Partnership’s Quarterly Report on Form 10-Q for the period ended  September 30, 2004) |
| 10.3                    | *          |            | U.S. Shipping Partners  L.P. Annual Incentive Plan. (incorporated by reference to Exhibit 10.3 to the  Partnership’s Quarterly Report on Form 10-Q for the period ended September  30, 2004) |
| 10.4                    |       |            | Omnibus Agreement among  United States Shipping Master LLC, US Shipping General Partner LLC, U.S.  Shipping Operating LLC and U.S. Shipping Partners L.P. (incorporated by  reference to Exhibit 10.4 to the Partnership’s Quarterly Report on Form 10-Q  for the period ended September 30, 2004) |
| 10.5                    | †     |            | Support Agreement dated as  of September 13, 2002 between Amerada Hess Corporation and USS Chartering LLC  (incorporated by reference to Exhibit 10.6 to the Partnership’s Registration  Statement on Form S-1 (Registration No. 333-118141 filed August 12, 2004). |
| 10.6                    | *          |            | Employee Unit Purchase  Plan. (incorporated by reference to Exhibit 10.6 to the Partnership’s  Quarterly Report on Form 10-Q for the period ended September 30, 2004) |
| 10.7                    |       |            | Second Amended and  Restated Credit Agreement, dated as of November 3, 2004, among U.S. Shipping  Partners L.P., U.S. Shipping Operating LLC, ITB Baltimore LLC, ITB Groton  LLC, ITB Jacksonville LLC, ITB Mobile LLC, ITB New York LLC, ITB Philadelphia  LLC, USS Chartering LLC, USCS Chemical Chartering LLC, USCS Chemical Pioneer  LLC, USCS Charleston Chartering LLC, USCS Charleston LLC, USCS ATB LLC,  Canadian Imperial Bank of Commerce, KeyBank National Association and the  various lenders thereto. (incorporated by reference to Exhibit 10.7 to  the Partnership’s Quarterly Report on Form 10-Q for the period ended  September 30, 2004) |
| 10.8                    |       |            | First Amendment to Second  Amended and Restated Credit Agreement, dated as of November 3, 2004,  among U.S. Shipping Partners L.P., U.S. Shipping Operating LLC, ITB Baltimore  LLC, ITB Groton LLC, ITB Jacksonville LLC, ITB Mobile LLC, ITB New York LLC,  ITB Philadelphia LLC, USS Chartering LLC, USCS Chemical Chartering LLC, USCS  Chemical Pioneer LLC, USCS Charleston Chartering LLC, USCS Charleston LLC,  USCS ATB LLC, Canadian Imperial Bank of Commerce, KeyBank National  Association and the various lenders thereto (incorporated by reference to  Exhibit 10.1 to the Partnership’s Quarterly Report on Form 10-Q for the  period ended June 30, 2005). |
| 10.9                    |       |            | Second Amendment to Second  Amended and Restated Credit Agreement, dated as of October 24, 2005, among  U.S. Shipping Partners L.P., U.S. Shipping Operating LLC, ITB Baltimore LLC,  ITB Groton LLC, ITB Jacksonville LLC, ITB Mobile LLC, ITB New York LLC, ITB  Philadelphia LLC, USS Chartering LLC, USCS Chemical Chartering LLC, USCS  Chemical Pioneer LLC, USCS Charleston Chartering LLC, USCS Charleston LLC,  USCS ATB LLC, Canadian Imperial Bank of Commerce, KeyBank National  Association and the various lenders thereto (incorporated |

 

77

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|   |   |   | by reference to  Exhibit 10.2 to the Partnership’s Quarterly Report on Form 10-Q for the  period ended September 30, 2005)                                                                              |
|--------|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.10  | *      |   | Amended and Restated  Employment Agreement for Paul B. Gridley. (incorporated by reference to  Exhibit 10.8 to the Partnership’s Quarterly Report on Form 10-Q for the  period ended September 30, 2004)     |
| 10.11  | *      |   | Amended and Restated  Employment Agreement for Joseph P. Gehegan. (incorporated by reference to  Exhibit 10.9 to the Partnership’s Quarterly Report on Form 10-Q for the  period ended September 30, 2004)   |
| 10.12  | *      |   | Amended and Restated  Employment Agreement for Calvin G. Chew. (incorporated by reference to  Exhibit 10.10 to the Partnership’s Quarterly Report on Form 10-Q for the  period ended September 30, 2004)     |
| 10.13  | *      |   | Amended and Restated  Employment Agreement for Alan Colletti. (incorporated by reference to Exhibit  10.11 to the Partnership’s Quarterly Report on Form 10-Q for the period ended  September 30, 2004)      |
| 10.14  | *      |   | Amended and Restated  Employment Agreement for Jeffrey M. Miller. (incorporated by reference to  Exhibit 10.12 to the Partnership’s Quarterly Report on Form 10-Q for the  period ended September 30, 2004)  |
| 10.15  | *      |   | Amended and Restated  Employment Agreement for Albert E. Bergeron (incorporated by reference to  Exhibit 10.13 to the Partnership’s Quarterly Report on Form 10-Q for the  period ended September 30, 2004). |
| 21.1   |   |   | List of subsidiaries                                                                                                                                                                                              |
| 31.1   |   |   | Certification of the Chief  Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                          |
| 31.2   |   |   | Certification of the Chief  Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                          |
| 32.1   |   |   | Certification of the Chief  Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                          |
| 32.2   |   |   | Certification of the Chief  Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                          |

 

----

† Confidential treatment wasgranted for omitted portions.

* Management contract,compensatory plan or arrangement.

 

78

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**INDEX TOFINANCIAL STATEMENTS**

 
| **U.S.  SHIPPING PARTNERS L.P.**                                                                                                              |
|-----------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                    |
| CONSOLIDATED FINANCIAL  STATEMENTS                                                                                                            |
| Report of Independent  Registered Public Accounting Firm                                                                                      |
| Consolidated Balance Sheets as of  December 31, 2005 and 2004                                                                            |
| Consolidated Statements of  Operations and Comprehensive Income for the years ended December 31,  2005, 2004 and 2003                    |
| Consolidated Statements of  Changes in Partners’ Capital/Members’ Equity for the years ended  December 31, 2005, 2004 and 2003 |
| Consolidated Statements of  Cash Flows for the years ended December 31, 2005, 2004 and 2003                                              |
| Notes to Consolidated  Financial Statements                                                                                                   |

 

F-1

----

 

**Report of Independent Registered Public Accounting Firm**

 

Tothe General Partner and Unitholders of U.S. Shipping Partners L.P.:

 

Wehave completed an integrated audit of U.S. Shipping Partners L.P’s 2005consolidated financial statements and of its internal control over financialreporting as of December 31, 2005 and audits of its 2004 and 2003consolidated financial statements in accordance with the standards of thePublic Company Accounting Oversight Board (United States).  Ouropinions, based on our audits, are presented below.

 

Consolidated financial statements

 

Inour opinion, the consolidated financialstatements listed in the accompanying index present fairly, in allmaterial respects, the financial position of U.S. Shipping Partners L.P. andits subsidiaries at December 31, 2005 and 2004, and the results of  their operations and their cash flows foreach of the three years in the period ended December 31, 2005 inconformity with accounting principles generally accepted in the United Statesof America. These financial statements are the responsibility of the Company’smanagement.  Our responsibility is toexpress an opinion on these financial statements****basedon our audits.  We conducted our auditsof these statements in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  An audit offinancial statements includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements, assessing theaccounting principles used and significant estimates made by management, andevaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

 

Internalcontrol over financial reporting

 

Also,in our opinion, management’s assessment, included in Management’s Report onInternal Control Over Financial Reporting appearing under Item 9A, that theCompany maintained effective internal control over financial reporting as of December 31,2005 based on criteria established in *Internal Control -Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO), is fairly stated, in allmaterial respects, based on those criteria. Furthermore, in our opinion, theCompany maintained, in all material respects, effective internal control overfinancial reporting as of December 31, 2005, based on criteria establishedin *Internal Control - Integrated Framework*issued by the COSO.  The Company’smanagement is responsible for maintaining effective internal control overfinancial reporting and for its assessment of the effectiveness of internalcontrol over financial reporting.  Ourresponsibility is to express opinions on management’s assessment and onthe effectiveness of the Company’s internal control over financial reportingbased on our audit. We conducted our audit of internal control over financialreporting in accordance with the standards of the Public Company AccountingOversight Board (United States).  Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects.  Anaudit of internal control over financial reporting includes obtaining anunderstanding of internal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the design and operatingeffectiveness of internal control, and performing such other procedures as weconsider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

 

Acompany’s internal control over financial reporting is a process designed toprovide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordancewith generally accepted accounting principles. A company’s internal control over financial reporting includes thosepolicies and procedures that (i) pertain to the maintenance of recordsthat, in reasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (ii) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of the

 

F-2

----

 

company;and (iii) provide reasonable assurance regarding prevention or timelydetection of unauthorized acquisition, use, or disposition of the company’sassets that could have a material effect on the financial statements.

 

Becauseof its inherent limitations, internal control over financial reporting may notprevent or detect misstatements.  Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures may deteriorate.

 

 
| /s/ PricewaterhouseCoopers  LLP |   |
|---------------------------------|--------|
| PricewaterhouseCoopers LLP      |
| Florham  Park, NJ               |
| March  15, 2006                 |
|                            |

 

F-3

----

 

**U.S. Shipping Partners L.P.**

**Consolidated Balance Sheets**

**December 31, 2005 and 2004**

**(in thousands)**

 

| ** **                                      | ** ** | **December 31,** | ** ** |
|-------------------------------------------------|------------|------------------|------------|
| ** **                                      | ** ** | **2005**         | ** ** | **2004** | ** ** |
| **Assets**                                      |       |             |       |   |   |
| Current  assets                                 |       |             |       |   |   |
| Cash and equivalents                            |       | $                | 10,000     |   | $ | 30,258 |   |
| Accounts receivable, net                        |       | 6,993            |       | 6,979 |   |
| Prepaid expenses and other current assets       |       | 4,123            |       | 3,751 |   |
| Total current assets                            |       | 21,116           |       | 40,988 |   |
| Vessels and  equipment, net                     |       | 245,062          |       | 201,923 |   |
| Deferred  financing costs, net                  |       | 3,186            |       | 3,962 |   |
| Other assets                                    |       | 6,858            |       | 1,733 |   |
| Total assets                                    |       | $                | 276,222    |   | $ | 248,606 |   |
|                                            |       |             |       |   |   |
| **Liabilities  and Partners’ Capital**     |       |             |       |   |   |
| Current  liabilities                            |       |             |       |   |   |
| Current portion of long-term debt               |       | $                | 1,850      |   | $ | 1,500 |   |
| Accounts payable                                |       | 7,051            |       | 2,945 |   |
| Due to affiliates                               |       | 833              |       | 1,430 |   |
| Deferred revenue                                |       | —           |       | 2,325 |   |
| Accrued expenses and other liabilities          |       | 6,992            |       | 4,957 |   |
| Total current liabilities                       |       | 16,726           |       | 13,157 |   |
| Term loan                                       |       | 126,187          |       | 98,125 |   |
| Advances  from Hess                             |       | 12,350           |       | 11,387 |   |
| Deferred  income taxes                          |       | 1,091            |       | 2,944 |   |
| Other  liabilities                              |       | —           |       | 207 |   |
| Total liabilities                               |       | 156,354          |       | 125,820 |   |
| Commitments  and contingencies (Notes 6 and 10) |       |             |       |   |   |
|                                            |       |             |       |   |   |
| **Partners’  Capital**                     |       |             |       |   |   |
| Partners’  capital                         |       | 117,999          |       | 122,993 |   |
| Accumulated  other comprehensive income (loss)  |       | 1,869            |       | (207 | ) |
| Total partners’ capital                    |       | 119,868          |       | 122,786 |   |
| Total liabilities and partners capital          |       | $                | 276,222    |   | $ | 248,606 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

F-4

----

 

**U.S. Shipping Partners L.P.**

**Consolidated Statements of Operations and ComprehensiveIncome**

**Years Ended December 31, 2005, 2004 and 2003**

**(in thousands, except per unit data)**

 
| ** **                                              | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                              | ** ** | **2005**                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                              | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Revenues**                                            |       | $                           | 131,534    |   | $ | 122,355 |   | $ | 80,514 |   |
|                                                    |       |                        |       |   |   |   |   |
| **Operating  expenses**                                 |       |                        |       |   |   |   |   |
| Vessel operating expenses                               |       | 47,986                      |       | 47,119 |   | 33,143 |   |
| Voyage expenses                                         |       | 24,203                      |       | 20,415 |   | 9,889 |   |
| General and administrative expenses                     |       | 10,826                      |       | 10,321 |   | 7,153 |   |
| Depreciation and amortization                           |       | 25,704                      |       | 23,945 |   | 17,921 |   |
| Total operating expenses                                |       | 108,719                     |       | 101,800 |   | 68,106 |   |
| Operating income                                        |       | 22,815                      |       | 20,555 |   | 12,408 |   |
| Interest expense                                        |       | 6,407                       |       | 9,960 |   | 10,039 |   |
| Loss on debt extinguishment                             |       | —                      |       | 6,397 |   | — |   |
| Other income                                            |       | (1,031                      | )          | (369 | ) | (136 | ) |
| Income before income taxes                              |       | 17,439                      |       | 4,567 |   | 2,505 |   |
| (Benefit) provision for income taxes                    |       | (640                        | )          | 3,119 |   | 72 |   |
| Net income                                              |       | 18,079                      |       | 1,448 |   | 2,433 |   |
| **Other comprehensive income**                          |       |                        |       |   |   |   |   |
| Fair market value adjustment for  derivatives           |       | 2,076                       |       | 538 |   | 363 |   |
| Comprehensive income                                    |       | $                           | 20,155     |   | $ | 1,986 |   | $ | 2,796 |   |
|                                                    |       |                        |       |   |   |   |   |
| General partner’s interest in net income           |       | $                           | 361        |   | $ | (107 | ) | $ | — |   |
|                                                    |       |                        |       |   |   |   |   |
| **Limited partners’ interest in net income**       |       |                        |       |   |   |   |   |
| Net income                                              |       | $                           | 17,718     |   | $ | 1,555 |   | $ | 2,433 |   |
| Net income per unit - basic and diluted                 |       | $                           | 1.28       |   | $ | 0.18 |   | $ | 0.31 |   |
| Weighted average units outstanding - basic  and diluted |       | 13,800                      |       | 8,770 |   | 7,800 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

F-5

----

 

**U.S. Shipping Partners L.P.**

**Consolidated Statements of Changes in Partners’Capital/Members’ Equity**

**Years Ended December 31, 2005, 2004 and 2003**

**(in thousands)**

 
| ** **                                                                                       | ** ** | ** **        | ** ** | ** **                  | ** ** | ** **       | ** ** | ** **        | ** ** | ** ** | ** ** | ** **  | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------------|------------|------------------|------------|-------------------|------------|------------|------------|-------------|------------|-----------------|------------|------------|------------|
| ** **                                                                                       | ** ** | ** **        | ** ** | **Partners’  Capital** | ** ** | **Other**        | ** ** | ** **        | ** ** |
| ** **                                                                                       | ** ** | **Members’** | ** ** | **Limited  Partners**       | ** ** | ** **       | ** ** | **Comprehensive** | ** ** | ** ** | ** ** |
| ** **                                                                                       | ** ** | **Equity**        | ** ** | **Common**                  | ** ** | **Subordinated** | ** ** | **General**       | ** ** | **Income** | ** ** | ** **  | ** ** |
| ** **                                                                                       | ** ** | **(Predecessor)** | ** ** | **Units**                   | ** ** | **$**            | ** ** | **Units**         | ** ** | **$**      | ** ** | **Partner** | ** ** | **(Loss)**      | ** ** | **Total**  | ** ** |
| ** **                                                                                       | ** ** | ** **        | ** ** | ** **                  | ** ** | ** **       | ** ** | ** **        | ** ** | ** ** | ** ** | ** **  | ** ** | ** **      | ** ** | ** ** | ** ** |
| **Balance  at December 31, 2002**                                                                |       | $                 | 40,186     |                        | —     |             | $          | —            |       | —     |       | $           | —     |            | $          | —     |       | $ | (1,108 | ) | $ | 39,078 |   |
| Net income                                                                                       |       | 2,433             |       | —                      |       | —           |       | —            |       | —     |       | —      |       | —          |       | 2,433      |       |
| Fair market value  adjustment of derivatives                                                     |       | —            |       | —                      |       | —           |       | —            |       | —     |       | —      |       | 363             |       | 363        |       |
| Member  contributions                                                                            |       | 5,850             |       | —                      |       | —           |       | —            |       | —     |       | —      |       | —          |       | 5,850      |       |
|                                                                                             |       |              |       |                        |       |             |       |              |       |       |       |        |       |            |       |       |       |
| **Balance  at December 31, 2003**                                                                |       | 48,469            |       | —                      |       | —           |       | —            |       | —     |       | —      |       | (745            | )          | 47,724     |       |
| Net income for  the period January 1, 2004 to November 2, 2004                                   |       | 6,800             |       | —                      |       | —           |       | —            |       | —     |       | —      |       | —          |       | 6,800      |       |
| Member  contributions                                                                            |       | 2                 |       | —                      |       | —           |       | —            |       | —     |       | —      |       | —          |       | 2          |       |
| Member  distributions                                                                            |       | (15,000           | )          | —                      |       | —           |       | —            |       | —     |       | —      |       | —          |       | (15,000    | )          |
| Adjustment to  reflect net assets not contributed to the Partnership                             |       | (31,690           | )          | —                      |       | —           |       | —            |       | —     |       | —      |       | —          |       | (31,690    | )          |
| Book value of net  assets contributed to the Partnership                                         |       | (8,581            | )          | 900                         |       | 956              |       | 6,900             |       | 7,326      |       | 299         |       | —          |       | —     |       |
| Proceeds from  initial public public offering of common units, net of offering costs of  $15,160 |       | —            |       | 6,900                       |       | 138,364          |       | —            |       | —     |       | —      |       | —          |       | 138,364    |       |
| Redemption of  common units                                                                      |       | —            |       | (900                        | )          | (18,600          | )          | —            |       | —     |       | —      |       | —          |       | (18,600    | )          |
| Net loss for the  period November 3, 2004 to December 31, 2004                                   |       | —            |       | —                      |       | (2,622           | )          | —            |       | (2,623     | )          | (107        | )          | —          |       | (5,352     | )          |
| Fair market value  adjustment of derivatives                                                     |       | —            |       | —                      |       | —           |       | —            |       | —     |       | —      |       | 538             |       | 538        |       |
|                                                                                             |       |              |       |                        |       |             |       |              |       |       |       |        |       |            |       |       |       |
| **Balance  at December 31, 2004**                                                                |       | —            |       | 6,900                       |       | 118,098          |       | 6,900             |       | 4,703      |       | 192         |       | (207            | )          | 122,786    |       |
| Net income                                                                                       |       | —            |       | —                      |       | 8,859            |       | —            |       | 8,859      |       | 361         |       | —          |       | 18,079     |       |
| Fair market value  adjustment for derivatives                                                    |       | —            |       | —                      |       | —           |       | —            |       | —     |       | —      |       | 2,076           |       | 2,076      |       |
| Cash  distributions                                                                              |       | —            |       | —                      |       | (11,306          | )          | —            |       | (11,306    | )          | (461        | )          | —          |       | (23,073    | )          |
| **Balance  at December 31, 2005**                                                                |       | $                 | —     |                        | 6,900      |             | $          | 115,651           |       | 6,900      |       | $           | 2,256      |            | $          | 92         |       | $ | 1,869 |   | $ | 119,868 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

F-6

----

 

**U.S. Shipping Partners L.P.**

**Consolidated Statements of Cash Flows**

**Years Ended December 31, 2005, 2004 and 2003**

** (in thousands)**

 
| ** **                                                                        | ** ** | **For the Years Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                        | ** ** | **2005**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Cash  flows from operating activities**                                         |       |                                 |       |   |   |   |   |
| Net income                                                                        |       | $                                    | 18,079     |   | $ | 1,448 |   | $ | 2,433 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities |       |                                 |       |   |   |   |   |
| Depreciation and amortization, including amortization  of deferred financing fees |       | 26,634                               |       | 24,745 |   | 18,488 |   |
| Deferred income taxes                                                             |       | (1,903                               | )          | 2,895 |   | 38 |   |
| Capitalized drydock costs                                                         |       | (8,930                               | )          | — |   | (12,448 | ) |
| Loss on debt extinguishment                                                       |       | —                               |       | 6,397 |   | — |   |
| Provision for accounts receivable                                                 |       | 314                                  |       | 382 |   | — |   |
| Changes in assets and liabilities:                                                |       |                                 |       |   |   |   |   |
| Accounts receivable                                                               |       | (328                                 | )          | (10,835 | ) | (1,217 | ) |
| Prepaid expenses and other current assets                                         |       | 1,526                                |       | (2,749 | ) | (174 | ) |
| Other assets                                                                      |       | (113                                 | )          | — |   | (10 | ) |
| Accounts payable                                                                  |       | (803                                 | )          | (1,785 | ) | 3,235 |   |
| Deferred revenue                                                                  |       | (2,325                               | )          | 2,325 |   | — |   |
| Accrued expenses and other liabilities                                            |       | (1,542                               | )          | 4,361 |   | 270 |   |
| Net cash provided by operating activities                                         |       | 30,609                               |       | 27,184 |   | 10,615 |   |
|                                                                              |       |                                 |       |   |   |   |   |
| **Cash flows from investing activities**                                          |       |                                 |       |   |   |   |   |
| Proceeds from sale of vessels and equipment                                       |       | —                               |       | 2,000 |   | — |   |
| Construction of vessels and equipment                                             |       | (23,579                              | )          | (7,929 | ) | — |   |
| Purchase of vessels and equipment                                                 |       | (29,648                              | )          | (33,121 | ) | (5,881 | ) |
| Deposit to secure shipyard slot                                                   |       | (3,788                               | )          | — |   | — |   |
| Change in restricted cash                                                         |       | —                               |       | 502 |   | (502 | ) |
| Advances from Hess, net                                                           |       | 963                                  |       | 4,007 |   | 5,326 |   |
| Net cash used in investing activities                                             |       | (56,052                              | )          | (34,541 | ) | (1,057 | ) |
|                                                                              |       |                                 |       |   |   |   |   |
| **Cash flows from financing activities**                                          |       |                                 |       |   |   |   |   |
| Member contributions                                                              |       | —                               |       | 2 |   | 5,850 |   |
| Gross proceeds from issuance of common  units                                     |       | —                               |       | 153,524 |   | — |   |
| Redemption of common units held by  Predecessor                                   |       | —                               |       | (18,600 | ) | — |   |
| Offering expenses                                                                 |       | —                               |       | (15,160 | ) | — |   |
| Proceeds from issuance of term loan                                               |       | 30,000                               |       | 202,500 |   | 15,000 |   |
| Repayment of debt                                                                 |       | (1,588                               | )          | (247,250 | ) | (24,375 | ) |
| Distributions to partners/members                                                 |       | (23,073                              | )          | (15,000 | ) | — |   |
| Cash retained by general partner                                                  |       | —                               |       | (23,038 | ) | — |   |
| Deferred financing costs                                                          |       | (154                                 | )          | (7,928 | ) | (694 | ) |
| Net cash provided by (used in) financing  activities                              |       | 5,185                                |       | 29,050 |   | (4,219 | ) |
|                                                                              |       |                                 |       |   |   |   |   |
| Net (decrease) increase in cash                                                   |       | (20,258                              | )          | 21,693 |   | 5,339 |   |
| Cash, beginning of period                                                         |       | 30,258                               |       | 8,565 |   | 3,226 |   |
| Cash, end of period                                                               |       | $                                    | 10,000     |   | $ | 30,258 |   | $ | 8,565 |   |
| **Supplemental disclosure of cash flow  information**                             |       |                                 |       |   |   |   |   |
| Cash paid during the year for                                                     |       |                                 |       |   |   |   |   |
| Interest                                                                          |       | $                                    | 6,733      |   | $ | 9,232 |   | $ | 9,472 |   |
| Income taxes                                                                      |       | $                                    | 857        |   | $ | 17 |   | $ | 6 |   |
| **Supplemental disclosure of non-cash  investing and financing activities**       |       |                                 |       |   |   |   |   |
| Retention of non-cash assets by the general  partner                              |       | $                                    | —     |   | $ | 8,652 |   | $ | — |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

F-7

----

 

**U.S. Shipping Partners L.P.**

**Notes to Consolidated Financial Statements**

**Years Ended December 31, 2005, 2004 and 2003**

** (dollars in thousands,except unit data)**

 

**1.****            ****Formation and Nature of Operations**

 

On July 30, 2004 U.S. Shipping Partners L.P. (the “Partnership”) wasformed to acquire, own and operate integrated tug barge units (“ITBs”) thattransport petroleum products and specialty refined petroleum and chemicalproduct, or parcel, tankers (“Parcel Tankers”) conducted by United StatesShipping Master LLC and its subsidiaries, (collectively, the“Predecessor”).  The Predecessor has,since September 2002, engaged in transportation services between ports in theUnited States, principally for refined petroleum products and petrochemical andcommodity chemical products. The vessels operate under the regulatoryprovisions of the Jones Act.  On November3, 2004, the Predecessor contributed assets and liabilities constituting thebusiness of the Predecessor to the Partnership in connection with the initialpublic offering of the common units representing limited partner interests inthe Partnership (the “common units”).  Inexchange for these assets and liabilities, the Predecessor received 899,968common units and 6,899,968 subordinated units representing limited partnerinterests in the Partnership.  ThePartnership’s general partner received a 2% general partner interest andcertain incentive distribution rights in the Partnership.  Incentive distribution rights represent theright to receive an increasing percentage of cash distributions after theminimum quarterly distribution, any cumulative arrearages on common units, andcertain target distribution levels, have been achieved.  The Partnership is required to distribute allof its available cash from basic surplus, as defined in the Partnershipagreement.  The target distributionlevels entitle the general partner to receive 15% of quarterly cashdistributions in excess of $0.50 per unit until all unitholders have received$0.575 per unit, 25% of quarterly cash distributions in excess of $0.575 perunit until all unitholders have received $0.70 per unit, and 50% of quarterlycash distributions in excess of $0.70 per unit. During 2005, the Partnership acquired two additional vessels, the *Houston,*a petroleum product tanker, andthe *Sea Venture,*a parcel tanker.

 

The transfer to the Partnership of substantially all of the assets andliabilities constituting the business of the Predecessor represented areorganization of entities under common control and was recorded at historicalcost.  The net assets transferred were$31,690 less than the total net assets of the Predecessor due to the retentionby the general partner of certain net assets, including cash of $23,038,accounts receivable totaling $7,917, fixed assets of $503, prepaid expenses of$242, accrued expenses of $1,275, affiliate receivables of $1,234 and otherassets of $31.  The consolidatedfinancial statements included herein are for the Predecessor for all periodsprior to November 3, 2004.

 

**2.****            ****Initial Public Offering**

 

On November 3, 2004, the Partnership completed its initial publicoffering of 6,899,968 common units (including 899,968 common units sold uponexercise of the underwriters’ over-allotment option) at a price of $22.25 perunit.  Total gross proceeds from thissale were $153,524.  Concurrent with thissale, the Partnership redeemed 899,968 common units held by the Predecessor ata cost of $18,600.  After the initialpublic offering, there were 6,899,968 common units and 6,899,968 subordinatedunits outstanding.  As described in thepartnership agreement, during the subordination period the subordinated unitsare not entitled to receive any distributions until the common units havereceived their minimum quarterly distribution plus any arrearages from priorquarters.  The subordination period willend once the Partnership meets certain financial tests described in thepartnership agreement, but generally cannot end before December 31, 2009.  When the subordination period ends, allsubordinated units will convert into common units on a one-for-one basis andcommon units will no longer be entitled to arrearages.  If the Partnership meets certain financialtests described in the partnership agreement, 25% of the class A subordinatedunits can convert into common units on or after December 31, 2007 and anadditional 25% can convert into common units on or after December 31, 2008.   If the Partnership meets certain financialtests described in the partnership agreement, 25% of the class B subordinatedunits can convert into common units on or after December 31, 2008 and anadditional 25% can convert into common units on or after December 31, 2009.

 

The gross proceeds retained by the Partnership relating to the sale ofthe common units totaled $153,524.  Theseproceeds were used to repay $93,750 in outstanding term debt, $10,918 inunderwriting and structuring fees, $4,242 in professional fees and otheroffering expenses, $18,600 to redeem 899,968 units held by United StatesShipping Master LLC, and $1,332 in costs to amend and restate the creditfacility.  The remaining $24,682 was usedfor working capital purposes.

 

F-8

----

 

**3.****            ****Summary of Significant Accounting Principles**

 

**Principlesof Consolidation**

 

These consolidated financial statements are for the Partnership and itswholly-owned subsidiaries.  For allperiods prior to November 3, 2004, the business was operated by the Predecessorand, therefore, the consolidated financial statements are for the Predecessorfor those periods.  All inter-companytransactions and balances have been eliminated in consolidation.

 

**Cash andCash Equivalents**

 

The Partnership considers all highly liquid investments with originalmaturities of three months or less to be cash equivalents.

 

**RevenueRecognition**

 

The Partnership earns revenue under contracts of affreightment, spotvoyage charters, consecutive voyage charters and time charters. For contractsof affreightment, spot voyage charters and consecutive voyage charters, revenueand voyage expenses are recognized based upon the relative transit time in eachperiod compared to the total estimated transit time of each voyage. Althoughcontracts of affreightment, consecutive voyage charters and certain contractsfor spot voyage charters may be effective for a period in excess of one year,revenue is recognized on the basis of individual voyages. For time charters,revenue is recognized on a daily basis during the contract period, withexpenses recognized as incurred.

 

At December 31, 2004, the Partnership received an advance payment of$2,325 for freight revenue from a customer. This deferred revenue is classified as a liability until earned. AtDecember 31, 2005, no advance payments were received by the Partnership.

 

**Vessels andEquipment**

 

Vessels and equipment are recorded at cost, including capitalizedinterest and transaction fees where appropriate, and depreciated to salvagevalue using the straight-line method as follows: ITBs and the*Sea Venture* to their mandatory retirementas required by the Oil Pollution Act of 1990 (“OPA 90”), between 2012 and 2014;and 10 years for the *Chemical Pioneer*,*Charleston* and *Houston*. Furniture and fixtures are depreciated over the estimated useful life ofthree to seven years. Major renewals and betterments of assets are capitalizedand depreciated over the remaining useful lives of the assets. Maintenance andrepairs that do not improve or extend the useful lives of the assets areexpensed as incurred.  Leaseholdimprovements are capitalized and depreciated over the shorter of their usefullife or the remaining term of the lease.

 

When property items are retired, sold or otherwise disposed of, therelated cost and accumulated depreciation are removed from the accounts withany gain or loss on the dispositions included in income.  Assets to be disposed of are reported at thelower of their carrying amounts or fair values, less the estimated costs ofdisposal.

 

Construction costs of new vessels are capitalized and included inconstruction in progress until completed. Interest incurred during the construction of equipment is capitalized.

 

**Drydocking**

 

Both domestic and international regulatory bodies require thatpetroleum carrying shipping vessels be drydocked for major repair andmaintenance at least every five years and chemical vessels be drydocked twiceevery five years. In addition, vessels may have to be drydocked in the event ofaccidents or other unforeseen damage. The Partnership capitalizes expendituresincurred for drydocking and amortizes these expenditures over 60 monthsfor the ITBs and 30 months for the parcel tankers and *Houston*. During 2005, the Partnership capitalized $15,616 of expenditures for thedrydocking of the *New York*, *Jacksonville,*and *Houston*. In 2006, the Partnership will be placing five vessels into drydock andestimates the total expenditures will be $27,900.

 

**FuelSupplies**

 

Fuel used to operate the Partnership’s vessels, and on hand at the endof the period, is recorded at cost. Such amounts totaled $2,028 and $1,138 atDecember 31, 2005 and 2004, respectively, and are included in prepaid expensesand other current

 

F-9

----

 

assetsin the consolidated balance sheets. Additionally, amounts accrued for fuel purchases, $1,848 and $816 atDecember 31, 2005 and 2004, respectively, are included in accrued expenses andother current liabilities in the consolidated balance sheets.

 

**DeferredFinancing Costs**

 

Direct costs associated with obtaining long-term financing are deferredand amortized utilizing the effective interest method over the terms of therelated financing. For the years ended December 31, 2005, 2004 and 2003, thePartnership incurred $154, $7,928 and $694 respectively, of deferred financingcosts related to the issuance or modification of debt in connection with theacquisition of vessels and equipment. For the years ended December 31, 2005,2004 and 2003, amortization expense was $930, $800 and $567, respectively.   These costs are included in interestexpense.

 

**Use ofEstimates**

 

The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosures of contingent assets and liabilitiesat the date of the financial statements, and the reported amounts of revenuesand expenses during the reporting period. The most significant estimates relateto depreciation of vessels, liabilities incurred for property and indemnityclaims, and the allowance for doubtful accounts. Actual results could differfrom those estimates.

 

**Concentrationof Credit Risk**

 

Financial instruments that potentially subject the Partnership toconcentrations of credit risk are primarily cash and trade accounts receivable.The Partnership maintains its cash on deposit at a financial institution inamounts that, at December 31, 2005, exceeded insurable limits by $9,800.

 

The Partnership’s operations are concentrated in long-haul coastwisemarine transportation services, principally for refined petroleum production inthe U.S. domestic “coastwise” trade. Events or changes in regulations impactingthis industry could have a material impact on the Partnership’s operations.

 

With respect to accounts receivable, the Partnership extends creditbased upon an evaluation of a customer’s financial condition and generally doesnot require collateral. The Partnership maintains an allowance for doubtfulaccounts for potential losses, totaling $139 and $100 at December 31, 2005 and2004, respectively.  The Partnership doesnot believe it is exposed to concentrations of credit risk that are likely tohave a material adverse effect on its financial position, results of operationsor cash flows.   For the years endedDecember 31, 2005 and 2004, the Partnership charged to expense $314 and $382,respectively, and incurred write-offs of $275 and $282, respectively. Therewere no amounts charged to expense or write offs incurred in 2003.

 

Voyage revenues and accounts receivable for the Partnership’s customersincluded the following concentration:

 

| ** ** | ** ** | **Voyage Revenues**         | ** ** | **Accounts Receivable** | ** ** |
|------------|------------|-----------------------------|------------|-------------------------|------------|
| ** ** | ** ** | **Year Ended December 31,** | ** ** | **December 31,**        | ** ** |
| ** ** | ** ** | **2005**                    | ** ** | **2004**                | ** ** | **2003** | ** ** | **2005** | ** ** | **2004** | ** ** |
| BP         |       | 30                          | %          | 27                      | %          | 52 | % | 16 | % | 13 | % |
| Shell      |       | 25                          | %          | 20                      | %          | 23 | % | 30 | % | 14 | % |
| Hess       |       | 10                          | %          | 12                      | %          | 15 | % | 6 | % | 5 | % |
| Valero     |       | 3                           | %          | 4                       | %          | — |   | 10 | % | — |   |

 

Voyage revenues from Hess do not include payments from Hess under theHess support agreement. Accounts receivable from Hess include accountsreceivable under the Hess support agreement.

 

F-10

----

 

**Long-LivedAssets**

 

The Partnership reviews long-lived assets for impairment wheneverevents or changes in circumstances indicate that the carrying amount of anasset may not be recoverable. In such instances, an impairment charge would berecognized if the estimated fair value of the asset is less than the asset’snet book value.

 

**DerivativeInstruments**

 

The Partnership utilizes derivative financial instruments to reduceinterest rate risks. The Partnership does not hold or issue derivativefinancial instruments for trading purposes. Statement of Financial AccountingStandards No. 133, *Accounting forDerivative Instruments and Hedging Activities*, (“SFASNo. 133”), as amended, establishes accounting and reporting standards forderivative instruments and hedging activities. It requires that an entityrecognize all derivatives as either assets or liabilities in the statement offinancial condition and measure those instruments at fair value. Changes in thefair value of those instruments are reported in earnings or other comprehensiveincome depending on the use of the derivative and whether it qualifies forhedge accounting. The accounting for gains and losses associated with changesin the fair value of the derivative and the effect on the consolidatedfinancial statements will depend on its hedge designation and whether the hedgeis highly effective in achieving offsetting changes in the fair value of cashflows of the asset or liability hedged.

 

**Taxes**

 

As a limited liability company, the Predecessor was treated as apartnership for income tax purposes. Accordingly, the Predecessor was generallynot subject to federal and state taxes, and its profits and losses were passeddirectly to its members for inclusion in their respective income tax returns.The Predecessor was subject to certain state franchise and other taxes.

 

One of the Predecessor’s subsidiaries, USS Vessel Management Inc.,was a corporation and was subject to federal, state and local income taxes,which are reflected in these financial statements.  Upon completion of the initial publicoffering, a subsidiary of the Partnership, Chemical Pioneer Inc., was convertedfrom a limited liability company to a corporation and, consequently, is subjectto federal, state and local income taxes. Deferred income taxes represent thetax effects of differences between the financial reporting and tax bases of theassets and liabilities at enacted tax rates in effect for the years in whichthe differences are expected to reverse. As a master limited partnership, thePartnership is generally not responsible for federal and state income taxes, andits profits and losses are passed directly to its members for inclusion intheir respective income tax returns. The Partnership is subject to certainstate franchise and other taxes.  AtDecember 31, 2005 and 2004, tax payable amounts included in accrued expensesand other liabilities were $1,051 and $402, respectively.

 

The Partnership provides deferred income taxes for the tax effects ofdifferences between the financial reporting and tax bases of assets andliabilities of our corporate subsidiary, which are recorded at enacted taxrates in effect for the years in which the differences are projected toreverse.  The Partnership evaluates therecoverability of deferred tax assets and establishes a valuation allowancewhen it is more likely than not that some portion or all of the deferred taxassets will not be realized.  No suchallowance was recorded at December 31, 2005 and 2004.

 

**Fair Valueof Financial Instruments**

 

The carrying amount of the Partnership’s financial instruments includedin current assets and current liabilities approximates their fair value due totheir short-term nature. At December 31, 2005 and 2004, the net book valueof long-term debt approximated its fair value as it based on secondary marketindicators.  Since the Partnership’s debtis not quoted, estimates are based on each obligation’s characteristics,including remaining maturities, interest rate, amortization schedule andliquidity.

 

**Reclassification**

 

Certain prior period amounts have been reclassified to conform tocurrent year presentation.  At December31, 2004, we have revised the classification of $1,301 of receivables frominsurance carriers for amounts in excess of policy deductibles from accruedexpenses to other current assets in the Partnership’s consolidated balancesheet.

 

F-11

----

 

**Net Incomeper Unit**

 

Basic net income per unit is determined by dividing net income, afterdeducting the amount of net income allocated to the general partner’s interest,as described below, by the weighted average number of units outstanding duringthe period.  Diluted net income per unitis calculated in the same manner as net income per unit, except that theweighted average number of outstanding units is increased to include thedilutive effect of outstanding unit options or phantom units.  The Partnership’s long-term incentive plancurrently permits the issuance of an aggregate of 689,997 units. There were nounit options or phantom units outstanding during the periods ended December 31,2005 and 2004.  For periods prior toNovember 3, 2004, such units are equal to the common and subordinated unitsreceived by the Predecessor in exchange for the net assets contributed to thePartnership, or 7,799,936.

 

As required by Emerging Issues Task Force Issue No. 03-6,“Participating Securities and the Two-Class Method under FASB Statement No.128, Earnings per Share” (“EITF 03-6”), the general partner’s interest in netincome is calculated as if all net income for the year was distributedaccording to the terms of the partnership agreement, regardless of whetherthose earnings would or could be distributed. The partnership agreement does not provide for the distribution of netincome; rather, it provides for the distribution of available cash, which is acontractually defined term that generally means all cash on hand at the end ofeach quarter after establishment of cash reserves.  Unlike available cash, net income is affectedby non-cash items, such as deferred income tax provisions.

 

As described in Note 1 above, the general partner’s incentivedistribution rights entitle it to receive an increasing percentage ofdistributions when the quarterly cash distribution exceeds $0.50 per unit.  For purposes of EITF 03-6, the Partnershipmust treat net income as if it were distributable.  Therefore, since net income did not exceed$0.50 per unit for any quarter during 2005 or the quarter ended December 31,2004, the assumed distribution of net income does not result in use of theincreasing percentages to calculate the general partner’s interest in netincome.  Distributions during the yearended December 31, 2005 and for the period ended December 31, 2004 were $1.80and $0.2885 per unit, respectively.

 

**NewAccounting Pronouncements**

 

On April 4, 2005, the Financial Accounting Standards Board (“FASB”)issued Interpretation No. 47, “Accounting for Conditional Asset RetirementObligations, an interpretation of FASB Statement No. 143” (“FIN 47”).  This interpretation clarifies that an entityis required to recognize a liability for the fair value of a conditional assetretirement obligation when incurred if the liability’s fair value can bereasonably estimated.  It also clarifieswhen an entity would have sufficient information to reasonably estimate thefair value of an asset retirement obligation. The Partnership adopted FIN 47 in 2005, which resulted in no impact onthe consolidated financial statements.

 

On June 2, 2005, the FASB issued FASB Statement No. 154, “AccountingChanges and Error Corrections-a replacement of APB No. 20 and FAS No. 3” (“FAS154”).  FAS 154 replaces APB Opinion No.20, “Accounting Changes” (“APB 20”) and FASB Statement No. 3 “ReportingAccounting Changes in Interim Financial Statements” (“FAS 3”) and changes therequirements for the accounting for and reporting of a change in accountingprinciple.  It also applies to changesrequired by an accounting pronouncement in the unusual instance that thepronouncement does not include specific transition provisions.  When a pronouncement includes specifictransition provisions, those provisions should be followed.  The Partnership adopted FAS 154 in 2005,which resulted in no impact on the consolidated financial statements.

 

**4.****            ****Vessels and Equipment**

 

Vessels and equipment consists of the following:

 

| ** **                        | ** ** | **December 31,** | ** ** |
|-----------------------------------|------------|------------------|------------|
| ** **                        | ** ** | **2005**         | ** ** | **2004** | ** ** |
| Vessels                           |       | $                | 257,688    |   | $ | 228,171 |   |
| Capitalized  drydock expenditures |       | 28,064           |       | 12,448 |   |
| Construction-in-progress          |       | 31,508           |       | 7,929 |   |
| Office  furniture and equipment   |       | 131              |       | — |   |
| Total vessels and equipment       |       | 317,391          |       | 248,548 |   |
| Less:  Accumulated depreciation   |       | 72,329           |       | 46,625 |   |
| Total vessels and equipment, net  |       | $                | 245,062    |   | $ | 201,923 |   |

 

F-12

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Depreciation and amortization of vessels and equipment for the yearsended December 31, 2005, 2004 and 2003 was $25,704, $23,945, and $17,921,respectively.  Depreciation includesamortization of drydocking expenditures of $5,388,    $4,974, and $833 for the years endedDecember 31, 2005, 2004, and 2003, respectively.  Construction in-progress for the years endedDecember 31, 2005 and 2004 includes amounts paid for the construction of an ATB(Note 10) and capitalized interest of $1,140 and $72, respectively.  Capitalized drydock expenditures of $6,041were accrued at December 31, 2005.  Nodrydock amounts were accrued at December 31, 2004.

 

On November 28, 2005 the Partnership acquired the *Sea Venture*, a Jones Act, 19,000 dwtdouble-bottomed chemical/product tanker. The vessel was re-built in 1983and is capable of carrying twenty-one different grades of product inindependent cargo tanks.  The purchaseprice of the vessel, including legal, survey and other acquisition costs, was$4,126. The vessel is in drydock and will be available for trading in May 2006.  The transaction was financed utilizingoperating cash.  The Partnershipestimates the drydock will cost approximately $8,900.

 

On September 9, 2005, the Partnership acquired the *Gus Darnell*, renamed the *Houston*, a Jones Act coastwisedouble-hulled product tanker, built in 1985, capable of carrying 240,000barrels.  The purchase price of thevessel, including legal, survey and other acquisition costs, was $25,392.  The vessel was drydocked in Singapore at acost of $3,116 and was placed in service in October 2005.

 

In connection with the closing of the initial public offering atNovember 2, 2004, certain assets were retained by the general partner,including furniture and fixtures with a net book value of $503 at the date ofclosing.

 

**5.****            ****Income Taxes**

 

The components of the provision for income taxes for the years endedDecember 31, 2005, 2004 and 2003 are as follows:

 

| ** **                           | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------|------------|-----------------------------|------------|
| ** **                           | ** ** | **2005**                    | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                 |       |                        |       |   |   |   |   |
| **Current**                          |       |                        |       |   |   |   |   |
| Federal                              |       | $                           | 932        |   | $ | 145 |   | $ | — |   |
| State                                |       | 331                         |       | 79 |   | 34 |   |
|                                 |       | 1,263                       |       | 224 |   | 34 |   |
| **Deferred**                         |       |                        |       |   |   |   |   |
| Federal                              |       | (1,475                      | )          | 2,232 |   | 33 |   |
| State                                |       | (428                        | )          | 663 |   | 5 |   |
|                                 |       | (1,903                      | )          | 2,895 |   | 38 |   |
| (Benefit)/provision for income taxes |       | $                           | (640       | ) | $ | 3,119 |   | $ | 72 |   |

 

A reconciliation of income tax expense, as computed using the federalstatutory income tax rate of 34%, to the provision (benefit) for income taxesfor the years ended December 31, 2005, 2004 and 2003 is as follows:

 
| ** **                                                                             | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                             | ** ** | **2005**                    | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                                   |       |                        |       |   |   |   |   |
| Tax at  federal statutory rate of 34%                                                  |       | $                           | 5,929      |   | $ | 1,553 |   | $ | 852 |   |
| Entities not  subject to federal income tax                                            |       | (6,476                      | )          | (1,792 | ) | (820 | ) |
| State and  local income taxes, net of federal benefit                                  |       | (44                         | )          | 19 |   | 33 |   |
| Increase in deferred taxes resulting from  conversion of a subsidiary to a corporation |       | —                      |       | 3,244 |   | — |   |
| Other                                                                                  |       | (49                         | )          | 95 |   | 7 |   |
| Total                                                                                  |       | $                           | (640       | ) | $ | 3,119 |   | $ | 72 |   |

 

Significant components of deferred income tax liabilities and assets asof December 31, 2005 and 2004 are as follows:

 

F-13

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| ** **                                        | ** ** | **December 31,** | ** ** |
|---------------------------------------------------|------------|------------------|------------|
| ** **                                        | ** ** | **2005**         | ** ** | **2004** | ** ** |
| **Current  deferred tax assets (liabilities)**    |       |             |       |   |   |
| Prepaid  expenses                                 |       | $                | (2         | ) | $ | (19 | ) |
| Net  operating loss carryforward                  |       | —           |       | 19 |   |
| Allowance  for doubtful accounts                  |       | 52               |       | — |   |
|                                              |       | 50               |       | — |   |
|                                              |       |             |       |   |   |
| **Noncurrent  deferred tax assets (liabilities)** |       |             |       |   |   |
| Depreciation  and amortization                    |       | (1,091           | )          | (2,944 | ) |
|                                              |       | (1,091           | )          | (2,944 | ) |
| Net deferred tax liability                        |       | $                | (1,041     | ) | $ | (2,944 | ) |

 

**6.****            ****Financing**

 

*a.*             *Amended and Restated CreditFacility*

 

On April 13, 2004, the Predecessor entered into an amended andrestated credit facility. The amended and restated credit facility provided fora $202,500 term loan that bore interest at LIBOR plus 2.25% or the prime rateplus an applicable margin. Principal and interest was due and payablequarterly. The loan would have matured on March 31, 2010, and wascollateralized by all of the Predecessor’s assets. The amended and restatedcredit facility contained various financial covenants including certainrestrictions on the sale or acquisition of assets and a requirement to adhereto specified financial ratios.

 

The amended and restated credit facility provided for a revolvingcredit facility up to $25,000, with a letter of credit sub-facility of$10,000. The amended and restated credit facility required a 1% annualcommitment fee on the sum of the average daily unused portion of the line ofcredit amount and 1.75% to 2.25%, depending on certain debt leverageratios, on any outstanding letters of credit. Borrowings bore interest at the bank prime rate plus 0.75% to 1.25% orLIBOR plus 1.75% to 2.25%, depending in each case on certain debt leverageratios.

 

In connection with entering into the amended and restated creditfacility, the Predecessor expensed $3,167 of financing costs and capitalized$4,064 of financing costs.  Thisrefinance arrangement resulted in full payment of the $14,175 term loan for thePredecessor, and the $29,000 term loan due to Hess, as well as amending theline of credit and the term loan. In addition, a distribution of $15,000 wasmade to members of the Predecessor.

 

In connection with the Partnership’s initial public offering of commonunits, as described in Note 2, all of the Predecessor’s debt balances werecontributed to the Partnership. Approximately $93,750 of the debt was repaid with proceeds of theinitial public offering.

 

*b.**           **Second Amended and RestatedCredit Facility*

 

On November 3, 2004, the Partnership entered into a second amended andrestated credit agreement, which provides for a $100,000 term loan that bearsinterest at LIBOR (4.20% and 2.56% at December 31, 2005 and 2004, respectively)plus 2.00%, or the prime rate (7.25% and 5.25% at December 31, 2005 and 2004,respectively) plus an applicable margin. Principal and interest is due and payable quarterly.  The loan matures on April 30, 2010, and iscollateralized by all the Partnership’s assets. The second amended and restatedcredit facility contains various financial covenants, including certainrestrictions on the sale or acquisition of assets and a requirement to adhereto specified financial ratios.

 

The second amended and restated credit facility provides for arevolving credit facility up to $50,000, with a letter of credit sub-facilityof $10,000, of which the Partnership has $600 outstanding.  The second amended and restated creditfacility requires a 0.50% annual commitment fee on the sum of the average dailyunused portion of the line of credit amount, a 1.50% to 2.00% fee, depending on certain debt leverageratios, on any outstanding letters of credit, and a 0.75% annual commitment feewith respect to the delayed draw term loan. Borrowings bear interest at the bank’s prime rate plus 0.50% to 1.00% orLIBOR plus 1.50% to 2.00%, depending in each case on certain debt leverageratios.

 

In connection with entering into the secondamended and restated credit facility, the Partnership expensed $3,230 ofpreviously capitalized financing costs and certain additional costs incurred inamending and restating this credit facility. In

 

F-14

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addition, $890 of costs incurred in amending and restating this creditfacility were capitalized.

 

On September 9, 2005, the Partnership borrowed anadditional $30,000 on its existing credit facility to finance the purchase anddrydock of the *Houston*.   The loan matures on April 30, 2010, bearsinterest at LIBOR plus 2.00%, and is amortized, on a pro-rated basis, inaccordance with the existing debt repayment schedule.  In connection with this borrowing $154 offinancing costs incurred were capitalized.

 

In addition, the second amended and restated creditfacility provides the option to increase, up to an additional amount not toexceed an additional $60,000 in the aggregate, the maximum amount available tous under the credit agreement through increases in either the term facility,revolving credit facility or both, which option expires November 2, 2006.  Our exercise of this option is at the mutualdiscretion of the lending institution and the Partnership, and is contingentupon, among other things:

 

•   no event of default having occurred and continuing; and

•   the proceeds being used to construct or acquire new vessels.

 

On October 24, 2005, the Partnership amended itsSecond Amended and Restated Credit Agreement principally to allow foradditional payments, not to exceed $7,500, to be made by the Partnership to theSENESCO shipyard for construction of its ATB. See Note 10 for additional information.

 

The second amended and restated credit facility alsoprovided for a delayed draw term loan of $30,000, which expired on November 2,2005.  The Partnership decided not toexercise this option and allowed it to expire.

 

As of December 31, 2005 and2004, outstanding debt balances were as follows:

 
| ** **                         | ** ** | **December 31,** | ** ** |
|------------------------------------|------------|------------------|------------|
| ** **                         | ** ** | **2005**         | ** ** | **2004** | ** ** |
| **Short-term:**                    |       |             |       |   |   |
| Current  portion of long-term debt |       | $                | 1,850      |   | $ | 1,500 |   |
|                               |       |             |       |   |   |
| **Long-term:**                     |       |             |       |   |   |
| Term loan                          |       | 126,187          |       | 98,125 |   |
| Total debt                         |       | $                | 128,037    |   | $ | 99,625 |   |

 

As of December 31, 2005, principal payments under the long-termdebt agreement for each of the next five years and thereafter are as follows:

 
| **Year  ended December 31,** | ** ** | ** ** | ** ** |
|------------------------------|------------|------------|------------|
| 2006                         |       | $          | 1,850      |   |
| 2007                         |       | 6,167      |       |
| 2008                         |       | 10,446     |       |
| 2009                         |       | 58,468     |       |
| 2010                         |       | 51,106     |       |
| Thereafter                   |       | —     |       |
|                         |       | $          | 128,037    |   |

 

**7.****            ****Interest Rate Hedging**

 

During 2002, the Predecessor entered into contracts to hedge theinterest rate risk on a portion of the term loan.  As discussed in Note 6, payments under theterm loan are based on blended LIBOR plus 2.00% at December 31, 2005 and2004.  To hedge the risk of increasinginterest rates, the Predecessor entered into a $62,375 notional principalinterest rate swap that effectively converted the floating LIBOR-based paymentsto a fixed rate of 3.15% plus the LIBOR-rate spread of 3.25%, resulting in a6.40% interest rate.  The contractexpires in December 2006.  In April 2004,the LIBOR-rate spread on the

 

F-15

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aforementionedinterest rate swap was changed to 2.25%, resulting in a 5.40% interestrate.  In November 2004, the LIBOR-ratespread on the aforementioned interest rate swap was changed to 2.00%, resultingin a 5.15% interest rate.  In April 2004,the Predecessor also entered into a second contract to hedge the interest raterisk on an additional portion of the term loan. The Predecessor entered into a $54,250 notional principal interest rateswap that effectively converted the floating LIBOR-based payments to a fixedrate of 3.9075% plus the LIBOR-rate spread of 2.25%, resulting in a 6.1575%interest rate.  In November 2004, theLIBOR-rate spread on the aforementioned interest rate swap was changed to2.00%, resulting in a 5.9075% interest rate. The contract expires in December 2008. At December 31, 2005 and 2004,LIBOR was 4.20% and 2.56%, respectively. The unrealized gain related to interest rate hedges was $1,869 as ofDecember 31, 2005.  The unrealized lossrelated to interest rate hedges was $207 as of December 31, 2004.  These amounts are reflected in othercomprehensive gain/(loss) as the contracts have been designated as cash flowhedges.

 

**8.****            ****Hess Support Agreement**

 

On September 13, 2002, the Predecessor entered into an agreement(the “Support Agreement”) with Hess in which certain daily charter rates wereagreed for five years and based upon which support payments would be made byHess to the Partnership. For the years ended December 31, 2005 and 2004, fiveITBs were covered by this agreement. Under the terms of the Support Agreement, Hess agreed to pay thePartnership for the amount by which the Partnership’s negotiated third-partycontract rates are less than the agreed charter rate. However, in the eventthat the charter rates the Partnership receives on the ITBs are in excess ofthe Hess support rate, then the Partnership must pay such excess amounts toHess until the Partnership has repaid Hess for all prior support payments madeby Hess to us, and then the Partnership must share 50% of any additional excessamount with Hess. The differences resulting from these rates are calculated ona monthly basis. The net amounts received or paid by the Partnership will beconsidered contingent purchase price until the end of the Support Agreementterm (September 2007), at which time the net amount received or paid willbe treated as a purchase price adjustment.

 

From September 13, 2002 to December 31, 2005, thePartnership’s third-party contract rates have been less than the agreedcharter rates by a cumulative amount of $12,350, which has been classified asadvances from Hess. For the years ended December 31, 2005 and 2004, advancesfrom Hess under the support agreement were $963 and $4,007, respectively.

 

**9.****            ****Related Party Transactions**

 

Hess is one of the Partnership’s significant customers. Voyage revenuesearned from transactions with Hess (which do not include amounts under theSupport Agreement) for the years ended December 31, 2005, 2004 and 2003 were$13,251, $14,221, and $12,423, respectively. Accounts receivable due under the Support Agreement were $344 and $9 atDecember 31, 2005 and 2004, respectively.

 

On September 12, 2002, the Predecessor entered into a three-yearagreement with an affiliate of one of the Predecessor’s members whereby theaffiliate provided certain business advisory and management services, includingthe assistance with the development of corporate strategy, budgeting andassistance in procuring financing, to the Predecessor for an annual fee of $500.A further agreement was made on May 6, 2003 with the affiliate for similaradditional services.  The Predecessorincurred and paid approximately $600 and $564 in 2004 and 2003, respectively,for business advisory and management services. These agreements were terminated concurrent with the closing of thePartnership’s initial public offering. United States Shipping Master LLC paid this affiliate $3,700 inconnection with such termination.

 

Certain subsidiaries of the Predecessor were not contributed to thePartnership; however, these subsidiaries’ expenses are entirely reimbursable bythe Partnership.  Amounts reimbursable tothese subsidiaries include general and administrative expenses, and wages andbenefits for crew members.  These amountswere $37,737 and $6,717, respectively, for the year ended December 31, 2005 andfor the period November 3, 2004 through December 31, 2004.

 

On September 23, 2005, the Partnership entered into a new ten-yearlease for office space for our New York City office.  The Partnership subleases 75% of the leasedspace to certain companies affiliated with the Chairman and Chief ExecutiveOfficer of the Partnership.  Theaffiliated companies will pay their portion of the rent in advance of thePartnership making the rental payment. The Partnership has provided a letter of credit totaling $214 to securefinal payments of the lease commitment. The Partnership has been reimbursed 75% of the cost of providing theletter of credit and has received a guaranty from its Chairman in the event ofany default of the lease, including that which would require drawdown of theletter of credit.  Terms of the lease arefurther discussed in Note 10.

 

F-16

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**10.****         ****Commitments and Contingencies**

 

*Leases*

 

On October 17, 2002, a subsidiary of the Predecessor, which wasnot contributed to the Partnership, entered into a six-year operating leaseagreement for office space in New Jersey. On November 18, 2003, thissubsidiary entered into a five-year operating lease for additional office spaceat the same location and took possession in May 2004. The subsidiary alsoleases office equipment under operating lease arrangements. General andadministrative expenses incurred on behalf of the Partnership by this subsidiaryare entirely reimbursable by the Partnership. On September 23, 2005, the Partnership entered into a ten-year lease foroffice space for our New York office, commencing on January 1, 2006.  The Partnership, as the lessee, subleases 75%of the leased space to certain companies affiliated with the Chairman and ChiefExecutive Officer of the Partnership. The total obligation of the lease over the ten-year period is $4,150,including annual escalation; however, the Partnership is entitled to sublease incomeof $3,112 from the affiliated companies. Average annual rental expense, net of sublease income of $311, to thePartnership is $104.  The lease providesfor additional payments of real estate taxes, insurance and other operatingexpenses applicable to the property and the sublease provides for theaffiliated companies to pay 75% of these expenses.  Total rental expense excludes such additionalexpense payments as part of the minimum rentals.

 

At December 31, 2005, future rental commitments under thesenoncancelable leases are as follows:

 

| ** **                   | ** ** | **Operating** | ** ** | ** **    | ** ** | **Net**    | ** ** |
|------------------------------|------------|---------------|------------|---------------|------------|------------|------------|
| **Year  ended December 31,** | ** ** | **Leases**    | ** ** | **Subleases** | ** ** | **Leases** | ** ** |
| 2006                         |       | $             | 634        |          | $          | (197       | )          | $ | 437 |   |
| 2007                         |       | 771           |       | (302          | )          | 469        |       |
| 2008                         |       | 807           |       | (307          | )          | 500        |       |
| 2009                         |       | 484           |       | (312          | )          | 172        |       |
| 2010                         |       | 424           |       | (318          | )          | 106        |       |
| **Thereafter**               |       | 2,235         |       | (1,676        | )          | 559        |       |
|                         |       | $             | 5,355      |          | $          | (3,112     | )          | $ | 2,243 |   |

 

Rent expense for the years ended December 31, 2005, 2004 and 2003was approximately $473, $411, and $272, respectively.   In addition to minimum rental paymentsabove, rent expense includes reimbursements for real estate taxes and rental ofa warehouse under a cancelable lease.

 

*Employment Agreements*

 

The general partner of the Partnership has entered into employmentagreements, expiring in 2007, with its six executive officers. The employment agreementshave an initial term of three years that are automatically extended forsuccessive one-year terms unless either party gives 60-days written noticeprior to the end of the term that such party desires not to renew theemployment agreement. The employment agreements currently provide for anaggregate base annual salary of $1,812. In addition, each employee is eligibleto receive an annual bonus award as determined by the Board of Directors of thegeneral partner at its sole discretion. If the employee’s employment isterminated without cause or if the employee resigns for a good reason, theemployee will be paid, for a period equal to the longer of (a) theremaining term of the employee’s agreement or (b) one year, a monthlypayment equal to one-twelfth of the employee’s then annual salary.

 

*Claims and Litigation*

 

During July 2005, the ITB *Mobile*was offhire for a period of approximately two days due to a groundingincident.  As a result, a claim of $1,450was filed with our insurance carrier.  AtDecember 31, 2005, a remaining liability associated with this claim of $205 anda corresponding receivable from the insurance carrier of $535 was recorded inthe Partnership’s balance sheet. At December 31, 2005 and 2004, the Partnershiprecorded a liability for total claims exposure, both insured and uninsured, of$1,469 and $1,522, respectively, and a corresponding receivable from theinsurance carrier of $1,414 and $1,428, respectively.

 

The Partnership is the subject of various claims and lawsuits in the ordinarycourse of business arising principally from personal injuries, collisions, andother casualties. Although the outcome of any individual claim or action cannotbe predicted with certainty, the Partnership believes that any adverse outcome,individually or in the aggregate, would be substantially

 

F-17

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mitigatedby applicable insurance and would not have a material adverse effect on thegeneral partner’s financial position, results of operations or cash flows. ThePartnership is subject to deductibles with respect to its insurance coverage upto $150 per incident and provides on a current basis for estimated paymentsthereunder.  Legal costs associated withsuch claims are expensed as incurred.

 

*Charter Commitments*

 

The Partnership’s time charters and consecutive voyage charters extendover various periods of time.  AtDecember 31, 2005, minimum future charter revenue from vessel charters wasas follows:

 

| **Year  ended December 31,** | ** ** | ** ** | ** ** |
|------------------------------|------------|------------|------------|
| 2006                         |       | $          | 95,238     |   |
| 2007                         |       | 102,809    |       |
| 2008                         |       | 75,316     |       |
| 2009                         |       | 38,022     |       |
| 2010                         |       | 28,581     |       |
| **Thereafter**               |       | 82,423     |       |
|                         |       | $          | 422,389    |   |

 

*Capital Expenditures*

 

In August 2004, the Partnership entered into a contract with SouthernNew England Shipyard Company (“SENESCO”) to build a 19,999 dwt articulated tugbarge (“ATB”) for the Partnership at a price of $45,400 to be delivered inearly 2006.  The Agreement also providedfor options to build up to three additional ATB’s. SENESCO has indicated thatthey are not able to complete the first ATB on the contract terms due toinfrastructure problems and production line issues, and that the completion ofthe barge will be delayed.   In November2005, the Partnership entered into a revised agreement with SENESCO regardingcompletion of the ATB at another facility, which SENESCO will operate.  The total cost of completion of the ATBpursuant to the revised agreement is expected to be approximately $53,400 witha contracted delivery date of December 2006. SENESCO has indicated that it is experiencing cost overruns and furtherdelays in completing the ATB.  Therevised agreement provides for substantial penalties for late delivery of theATB.  There is risk that the cost of theATB could be higher and that the ATB may not be completed in a timely manner,which could have a material adverse effect on the Partnership’s results ofoperations.  The Partnership and SENESCOhave mutually agreed to cancel the options to have SENESCO build up to threeadditional ATBs at a fixed price.

 

| ** **                   | ** ** | **Purchase**    | ** ** |
|------------------------------|------------|-----------------|------------|
| **Year  ended December 31,** | ** ** | **Commitments** | ** ** |
| 2006                         |       | $               | 26,152     |   |
| 2007                         |       | 405             |       |
|                         |       | $               | 26,557     |   |

 

On February 16, 2006, the Partnership entered into contracts toconstruct two additional ATBs with Manitowoc Marine Group (“MMG”) and EasternShipbuilding Group, Inc. (“Eastern”). The total construction price for the two ATBs is anticipated to beapproximately $130,000, or $65,000 per unit, including owner furnisheditems.  Additionally, the Partnership hascommitted to purchase owner-furnished items related to two option vesselstotaling $17,498.  See Note 12“Subsequent Events” for further information regarding these contracts.  At December 31, 2005, the Partnership made arefundable deposit of $3,288 and a non-refundable deposit of $500 to secure theshipyard slots for two newbuild ATB barges at MMG.  These amounts will be applied to the totalcontracted price in accordance with the February 16, 2006 contract.

 

*Letters of Credit*

 

The Partnership also has funding commitments that could potentiallyrequire its performance in the event of demands by third parties or contingentevents under letters of credit totaling $600 at December 31, 2005.  The letters of credit are primarily extendedto secure final payments associated with the building of the ATB engines andthe New York office lease.  There havebeen no claims against either letter of credit.

 

F-18

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**11.****         ****Employee Benefit Plans**

 

The Partnership maintains an employee savings plan underSection 401(k) of the Internal Revenue Code. The plan covers all officeemployees and allows participants to contribute to the plan a percentage ofpre-tax compensation, but not in excess of the maximum allowed under theInternal Revenue Code.  For the yearsended December 31, 2005, 2004, and 2003, the plan provided for matchingcontributions by the Partnership of 5%, 4%, and 3%, respectively.   In 2005, 2004, and 2003, the Partnershipmade matching contributions of approximately $176, $112, and $92, respectively,to the plan.

 

A significant number of the employees of a subsidiary of the generalpartner are covered by union sponsored, collectively bargained multi-employerpension plans.  These expenses aredirectly allocated to, and reimbursed by, the Partnership.  The Partnership contributed and charged toexpense $656, $548, and $436, in 2005, 2004, and 2003, respectively, for suchplans.  Information from the plan’sadministrators is not sufficient to permit the Partnership to determine itsshare, if any, of unfunded vested benefits.

 

**12.          Quarterly Results of Operations(Unaudited)**

 

The following summarizes certain quarterly results of operations:

 
| ** **                                               | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------------|------------|------------------------|------------|
| **2005**                                                 | ** ** | **December 31**        | ** ** | **September 30** | ** ** | **June 30** | ** ** | **March 31** | ** ** |
| Total  revenues                                          |       | $                      | 32,095     |   | $ | 32,624 |   | $ | 33,759 |   | $ | 33,056 |   |
| Operating  income                                        |       | $                      | 2,408      |   | $ | 6,024 |   | $ | 6,885 |   | $ | 7,498 |   |
| Net income                                               |       | $                      | 1,059      |   | $ | 4,475 |   | $ | 5,896 |   | $ | 6,649 |   |
| General  partner’s interest in net income           |       | $                      | 21         |   | $ | 89 |   | $ | 118 |   | $ | 133 |   |
| Limited  partners’ interest in net income           |       | $                      | 1,038      |   | $ | 4,386 |   | $ | 5,778 |   | $ | 6,516 |   |
| Net income  per limited partner unit (basic and diluted) |       | $                      | 0.07       |   | $ | 0.32 |   | $ | 0.42 |   | $ | 0.47 |   |

 
| ** **                                                      | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------------------------|------------|------------------------|------------|
| **2004**                                                        | ** ** | **December 31**        | ** ** | **September 30** | ** ** | **June 30** | ** ** | **March 31** | ** ** |
| Total revenues                                                  |       | $                      | 32,869     |   | $ | 35,716 |   | $ | 28,086 |   | $ | 25,684 |   |
| Operating income                                                |       | $                      | 2,015      |   | $ | 9,327 |   | $ | 4,021 |   | $ | 5,192 |   |
| Net (loss) income                                               |       | $                      | (6,030     | ) | $ | 6,497 |   | $ | (1,779 | ) | $ | 2,760 |   |
| General partner’s interest in net loss                     |       | $                      | (107       | ) | $ | — |   | $ | — |   | $ | — |   |
| Limited partners’ interest in net (loss)  income           |       | $                      | (5,923     | ) | $ | 6,497 |   | $ | (1,779 | ) | $ | 2,760 |   |
| Net (loss) income per limited partner unit  (basic and diluted) |       | $                      | (0.51      | ) | $ | 0.83 |   | $ | (0.23 | ) | $ | 0.35 |   |

 

Net income for the three months ended December 31, 2004 includes acharge for deferred income taxes of $3,244 relating to a change in tax statusof a subsidiary (Note 5) and a charge relating to extinguishment of debt of$3,230.  Net income for the three monthsended June 30, 2004 includes a charge relating to extinguishment of debt of$3,167.

 

**13.       Subsequent Events**

 

On February 3, 2006, the Board of Directors of the general partnerdeclared and the Partnership announced its regular cash distribution for thefourth quarter of 2005 of $0.45 per unit. The distribution was paid on allcommon, subordinated and general partner units on February 15, 2006 to allunitholders of record on February 10, 2006. The aggregate amount of thedistribution was $6,337.

 

On February 16, 2006, the Partnership entered into contracts toconstruct two additional ATBs with Manitowoc Marine Group (“MMG”) for theconstruction of two barges, and with Eastern Shipbuilding Group, Inc.(“Eastern”) for the construction of two tugs. The contract with MMG includesoptions to construct two additional barges. The contract with Eastern also includes options to construct and deliverup to four additional ATB tugs on the basis that each such option shall covertwo tugs.   The total construction pricefor the two ATBs is anticipated to be approximately $130,000, or $65,000 perunit, including owner furnished items. Deliveries of the ATBs are expected in August and November 2008.  Thecost per unit of the option ATBs is approximately $66,000, includingowner-furnished items.  The options forthe tugs must be exercised by August 2006 and February 2007, and the optionsfor the barges must be exercised by April 2006 and June 2006.  The Partnership has committed topurchase owner-furnished items related to the two option vessels totaling$17,498.  The Partnership has enteredinto a foreign currency forward contract to hedge the variability in cash flowsassociated with its liability related to one of these commitments totaling$13,902.

 

On March 15, 2006, the Partnership made a$5,000 deposit to reserve shipyard slots for the building of new vessels, ofwhich $4,600 is refundable if the Partnership elects by May 26, 2006 not toproceed with the building of the new vessels.

 

F-19

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**SIGNATURES**

 

Pursuant to the requirementsof Section 13 or 15(d) of the Securities Exchange Act of 1934, the registranthas duly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

 
| Date:  March 15, 2006 |                         |
|----------------------------|------------------------------|
|                       | U.S. SHIPPING PARTNERS  L.P. |
|                       | By:                          | US Shipping General  Partner LLC, |
|                       |                         | its general partner |
|                       |                         |
|                       |                         |
|                       | By:                          | /s/ Paul B. Gridley |   |
|                       |                         | Paul B. Gridley |
|                       |                         | Chairman, Chief Executive  Officer |
|                            |                              |  |  |  |

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, this report has been signed below bythe following persons on behalf of the registrant and in the capacitiesindicated on the dates indicated.

 
| **Signature**               | ** ** | **Title** | ** **                                              | **Date** | ** **      |
|-----------------------------|------------|-----------|---------------------------------------------------------|----------|-----------------|
|                        |       |      |                                                    |     |            |   |
| /s/ Paul B. Gridley         |       |      | Chairman,  Chief Executive Officer (principal           |     |            |   |
| Paul B. Gridley             |       |      | executive  officer)                                     |     | March  15, 2006 |   |
|                        |       |      |                                                    |     |            |   |
| /s/ Albert E. Bergeron      |       |      | Vice  President—Chief Financial Officer (principal |     |            |   |
| Albert E. Bergeron          |       |      | financial  and accounting officer)                      |     | March  15, 2006 |   |
|                        |       |      |                                                    |     |            |   |
| /s/ Bryan Ganz              |       |      | Director                                                |     | March  15, 2006 |   |
| Bryan Ganz                  |       |      |                                                    |     |            |   |
|                        |       |      |                                                    |     |            |   |
| /s/ Joseph P. Gehegan       |       |      | Director                                                |     |            |   |
| Joseph P. Gehegan           |       |      |                                                    |     | March  15, 2006 |   |
|                        |       |      |                                                    |     |            |   |
| /s/ William M. Kearns, Jr.  |       |      | Director                                                |     |            |   |
| William M. Kearns, Jr.      |       |      |                                                    |     | March  15, 2006 |   |
|                        |       |      |                                                    |     |            |   |
| /s/ M. William Macey, Jr.   |       |      | Director                                                |     |            |   |
| M. William Macey, Jr.       |       |      |                                                    |     | March  15, 2006 |   |
|                        |       |      |                                                    |     |            |   |
| /s/ Douglas L. Newhouse     |       |      | Director                                                |     |            |   |
| Douglas L. Newhouse         |       |      |                                                    |     | March  15, 2006 |   |
|                        |       |      |                                                    |     |            |   |
| /s/ Ronald L. O’Kelley |       |      | Director                                                |     |            |   |
| Ronald L. O’Kelley     |       |      |                                                    |     | March  15, 2006 |   |

 

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