**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION****Washington,D.C. 20549**

 

**FORM 10-Q**

 

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

 

**For the quarterly period ended June 30, 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.**

(Exactname 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 Floor  Edison, NJ 08837**               |
| (Address  of principal executive offices)                       |
| (Zip  Code)                                                     |
|                                                            |
| **(732) 635-1500**                                              |
| (Registrant’s  telephone number, including area code)      |

 

 

(Formername, former address and former fiscal year, if changed since last report)

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes  ý  No  o

 

Indicateby check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act).  Yes  o  No  ý

 

Thenumber of units outstanding of the registrant’s common units as of July 31,2005 was 6,899,968.  At that date,6,899,968 subordinated units were also outstanding.

 

 

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

**FORM 10-QFOR THE QUARTER ENDED JUNE 30, 2005**

**TABLE OFCONTENTS**

 
| **PART I—FINANCIAL INFORMATION** |                                                                                                                                                       |
|--------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                       |                                                                                                                                                       |
| Item 1.                                    | Financial Statements                                                                                                                                       |   |
|                                       |                                                                                                                                                       |   |
|                                       | Unaudited Condensed Consolidated Balance  Sheets as of June 30, 2005 and December 31, 2004                                                       |   |
|                                       |                                                                                                                                                       |   |
|                                       | Unaudited Condensed Consolidated Statements  of Operations and Comprehensive Income for the three and six-month periods  ended June 30, 2005 and 2004 |   |
|                                       |                                                                                                                                                       |   |
|                                       | Unaudited Condensed Consolidated Statement  of Partners’ Capital for the six-month period ended June 30, 2005                                    |   |
|                                       |                                                                                                                                                       |   |
|                                       | Unaudited Condensed Consolidated Statements  of Cash Flows for the six-month periods ended June 30, 2005 and 2004                                     |   |
|                                       |                                                                                                                                                       |   |
|                                       | Notes to Unaudited Condensed Consolidated  Financial Statements                                                                                            |   |
|                                       |                                                                                                                                                       |   |
| Item 2.                                    | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                                                                |   |
|                                       |                                                                                                                                                       |   |
| Item 3.                                    | Quantitative and Qualitative Disclosures  About Market Risk                                                                                                |   |
|                                       |                                                                                                                                                       |   |
| Item 4.                                    | Controls and Procedures                                                                                                                                    |   |
| ** **                                 | ** **                                                                                                                                                 |
| **PART II—OTHER  INFORMATION**   |                                                                                                                                                       |
|                                       |                                                                                                                                                       |
| Item 1.                                    | Legal Proceedings                                                                                                                                          |   |
|                                       |                                                                                                                                                       |   |
| Item 2.                                    | Unregistered Sales of Equity Securities and  Use of Proceeds                                                                                               |   |
|                                       |                                                                                                                                                       |   |
| Item 6.                                    | Exhibits                                                                                                                                                   |   |
|                                       |                                                                                                                                                       |   |
| SIGNATURES                                 |                                                                                                                                                       |

 

Inthis report, unless the context otherwise requires, the terms “we,” “us,” “our,”and “the Partnership” refer to U.S. Shipping Partners L.P., a Delaware limitedpartnership.

 

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**PART I—FINANCIAL INFORMATION**

 

**ITEM 1.**** Financial Statements**

 

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

**Unaudited Condensed Consolidated Balance Sheets**

**(in thousands)**

 
| ** **                                     | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                     | ** ** | ** **              | ** ** | ** **                  | ** ** |
| **Assets**                                     |       |                    |       |                        |       |
| Current assets                                 |       |                    |       |                        |       |
| Cash and equivalents                           |       | $                       | 31,007     |                        | $          | 30,258 |   |
| Accounts receivable, net                       |       | 5,815                   |       | 6,979                       |       |
| Prepaid expenses and other current assets      |       | 2,370                   |       | 2,450                       |       |
| Total current assets                           |       | 39,192                  |       | 39,687                      |       |
| Vessels and equipment, net                     |       | 200,652                 |       | 201,923                     |       |
| Deferred financing costs, net                  |       | 3,932                   |       | 3,962                       |       |
| Other assets                                   |       | 3,364                   |       | 1,733                       |       |
| Total assets                                   |       | $                       | 247,140    |                        | $          | 247,305 |   |
|                                           |       |                    |       |                        |       |
| **Liabilities and Partners’ Capital**     |       |                    |       |                        |       |
| Current liabilities                            |       |                    |       |                        |       |
| Current portion of long-term debt              |       | $                       | 1,500      |                        | $          | 1,500 |   |
| Accounts payable                               |       | 4,401                   |       | 2,945                       |       |
| Due to affiliates                              |       | 1,991                   |       | 1,430                       |       |
| Deferred revenue                               |       | —                  |       | 2,325                       |       |
| Accrued expenses                               |       | 2,669                   |       | 3,656                       |       |
| Total current liabilities                      |       | 10,561                  |       | 11,856                      |       |
| Term loan                                      |       | 97,375                  |       | 98,125                      |       |
| Advances from Hess                             |       | 11,620                  |       | 11,387                      |       |
| Deferred income taxes                          |       | 2,017                   |       | 2,944                       |       |
| Other liabilities                              |       | —                  |       | 207                         |       |
| Total liabilities                              |       | 121,573                 |       | 124,519                     |       |
| Commitments and contingencies (Note 8)         |       |                    |       |                        |       |
|                                           |       |                    |       |                        |       |
| **Partners’ Capital**                     |       |                    |       |                        |       |
| Partners’ capital                         |       | 125,139                 |       | 122,993                     |       |
| Accumulated other comprehensive income  (loss) |       | 428                     |       | (207                        | )          |
| Total partners’ capital                   |       | 125,567                 |       | 122,786                     |       |
| Total liabilities and partners’ capital   |       | $                       | 247,140    |                        | $          | 247,305 |   |

 

The accompanying notes arean integral part of these consolidated financial statements.

 

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

**Unaudited Condensed Consolidated Statements of Operations and ComprehensiveIncome**

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

 
| ** **                                              | ** ** | **For the Three Months Ended  June 30,** | ** ** | **For the Six Months Ended  June 30,** | ** ** |
|---------------------------------------------------------|------------|-----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                              | ** ** | **2005**                                      | ** ** | **2004**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                    |       |                                          |       |                                        |       |   |   |   |   |
| **Revenues**                                            |       | $                                             | 33,759     |                                        | $          | 28,086 |   | $ | 66,815 |   | $ | 53,770 |   |
|                                                    |       |                                          |       |                                        |       |   |   |   |   |
| **Operating expenses**                                  |       |                                          |       |                                        |       |   |   |   |   |
| Vessel operating expenses                               |       | 11,577                                        |       | 11,157                                      |       | 22,517 |   | 20,414 |   |
| Voyage expenses                                         |       | 6,536                                         |       | 4,903                                       |       | 12,614 |   | 9,120 |   |
| General and administrative expenses                     |       | 2,579                                         |       | 2,022                                       |       | 4,936 |   | 3,502 |   |
| Depreciation and amortization                           |       | 6,182                                         |       | 5,983                                       |       | 12,365 |   | 11,521 |   |
| Total operating expenses                                |       | 26,874                                        |       | 24,065                                      |       | 52,432 |   | 44,557 |   |
| Operating income                                        |       | 6,885                                         |       | 4,021                                       |       | 14,383 |   | 9,213 |   |
| Interest expense                                        |       | 1,309                                         |       | 2,681                                       |       | 2,684 |   | 5,129 |   |
| Loss on debt extinguishment                             |       | —                                        |       | 3,167                                       |       | — |   | 3,167 |   |
| Other income                                            |       | (225                                          | )          | (73                                         | )          | (426 | ) | (107 | ) |
| Income (loss) before income taxes                       |       | 5,801                                         |       | (1,754                                      | )          | 12,125 |   | 1,024 |   |
| (Benefit) provision for income taxes                    |       | (95                                           | )          | 25                                          |       | (420 | ) | 43 |   |
| Net income (loss)                                       |       | 5,896                                         |       | (1,779                                      | )          | 12,545 |   | 981 |   |
| **Other comprehensive income (loss)**                   |       |                                          |       |                                        |       |   |   |   |   |
| Fair market value adjustment of derivatives             |       | (1,055                                        | )          | 1,622                                       |       | 635 |   | 1,398 |   |
| Comprehensive income (loss)                             |       | $                                             | 4,841      |                                        | $          | (157 | ) | $ | 13,180 |   | $ | 2,379 |   |
|                                                    |       |                                          |       |                                        |       |   |   |   |   |
| General partner’s interest in net income           |       | $                                             | 118        |                                        | $          | — |   | $ | 251 |   | $ | — |   |
|                                                    |       |                                          |       |                                        |       |   |   |   |   |
| **Limited partners’ interest in net income**       |       |                                          |       |                                        |       |   |   |   |   |
| Net income (loss)                                       |       | $                                             | 5,778      |                                        | $          | (1,779 | ) | $ | 12,294 |   | $ | 981 |   |
| Net income (loss) per unit - basic and  diluted         |       | $                                             | 0.42       |                                        | $          | (0.23 | ) | $ | 0.89 |   | $ | 0.13 |   |
| Weighted average units outstanding - basic  and diluted |       | 13,800                                        |       | 7,800                                       |       | 13,800 |   | 7,800 |   |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

2

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

**Unaudited Condensed Consolidated Statement of Changes in Partners’Capital**

**(in thousands)**

 
| ** **                            | ** ** | **Partners’ Capital** | ** ** | **Accumulated**  | ** ** | ** ** | ** ** |
|---------------------------------------|------------|----------------------------|------------|------------------|------------|------------|------------|
| ** **                            | ** ** | **Limited Partners**       | ** ** | ** **       | ** ** | **Other**  | ** ** | ** ** | ** ** |
| ** **                            | ** ** | **Common**                 | ** ** | **Subordinated** | ** ** | ** ** | ** ** | **Comprehensive** | ** ** | ** ** | ** ** |
| ** **                            | ** ** | **Units**                  | ** ** | **$**            | ** ** | **Units**  | ** ** | **$** | ** ** | **General  Partner** | ** ** | **Income  (Loss)** | ** ** | **Total** | ** ** |
| ** **                            | ** ** | ** **                 | ** ** | ** **       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Balance at December 31, 2004** |       | 6,900                      |       | $                | 118,098    |       | 6,900      |   | $ | 4,703 |   | $ | 192 |   | $ | (207 | ) | $ | 122,786 |   |
| ** **                            |       |                       |       |             |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                            |       | —                     |       | 6,147            |       | —     |       | 6,147 |   | 251 |   | — |   | 12,545 |   |
|                                  |       |                       |       |             |       |       |       |   |   |   |   |   |   |   |   |
| Fair maket value adjustment of        |       |                       |       |             |       |       |       |   |   |   |   |   |   |   |   |
| derivatives                           |       | —                     |       | —           |       | —     |       | — |   | — |   | 635 |   | 635 |   |
|                                  |       |                       |       |             |       |       |       |   |   |   |   |   |   |   |   |
| Cash distributions                    |       | —                     |       | (5,096           | )          | —     |       | (5,096 | ) | (207 | ) | — |   | (10,399 | ) |
|                                  |       |                       |       |             |       |       |       |   |   |   |   |   |   |   |   |
| **Balance at June 30, 2005**     |       | 6,900                      |       | $                | 119,149    |       | 6,900      |   | $ | 5,754 |   | $ | 236 |   | $ | 428 |   | $ | 125,567 |   |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

3

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

**Unaudited Condensed Consolidated Statements of Cash Flows**

**(in thousands)**

 
| ** **                                                                        | ** ** | **For the Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                        | ** ** | **2005**                                    | ** ** | **2004** | ** ** |
| **Cash flows from operating activities**                                          |       |                                        |       |   |   |
| Net income                                                                        |       | $                                           | 12,545     |   | $ | 981 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities |       |                                        |       |   |   |
| Depreciation and amortization, including amortization  of deferred financing fees |       | 12,395                                      |       | 11,947 |   |
| Deferred income taxes                                                             |       | (960                                        | )          | — |   |
| Drydock advance payments                                                          |       | (381                                        | )          | — |   |
| Provision for accounts receivable                                                 |       | 42                                          |       | — |   |
| Loss on debt extinguishment                                                       |       | —                                      |       | 3,167 |   |
| Changes in assets and liabilities:                                                |       |                                        |       |   |   |
| Accounts receivable                                                               |       | 1,122                                       |       | (2,459 | ) |
| Prepaid expenses and other current assets                                         |       | 80                                          |       | (465 | ) |
| Other assets                                                                      |       | (203                                        | )          | — |   |
| Accounts payable                                                                  |       | 1,456                                       |       | (2,784 | ) |
| Deferred revenue                                                                  |       | (2,325                                      | )          | — |   |
| Accrued expenses and other liabilities                                            |       | (393                                        | )          | 962 |   |
| Net cash provided by operating activities                                         |       | 23,378                                      |       | 11,349 |   |
|                                                                              |       |                                        |       |   |   |
| **Cash flows from investing activities**                                          |       |                                        |       |   |   |
| Proceeds from sale of vessels and equipment                                       |       | —                                      |       | 2,000 |   |
| Construction/purchase of vessels and  equipment                                   |       | (10,713                                     | )          | (33,060 | ) |
| Deposit to secure shipyard slot                                                   |       | (1,000                                      | )          | — |   |
| Change in restricted cash                                                         |       | —                                      |       | 502 |   |
| Advances from Hess                                                                |       | 233                                         |       | 2,549 |   |
| Net cash used in investing activities                                             |       | (11,480                                     | )          | (28,009 | ) |
|                                                                              |       |                                        |       |   |   |
| **Cash flows from financing activities**                                          |       |                                        |       |   |   |
| Proceeds from issuance of term loan                                               |       | —                                      |       | 202,500 |   |
| Repayment of debt                                                                 |       | (750                                        | )          | (148,750 | ) |
| Member distributions                                                              |       | —                                      |       | (15,000 | ) |
| Deferred financing costs                                                          |       | —                                      |       | (6,597 | ) |
| Cash distributions                                                                |       | (10,399                                     | )          | — |   |
| Net cash (used in) provided by financing  activities                              |       | (11,149                                     | )          | 32,153 |   |
| Net increase in cash                                                              |       | 749                                         |       | 15,493 |   |
| Cash, beginning of period                                                         |       | 30,258                                      |       | 8,565 |   |
| Cash, end of period                                                               |       | $                                           | 31,007     |   | $ | 24,058 |   |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

4

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

**Notes to Unaudited Condensed Consolidated Financial Statements**

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

 

**1.****                                      Formationand Nature of Operations**

 

On July 30,2004, U.S. Shipping Partners L.P. (the “Partnership”) was formed toacquire, own and operate the business conducted by United States ShippingMaster LLC and its subsidiaries, (collectively, the “Predecessor”), whichprimarily consisted of the transportation of petroleum products by ourintegrated tug barge units (“ITBs”) and the transportation of specialty refinedpetroleum and chemical products by our parcel tankers (“Parcel Tankers”). Thevessels operate under the regulatory provisions of the Jones Act.

 

On November 3, 2004, the Predecessorcontributed assets and liabilities constituting the business of the Predecessorto the Partnership in connection with the initial public offering of the commonunits representing limited partner interests in the Partnership (the “commonunits”).  In exchange for these assetsand liabilities, the Predecessor received 899,968 common units and 6,899,968subordinated units representing limited partner interests in thePartnership.  The Partnership’s generalpartner received a 2% general partner interest and certain incentivedistribution rights in the Partnership. Incentive distribution rights represent the right to receive anincreasing percentage of cash distributions after the minimum quarterlydistribution, any cumulative arrearages on common units, and certain targetdistribution levels have been achieved. The Partnership is required to distribute all of its available cash frombasic surplus, as defined in the Partnership agreement.  The target distribution levels entitle thegeneral partner to receive 15% of quarterly cash distributions in excess of$0.50 per unit until all unitholders have received $0.575 per unit, 25% ofquarterly cash distributions in excess of $0.575 per unit until all unitholdershave received $0.70 per unit, and 50% of quarterly cash distributions in excessof $0.70 per unit.

 

The transfer to the Partnership of substantiallyall of the assets and liabilities constituting the business of the Predecessorrepresented a reorganization of entities under common control and was recordedat historical cost.

 

The unaudited condensed consolidatedfinancial statements included in this report for the three and six-monthperiods ended June 30, 2004 are for the Predecessor.  In the opinion of management, these financialstatements reflect all adjustments (consisting of normal recurring entries)necessary for a fair statement of the financial results of such interimperiods.  The results of operations forinterim periods are not necessarily indicative of the results of operations tobe expected for a full year.  Thesefinancial statements should be read together with the consolidated financialstatements and notes thereto included in the Partnership’s Annual Report on Form 10-Kfor the year ended December 31, 2004 (the “Form 10-K”).  The December 31, 2004 financialinformation included in this report has been derived from the auditedconsolidated financial statements included in the Form 10-K.

 

**2.****                                      InitialPublic Offering**

 

On November 3, 2004, the Partnershipcompleted its initial public offering of 6,899,968 common units (including899,968 common units sold upon exercise of the underwriters’ over-

 

5

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allotment option)at a price of $22.25 per unit.  Totalgross proceeds from this sale were $153,524. Concurrent with this sale, the Partnership redeemed 899,968 common unitsheld by the Predecessor at a cost of $18,600. After the initial public offering, there were 6,899,968 common units and6,899,968 subordinated units outstanding. As described in the partnership agreement, during the subordinationperiod the subordinated units are not entitled to receive any distributionsuntil the common units have received their minimum quarterly distribution plusany arrearages from prior quarters.  Thesubordination period will end once the Partnership meets certain financialtests described in the partnership agreement, but generally cannot end before December 31,2009.  When the subordination periodends, all subordinated units will convert into common units on a one-for-onebasis and common units will no longer be entitled toarrearages.  If the Partnership meetscertain financial tests described in the partnership agreement, 25% of theclass A subordinated units can convert into common units on or after December 31,2007 and an additional 25% can convert into common units on or after December 31,2008.  If the Partnership meets certainfinancial tests described in the partnership agreement, 25% of the class Bsubordinated units can convert into common units on or after December 31,2008 and an additional 25% can convert into common units on or after December 31,2009.

 

The gross proceeds retained by thePartnership relating to the sale of the common units totaled $153,524.  These proceeds were used to repay $93,750 inoutstanding term debt, and to pay $10,918 in underwriting and structuring fees,$4,242 in professional fees and other offering expenses, $18,600 to redeem899,968 units held by United States Shipping Master LLC, and $1,332 in costs toamend and restate the credit facility. The remaining $24,682 was used for working capital purposes.

 

**3.****                                      DeferredRevenue**

 

Revenue is recognized on a daily basis duringthe contract period, with expenses recognized as incurred.  At December 31, 2004, the Partnershipreceived advance payments of $2,325 for freight revenue from a customer.  The Partnership received no advance paymentsat June 30, 2005.  This deferredrevenue is classified as a liability until earned.

 

**4.****                                      NetIncome per Unit**

 

Basic netincome per unit is determined by dividing net income, after deducting theamount of net income allocated to the general partner’s interest, by theweighted average number of units outstanding during the period.  Diluted net income per unit is calculated inthe same manner as net income per unit, except that the weighted average numberof outstanding units is increased to include the dilutive effect of outstandingunit options or phantom units.  Therewere no options or phantom units outstanding during the three and six monthsended June 30, 2005.  For periodsprior to November 3, 2004, the weighted average number of units is equalto the common and subordinated units received by the Predecessor in exchangefor the net assets contributed to the Partnership, or 7,799,936.

 

6

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**5.****                                      Vesselsand Equipment**

 

Vessels and equipment consist of thefollowing:

 
| ** **                       | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|----------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                       | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Vessels                          |       | $                       | 228,171    |                        | $          | 228,171 |   |
| Capitalized drydock expenditures |       | 12,829                  |       | 12,448                      |       |
| Construction in progress         |       | 18,642                  |       | 7,929                       |       |
| Total vessels and equipment      |       | 259,642                 |       | 248,548                     |       |
| Less: Accumulated depreciation   |       | 58,990                  |       | 46,625                      |       |
|                             |       |                    |       |                        |       |
| Total vessels and equipment, net |       | $                       | 200,652    |                        | $          | 201,923 |   |

 

Construction in-progress at June 30,2005 and December 31, 2004 includes amounts paid for the construction ofan articulated tug barge (“ATB”) (Note 8) and capitalized interest of $449 and$72, respectively.

 

**6.****                                      HessSupport Agreement**

 

On September 13, 2002, the Predecessorentered into an agreement (the “Support Agreement”) with Hess in which certaindaily charter rates were agreed for five years and based upon which supportpayments would be made by Hess to the Predecessor.  Under the terms of the Support Agreement,Hess agreed to pay the Partnership for the amount by which the Partnership’snegotiated third-party contract rates are less than the agreed charter rate.However, in the event that the charter rates the Partnership receives on theITBs are in excess of the Hess support rate, then the Partnership must pay suchexcess amounts to Hess until the Partnership has repaid Hess for all priorsupport payments made by Hess to the Partnership, and then the Partnership mustshare 50% of any additional excess amount with Hess. The differences resultingfrom these rates are calculated on a monthly basis. The net amounts received orpaid by the Partnership will be considered contingent purchase price until theend of the Support Agreement term (September 2007), at which time the netamount received or paid will be treated as a purchase price adjustment.

 

From September 13, 2002 to June 30,2005, the Partnership’s third-party contract rates have been less than theagreed charter rates by a cumulative amount of $11,620, which has beenclassified as Advances from Hess.

 

**7.****                                      RelatedParty Transactions**

 

Hess is one of the Partnership’s significantcustomers. Voyage revenues earned from transactions with Hess (which do notinclude amounts under the Support Agreement) for the three months ended June 30,2005 and 2004 were $3,185 and $3,114, respectively, and for the six months

 

7

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ended June 30,2005 and 2004 were $6,335 and $7,342, respectively.  Accounts receivable due under the SupportAgreement were $678 and $9 at June 30, 2005 and December 31, 2004,respectively.

 

On September 12, 2002, the Partnershipentered into a three-year agreement with an affiliate of one of the Predecessor’smembers whereby the affiliate provided certain business advisory and managementservices, including the assistance with the development of corporate strategy,budgeting and assistance in procuring financing, to the Predecessor for anannual fee of $500. A further agreement was made on May 6, 2003 with theaffiliate for similar additional services for an annual fee of $100.  For the three and six months ended June 30,2004, the Predecessor incurred and paid $168 and $318, respectively, forbusiness advisory and management services. These agreements were terminated concurrent with the closing of thePartnership’s initial public offering.

 

Certain subsidiaries of the Predecessor werenot contributed to the Partnership; however, these subsidiaries’ expenses areentirely reimbursable by the Partnership as these subsidiaries work exclusivelyfor the Partnership.  Amountsreimbursable to these subsidiaries include general and administrative expenses,and wages and benefits for crew members. These amounts were $9,075 and $17,786, respectively for the three andsix months ended June 30, 2005. Amounts payable to these subsidiaries at the balance sheet date arereflected in the Due to Affiliates account.

 

**8.****                                      Commitmentsand Contingencies**

 

In August 2004, the Partnership enteredinto a fixed-price contract for the construction of an ATB, which is scheduledto be delivered in mid 2006. The contract price for the ATB is $45,400,including an anticipated $500 of supervision costs. The Partnership madepayments of $10,713 and $7,929 during the six months ended June 30, 2005and year ended December 31, 2004, respectively. The ATB constructioncontract provides the Partnership with options to purchase three additionalATBs over the next 24 months at fixed prices, subject to limited exceptions. Ifthe Partnership does not exercise any of the options, the Partnership must paythe shipyard an additional $375, and if the Partnership exercises the option foronly one additional ATB, the Partnership must pay the shipyard $125.  During the three months ended June 30,2005, the Partnership made a non-refundable deposit of $1,000 to secure ashipyard slot for construction of the second ATB, which will be creditedagainst the eventual contracted price.

 

**9.             SubsequentEvents**

 

On July 28, 2005, theBoard of Directors of the general partner declared and the Partnershipannounced its regular cash distribution for the second quarter of 2005 of $0.45per unit. The distribution will be paid on all common, subordinated and generalpartner units on August 15, 2005 to all unitholders of record on August 9,2005. The aggregate amount of the distribution will be $6,337.

 

On July 5, 2005, U.S. Shipping Partners L.P. (the “Partnership”)entered into a non-binding Memorandum of Agreement to acquire from WilmingtonTrust Company the motor vessel GUS W. DARNELL for an aggregate purchase priceof $25,000.  The vessel is a Jones Act coastwise double hulled producttanker, built in 1985, capable of carrying approximately 240,000 barrels. Thevessel was built for use by the Military Sealift Command of the U.S. Navy aspart of a fleet of six vessels, which they have used primarily to deliver jetfuel to various locations in the world.  The transaction

 

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willbe financed utilizing available cash and the Partnership’s existing creditfacilities and is expected to close in September 2005.

 

On July 8, 2005, the Board of Directors of the general partner ofthe Partnership approved the Memorandum of Agreement to acquire the motorvessel GUS W. DARNELL for an aggregate purchase price of $25,000 and thePartnership made a non-refundable deposit of $2,500 of the purchase price.

 

***ITEM 2.******  Management’sDiscussion and Analysis of Financial Condition and Results of Operations***

 

**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, to a limited extent, inthe coastwise transportation of petrochemical and commodity chemicalproducts.  Our fleet consists of eighttank vessels: six integrated tug barge units, or ITBs, and two parcel tankers.Our primary customers are major oil and chemical companies. A significantportion of our fleet capacity is currently committed to these companiespursuant to contracts with initial terms of one year or more, which provides uswith a relatively predictable level of cash flow. We do not assume ownership ofany of the products that we transport on our vessels.

 

Our market is largely insulated from directforeign competition because the Merchant Marine Act of 1920, commonly referredto as the 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 generate revenue by charging customers forthe transportation and distribution of their products utilizing our vessels.These services are generally provided under the following four basic types ofcontractual relationships:

 

•                  timecharters, which are contracts to charter a vessel for a fixed period of time,generally one year or more, at a set daily rate;

 

•                  contractsof affreightment, which are contracts to provide transportation services forproducts over a specific trade route, generally for one or more years, at anegotiated rate per ton;

 

•                  consecutivevoyage charters, which are charters for a specified period of time at anegotiated rate per ton; and

 

•                  spotcharters, which are charters for shorter intervals, usually a singleround-trip, that are made on either a current market rate or lump sumcontractual basis.

 

The principal difference between contracts of affreightment andconsecutive voyage charters is that in contracts of affreightment the customeris obligated to transport a specified minimum amount of product on our vesselduring the contract period, while in a consecutive voyage charter the customeris 

 

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obligated to fillthe contracted portion of the vessel with its product every time the vesselcalls at its facility during the contract period and, if the customer does nothave product ready to ship, it must pay us for idle time.

 

The table below illustrates the primarydistinctions among these types of contracts:

 
| ** **                | ** ** | **Time Charter**                                             | ** ** | **Contract of  Affreightment** | ** ** | **Consecutive  Voyage  Charter**  | ** ** | **Spot Charter**       | ** ** |
|---------------------------|------------|--------------------------------------------------------------|------------|--------------------------------|------------|-----------------------------------|------------|------------------------|------------|
| Typical contract length   |       | One year or                                                  |       | One year or                    |       | One year or                       |       | Single  voyage         |       |
|                      |       | more                                                         |       | more                           |       | more                              |       |                   |       |
| 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 three months ended June 30, 2005and 2004, we derived approximately 89% and 82%, respectively, of our revenueunder time charters, consecutive voyage charters and contracts ofaffreightment.  For the six months ended June 30,2005 and 2004, we derived approximately 92% and 69% of our revenue under timecharters, consecutive voyage charters and contracts of affreightment.  The balance of our revenue was derived fromspot charters.

 

The amounts received from or paid to Hesspursuant to the Hess support agreement are not recognized as revenue or expensebut are deferred for accounting purposes and will be reflected as an adjustmentto the purchase price relating to the acquisition of the ITBs.

 

On July 30, 2004, U.S. Shipping PartnersL.P. (the “Partnership”) was formed to own and operate the petroleum, refinedpetroleum, and chemical product marine transportation, distribution andlogistics business conducted by United States Shipping Master LLC and itssubsidiaries (the “Predecessor”).  On November 3,2004, United States Shipping Master LLC contributed substantially all of itsassets and liabilities to the Partnership in connection with the initial publicoffering of common units representing limited partner interests in thePartnership (the “common units”).  Inexchange for these assets and liabilities, United States Shipping Master LLCreceived 899,968 common units and 6,899,968 subordinated units representinglimited partner interests in the Partnership.

 

On November 3, 2004, the Partnershipcompleted its initial public offering of 6,899,968 common units (including899,968 common units sold upon exercise of the underwriters’ over-allotmentoption) at a price of $22.25 per unit. Total gross proceeds from this sale were $153.5 million, beforeunderwriting and structuring fees of $10.9 million, and offering costs ofapproximately $4.2 million.  ThePartnership used proceeds to repay $93.8 million in outstanding term debt,provide

 

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$24.7 million of working capital, pay $1.3 million of costs associatedwith amending and restating our credit facility, and redeem the 899,968 commonunits held by United States Shipping Master LLC for $18.6 million.

 

At the closing of the initial publicoffering, the Partnership entered into a second amended and restated creditagreement with several banks which provides for a $100.0 million term loan andthe ability to borrow up to an additional $120.0 million of term loans undercertain circumstances.  Principal andinterest is due and payable quarterly. The term loan matures on April 30, 2010.  The credit agreement also provides a $50.0million revolving credit facility which expires November 2, 2009.  The loans are collateralized by all thePartnership’s assets including eight vessels owned by the Partnership.  The second amended and restated creditfacility contains various financial covenants including certain restrictions onthe sale or acquisition of assets and a requirement to adhere to specifiedfinancial ratios.

 

**Definitions**

 

In order to understand our discussion of ourresults of operations, it is important to understand the meaning of thefollowing terms used in our analysis and the factors that influence our resultsof operations:

 

*•**                  Voyage revenue*. Voyage revenueincludes revenue from time charters, contracts of affreightment, consecutivevoyage charters and spot charters. Voyage revenue is impacted by changes incharter and utilization rates and by the mix of business among the types ofcontracts described in the preceding sentence.

 

*•**                  Voyage expenses*. Voyage expensesinclude items such as fuel, port charges, pilot fees, tank cleaning costs,canal tolls and other costs which are unique to a particular voyage. Thesecosts can vary significantly depending on the voyage trade route. Depending onthe form of contract, either we or our customer is responsible for theseexpenses. If we pay voyage expenses, they are included in our results ofoperations when they are incurred. Typically, our freight rates are higher whenwe pay voyage expenses. Our contracts of affreightment and consecutive voyagecharters generally contain escalation clauses whereby certain cost increases,including labor and fuel, can be passed on to our customers.

 

*•**                  Net voyage revenue*. Net voyagerevenue is equal to voyage revenue less voyage expenses. As explained above,the amount of voyage expenses we incur for a particular voyage depends upon theform of the contract. Therefore, in comparing revenues between reportingperiods, we use net voyage revenue to improve the comparability of reportedrevenues that are generated by the different forms of contracts.

 

*•**                  Vessel operating expenses*. We paythe vessel operating expenses regardless of whether we are operating under atime charter, contract of affreightment, consecutive voyage charter or spotcharter. The most significant direct vessel operating expenses are crewingcosts, vessel maintenance and repairs, fuel and lube oils and marine insurance.

 

*•**                  Depreciation and amortization*. Weincur fixed charges related to the depreciation of the historical cost of ourfleet and the amortization of expenditures for drydockings. The aggregatenumber of drydockings undertaken in a given period and the nature of the workperformed determine the level of drydocking expenditures.

 

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*•**                  General and administrative expenses*.General and administrative expenses consist of employment costs for shoresidestaff and cost of facilities, as well as legal, audit and other administrativecosts.

 

*•**                  Total vessel days*. Total vesseldays are equal to the number of calendar days in the period multiplied by thetotal number of vessels operating or in drydock during that period.

 

*•**                  Days worked.* Days worked areequal to total vessel days less drydocking days and days off-hire.

 

*•**                  Drydocking days*. Drydocking daysare days designated for the inspection and survey of vessels, and resultingmaintenance work, as required by the U.S. Coast Guard and the American Bureauof Shipping to maintain the vessels’ qualification to work in the U.S.coastwise trade. Both domestic (U.S. Coast Guard) and international(International Maritime Organization) regulatory bodies require that our ITBsbe drydocked for major repair and maintenance every five years, with amid-period underwater survey in lieu of drydocking, and our parcel tankers bedrydocked twice every five years. Drydocking days also include unscheduledinstances where vessels may have to be drydocked in the event of accidents orother unforeseen damage.

 

*•**                  Net utilization*. Net utilizationis a primary measure of operating performance in our business. Net utilizationis a percentage equal to the total number of days worked by a vessel or groupof vessels during a defined period, divided by total vessel days for thatvessel or group of vessels. Net utilization is adversely impacted bydrydocking, scheduled and unscheduled maintenance and idle time not paid for bythe customer.

 

*•**                  Time charter equivalent*. Timecharter equivalent, another key measure of our operating performance, is equalto the net voyage revenue earned by a vessel during a defined period, dividedby the total number of actual days worked by that vessel during that period.Fluctuations in time charter equivalent result not only from changes in charterrates charged to our customers, but from external factors such as weather orother delays.

 

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**Results of Operations**

 

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

 
| ** **                                 | ** ** | **For the Three Months Ended  June 30,** | ** ** | **For the Six Months Ended  June 30,** | ** ** |
|--------------------------------------------|------------|-----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                 | ** ** | **2005**                                      | ** ** | **2004**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                       |       |                                          |       |                                        |       |   |   |   |   |
| Voyage revenue                             |       | $                                             | 33,759     |                                        | $          | 28,086 |   | $ | 66,815 |   | $ | 53,770 |   |
| Vessel operating expenses                  |       | 11,577                                        |       | 11,157                                      |       | 22,517 |   | 20,414 |   |
| % of voyage revenue                        |       | 34.3                                          | %          | 39.7                                        | %          | 33.7 | % | 38.0 | % |
| Voyage expenses                            |       | 6,536                                         |       | 4,903                                       |       | 12,614 |   | 9,120 |   |
| % of voyage revenue                        |       | 19.4                                          | %          | 17.5                                        | %          | 18.9 | % | 17.0 | % |
| General and administrative expenses        |       | 2,579                                         |       | 2,022                                       |       | 4,936 |   | 3,502 |   |
| % of voyage revenue                        |       | 7.6                                           | %          | 7.2                                         | %          | 7.4 | % | 6.5 | % |
| Depreciation and amortization              |       | 6,182                                         |       | 5,983                                       |       | 12,365 |   | 11,521 |   |
| Operating income                           |       | 6,885                                         |       | 4,021                                       |       | 14,383 |   | 9,213 |   |
| % of voyage revenue                        |       | 20.4                                          | %          | 14.3                                        | %          | 21.5 | % | 17.1 | % |
| Interest expense                           |       | 1,309                                         |       | 2,681                                       |       | 2,684 |   | 5,129 |   |
| Loss on debt extinguishmnet                |       | —                                        |       | 3,167                                       |       | — |   | 3,167 |   |
| Other income                               |       | (225                                          | )          | (73                                         | )          | (426 | ) | (107 | ) |
| Income before provision for income taxes   |       | 5,801                                         |       | (1,754                                      | )          | 12,125 |   | 1,024 |   |
| (Benefit) provision for income taxes       |       | (95                                           | )          | 25                                          |       | (420 | ) | 43 |   |
| Net income                                 |       | $                                             | 5,896      |                                        | $          | (1,779 | ) | $ | 12,545 |   | $ | 981 |   |
|                                       |       |                                          |       |                                        |       |   |   |   |   |
| Total vessel days                          |       | 728                                           |       | 701                                         |       | 1,448 |   | 1,338 |   |
| Days worked                                |       | 723                                           |       | 684                                         |       | 1,440 |   | 1,311 |   |
| Drydocking days                            |       | —                                        |       | —                                      |       | — |   | — |   |
| Net utilization                            |       | 99.3                                          | %          | 97.6                                        | %          | 99.4 | % | 98.0 | % |
| Average daily time charter equivalent rate |       | $                                             | 37,647     |                                        | $          | 33,888 |   | $ | 37,650 |   | $ | 34,058 |   |

 

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

**UnauditedOther Financial Data**

**(in thousands)**

 
| ** **             | ** ** | **For the Three Months Ended  June 30,** | ** ** | **For the Six Months Ended  June 30,** | ** ** |
|------------------------|------------|-----------------------------------------------|------------|---------------------------------------------|------------|
| ** **             | ** ** | **2005**                                      | ** ** | **2004**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
|                   |       |                                          |       |                                        |       |   |   |   |   |
| Voyage revenues        |       | $                                             | 33,759     |                                        | $          | 28,086 |   | $ | 66,815 |   | $ | 53,770 |   |
| Voyage expenses        |       | 6,536                                         |       | 4,903                                       |       | 12,614 |   | 9,120 |   |
| Net voyage revenue (1) |       | $                                             | 27,223     |                                        | $          | 23,183 |   | $ | 54,201 |   | $ | 44,650 |   |

 

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(1) Net voyage revenue is equal to voyage revenue less voyageexpenses.  Net voyage revenue is anon-GAAP financial measure that we use in our business when comparingperformance in different periods.  Netvoyage revenue is not calculated or presented in accordance with generallyaccepted accounting principles, or GAAP.

 

***Three Months Ended June 30,2005 Compared to Three Months Ended June 30, 2004***

 

*Voyage Revenue.*  Voyage revenue was $33.8 million for thethree months ended June 30, 2005, an increase of$5.7 million, or 20%, as compared to voyage revenue of $28.1 million forthe three months ended June 30, 2004. The *Charleston*, which we beganoperating in late April 2004, contributed $3.0 million. The remainingincrease is primarily attributable to a 9% increase in time charter equivalentrates due to contractually escalated rates as well as increased spot rates dueto strong demand, primarily in the Gulf Coast – West Coast trade route. Netvoyage revenue was $27.2 million for the three months ended June 30, 2005, an increase of $4.0 million, or 17%, as compared tothe three months ended June 30, 2004.

 

*Vessel Operating Expenses.*  Vessel operating expenses were$11.6 million for the three months ended June 30, 2005, an increaseof $0.4 million, or 4%, as compared to $11.2 million for the threemonths ended June 30, 2004. The *Charleston*contributed $0.3 million of increased vessel operating expenses in the threemonths ended June 30, 2005.

 

*Voyage Expenses.*  Voyage expenses were $6.5 million for thethree months ended June 30, 2005, an increase of $1.6 million, or33%, as compared to voyage expenses of $4.9 million for the three monthsended June 30, 2004.  Voyageexpenses as a percentage of voyage revenue increased from 17.5% in the threemonths ended June 30, 2004 to 19.4% in the three months ended June 30,2005.  The increase in voyage expenses,both in dollars and as a percentage of voyage revenue, was partiallyattributable to the *Charleston*which added $0.8 million of expenses during the second quarter of 2005.  Additionally fuel increases of approximately$0.8 million were included in voyage expenses and passed on to our customers inthe form of fuel escalation surcharges.

 

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*General and Administrative Expenses.*  General and administrative expenses were$2.6 million for the three months ended June 30, 2005,an increase of $0.6 million, or 28%, compared to $2.0 million for thethree months ended June 30, 2004. The increase is attributable to increased costs associated with being apublic entity coupled with additional expenses necessary to accommodate thegrowth of our business.

 

*Depreciation and Amortization.*  Depreciation and amortization was $6.2million for the three months ended June 30, 2005, an increase of$0.2 million, or 3%, as compared to $6.0 million for the three monthsended June 30, 2004. This increase is due to the depreciation of the *Charleston*, which we placed in service on April 28, 2004.

 

*Interest Expense.*  Interest expense was $1.3 million forthe three months ended June 30, 2005, a decreaseof $1.4 million, or 51%, as compared to $2.7 million for the threemonths ended June 30, 2004 due to lower outstanding loan balances in2005.  Concurrent with our initial publicoffering on November 3, 2004, we repaid $93.8 million of debt, resultingin a debt balance of $100.0 million.  Atthe end of the second quarter 2005, our debt outstanding was $98.9 millioncompared to $198.1 million at June 30, 2004.

 

*Loss on Debt Extinguishment.** *In April 2004, we amended and restatedour then existing credit facility and used the proceeds to repay higherinterest rate debt.  The $3.2 millionloss on debt extinguishment represents the expensing of certain transactionfees associated with the debt that was repaid as well as certain other costsincurred in the transaction.

 

*(Benefit) Provision for Income Taxes.*  The provision for income taxes representsfederal and state income taxes for our subsidiary that is a corporation subjectto federal and state income taxes, as well as state income taxes for thosestates that tax our limited liability company subsidiaries ascorporations.  We recognized a taxbenefit for the three months ended June 30, 2005 principally as a resultof the operating loss incurred by our corporate subsidiary.

 

*Net Income.*  Net income was $5.9 million for thethree months ended June 30, 2005, an increase of $7.7 million, or431%, as compared to $1.8 million net loss for the three months ended June 30,2004.  This increase is primarily theresult of an increase in operating income of $2.9 million, a $1.4 milliondecrease in interest expense, and a $0.2 million increase in other income,which is principally interest income. Additionally, the amendment of our credit facility in 2004 contributed$3.2 million of expense during the three months ended June 30, 2004.

 

***Six Months Ended June 30,2005 Compared to Six Months Ended June 30, 2004***

 

*Voyage Revenue.*  Voyage revenue was $66.8 million for the sixmonths ended June 30, 2005, an increase of$13.0 million, or 24%, as compared to voyage revenue of $53.8 millionfor the six months ended June 30, 2004. The *Charleston*, which we placed in serviceon April 28, 2004, accounted for $8.4 million of the increase in voyagerevenue.  The remaining increase isprimarily attributable to an 8% increase in time charter equivalent rates dueto contractually escalated rates as well as increased spot rates due to strongdemand, primarily in the Gulf Coast – West Coast trade route.  Net voyage revenue was $54.2 million for thesix months ended June 30, 2005, an increase of$9.6 million, or 21%, as compared to the six months ended June 30, 2004.

 

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*Vessel Operating Expenses.*  Vessel operating expenses were$22.5 million for the six months ended June 30, 2005, an increase of$2.1 million, or 10%, as compared to $20.4 million for the six monthsended June 30, 2004. The *Charleston*contributed $2.2 million of increased vessel operating expenses in the sixmonths ending June 30, 2005. This increase was partially offset by a $0.1million reduction in vessel operating expenses due to the timing of certainexpenditures related to maintenance and supplies.

 

*Voyage Expenses.*  Voyage expenses were $12.6 million for thesix months ended June 30, 2005, an increase of $3.5 million, or 38%,as compared to voyage expenses of $9.1 million for the six months ended June 30,2004.  Voyage expenses as a percentage ofvoyage revenue increased from 17% in the six months ended June 30, 2004 to19% in the six months ended June 30, 2005. During the six months ended June 2005, the *Charleston*contributed $2.1 million of the increase in voyage expenses.  Additionally fuel increases were included invoyage expenses and passed on to our customers in the form of fuel escalationsurcharges.

 

*General and Administrative Expenses.*  General and administrative expenses were$4.9 million for the six months ended June 30, 2005,an increase of $1.4 million, or 41%, compared to $3.5 million for the sixmonths ended June 30, 2004.  Theincrease is attributable to increased costs associated with being a publicentity coupled with additional expenses necessary to accommodate the growth ofour business, including our acquisition of the *Charleston*.

 

*Depreciation and Amortization.*  Depreciation and amortization was $12.4million for the six months ended June 30, 2005, an increase of$0.8 million, or 7%, as compared to $11.5 million for the six monthsended June 30, 2004.  This increaseis due to the depreciation of the *Charleston*, which we placed in service on April 28, 2004.

 

*Interest Expense.*  Interest expense was $2.7 million forthe six months ended June 30, 2005, a decrease of$2.4 million, or 48%, as compared to $5.1 million for the six monthsended June 30, 2004 due to lower outstanding loan balances in 2005.  Concurrent with our initial public offeringon November 3, 2004, we repaid $93.8 million of debt, resulting in a debtbalance of $100.0 million.  At the end ofthe second quarter 2005, our debt outstanding was $98.9 million compared to$198.1 million at June 30, 2004.

 

*Loss on Debt Extinguishment.** *In April 2004, we amended and restatedour then existing credit facility and used the proceeds to repay higherinterest rate debt.  The $3.2 millionloss on debt extinguishment represents the expensing of certain transaction feesassociated with the debt that was repaid as well as certain other costsincurred in the transaction.

 

*(Benefit) Provision for Income Taxes.*  The provision for income taxes representsfederal and state income taxes for our subsidiary that is a corporation subjectto federal and state income taxes, as well as state income taxes for thosestates that tax our limited liability company subsidiaries ascorporations.  We recognized a taxbenefit for the six months ended June 30, 2005 principally as a result ofthe operating loss incurred by our corporate subsidiary.

 

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*Net Income.*  Net income was $12.5 million for the sixmonths ended June 30, 2005, an increase of $11.6 million, or 1179%,as compared to $1.0 million for the six months ended June 30, 2004.This increase is primarily the result of increased operating income of $5.2million, a $2.4 million decrease in interest expense, a $0.5 million increasein the benefit for income taxes, and $0.3 million of additional other income,which is principally interest income. Additionally, the amendment of our credit facility in 2004 contributed$3.2 million of expense during the six months ended June 30, 2004.

 

**Liquidity and Capital Resources**

 

***Operating Cash Flows***

 

Net cash provided by operating activities was$23.4 million for the six months ended June 30, 2005,an increase of $12.0 million, compared to $11.3 million for the sixmonths ended June 30, 2004. The increase is primarily the result of a $5.2million increase in operating income, a $4.5 million favorable working capitalfluctuation, a $2.4 million decrease in interest expense, a $0.3 millionincrease in other interest income, partially offset by an increase indrydocking expenditures of $0.4 million.

 

***Investing Cash Flows***

 

Net cash used in investing activities totaled$11.5 million for the six months ended June 30, 2005 and$28.0 million for the six months ended June 30, 2004.  During the 2005 period, we made $10.7 millionin progress payments for the construction of the ATB.  During the three months ended June 30,2005, the Partnership made payments of $1.0 million to secure a shipyard slotfor construction of the second ATB, which will be credited against the eventualcontracted price.  In January 2004,we sold the *Stolt Spirit* as scrapfor $2.0 million and purchased the *Charleston* for$33.1 million.

 

The amounts received from or paid to Hesspursuant to the Hess support agreement are not recognized as revenue or expensebut are deferred for accounting purposes and will be reflected as an adjustmentto the purchase price relating to the acquisition of the ITBs from Hess at theend of the Hess support agreement in September 2007.  Pending such adjustment, they are included incash flows from investing activities as advances from (payments to) Hess. Ifthe rate for an ITB exceeds the support rate set forth in the supportagreement, 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.  Paymentsfrom Hess to us under the support agreement were $0.2 million and$2.5 million for the six months ended June 30, 2005 and 2004,respectively. For the six months ended June 30, 2005 and 2004, five ITBswere covered. One ITB is under contract with Hess at a charter rate less thanthe support rate; this vessel will be covered by the support agreement upon anytermination of that contract.

 

***Financing Cash Flows***

 

Net cash used in financing activities was$11.1 million for the six months ending June 30, 2005.  Net cash provided by financing activities was$32.2 million for the six months ending June 30, 2004.  During 2005 we made scheduled debt repaymentsof $0.8 million.  In April 2004, weobtained

 

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$202.5 million of new financing from our amended and restated creditfacility and used it to finance the $33.1 million purchase of the *Charleston*, refinance $108.2 million of term loans, repay$29.0 million of subordinated debt, distribute $15.0 million to the members ofUnited States Shipping Master LLC, pay a $0.4 million bonus to our management,provide $10.1 million of working capital and pay $6.8 million of transactionfees In 2005,we also paid $10.4 million of distributions to partners asdescribed in “Payments of Distributions” below.

 

***Payments of Distributions***

 

On May 2, 2005, the board of directorsof US Shipping General Partner LLC declared a quarterly distribution tounitholders of $0.45 per unit in respect of the quarter ended March 31,2005, which was paid on May 16, 2005 to unitholders of record on May 9,2005.  On February 2, 2005, theboard declared a quarterly distribution to unitholders of $0.2885 per unit inrespect of the quarter ended December 31, 2004, which was paid on February 14,2005 to unitholders of record on February 9, 2005.  On July 28, 2005, the board declared aquarterly distribution of $0.45 per unit in respect of the quarter ended June 30,2005, payable on August 15, 2005, to unitholders of record on August 9,2005.

 

***Ongoing CapitalExpenditures***

 

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 be drydocked twice every five years. In addition, vessels mayhave to be drydocked in the event of accidents or other unforeseen damage.Periodically, we also make expenditures to acquire or construct additional tankvessel capacity and/or to upgrade our overall fleet efficiency.

 

Two of our six ITBs will be drydocked in September andNovember 2005, an additional two in 2006 and the remaining two in 2007. Weestimate that drydocking these vessels will cost approximately$6.0 million per vessel.  Inaddition, our parcel tankers are both required to be drydocked in 2006 and2008. We estimate drydocking of the parcel tankers will cost approximately$4.0 million per vessel. When drydocked, each of our ITBs will be out ofservice for approximately 45 to 55 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.

 

Our partnership agreement requires ourgeneral partner to deduct from basic surplus each quarter estimated maintenancecapital expenditures as opposed to actual maintenance capital expenditures inorder to reduce disparities in basic surplus caused by fluctuating maintenancecapital expenditures, such as retrofitting or drydocking. Because of thesubstantial capital expenditures we are required to make to maintain our fleet,our current annual estimated maintenance capital expenditures for purposes ofcalculating basic surplus will be $17.2 million, including our currentestimate of the capital required to bring our ITBs into compliance with the OilPollution Act of 1990 (“OPA 90”) by

 

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retrofitting oursix ITBs with double-sides. The amount of estimated maintenance capitalexpenditures deducted from basic surplus is subject to review and change by theboard of directors of our general partner at least once a year, with any changeapproved by the conflicts committee. We may elect to construct new double-hulledforebodies for some of our ITBs rather than retrofitting them with double-sides.We estimate that the cost of these new forebodies will be substantially higherthan the cost of retrofitting. The cost of retrofitting the ITBs compared tothe cost of new forebodies, market conditions, charter rates and theavailability and cost of financing will be major factors in our determinationwhether to retrofit the ITBs or construct new forebodies. If and when weconclude that our plan should be to construct new forebodies, the board ofdirectors of our general partner, with the approval of our conflicts committee,will determine what portion, if any, of the incremental cost of constructingnew forebodies represents a maintenance capital expenditure. Depending on thisdetermination, the board could elect to increase significantly the annualamount of our estimated capital expenditures. In years when estimatedmaintenance capital expenditures are higher than actual maintenance capitalexpenditures, the amount of cash available for distribution to unitholders willbe lower than if actual maintenance capital expenditures were deducted frombasic surplus.

 

The following table summarizes totalmaintenance capital expenditures, consisting of advanced payments of drydockingexpenditures, and expansion capital expenditures for the periods presented (inthousands):

 
| ** **                       | ** ** | **Six months ended  June 30,** | ** ** |
|----------------------------------|------------|-------------------------------------|------------|
| ** **                       | ** ** | **2005**                            | ** ** | **2004** | ** ** |
| Maintenance capital expenditures |       | $                                   | 381        |   | $ | — |   |
| Expansion capital expenditures   |       | 10,713                              |       | 33,060 |   |
| Total capital expenditures       |       | $                                   | 11,094     |   | $ | 33,060 |   |

 

In August 2004, the Partnership enteredinto a fixed price contract for the construction of an ATB, which is scheduledto be delivered in mid 2006. The contract price for the ATB is $45.4 million,including an anticipated $0.5 million of supervision costs. The Partnershipmade payments of $10.7 million and $7.9 million during the six months ended June 30,2005 and year ended December 31, 2004, respectively. The ATB constructioncontract provides the Partnership with options to purchase three additionalATBs over the next 24 months at fixed prices, subject to limited exceptions. Ifthe Partnership does not exercise any of the options, the Partnership must paythe shipyard an additional $0.4 million, and if the Partnership exercises theoption for only one additional ATB, the Partnership must pay the shipyard $0.1million.  During the three months ended June 30,2005, the Partnership made a non-refundable deposit of $1.0 million to secure ashipyard slot for construction of the second ATB, which will be creditedagainst the eventual contracted price.

 

On July 5, 2005, U.S. Shipping Partners L.P. (the “Partnership”)entered into a non-binding Memorandum of Agreement to acquire from WilmingtonTrust Company the motor vessel GUS W. DARNELL for an aggregate purchase priceof $25 million.  The vessel is a Jones Act coastwise double hulled producttanker, built in 1985, capable of carrying approximately 240,000 barrels. Thevessel was built for use by the Military Sealift Command of the U.S. Navy aspart of a fleet of six vessels, which they have used primarily to deliver jetfuel to various locations in the world.  The transaction will be financedutilizing available cash and the Partnership’s existing credit facilities andis expected

 

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toclose in September 2005.

 

On July 8, 2005, the Board of Directorsof the general partner of the Partnership approved the Memorandum of Agreementto acquire the motor vessel GUS W. DARNELL for an aggregate purchase price of$25 million and the Partnership made a non-refundable deposit of $2.5 millionof the purchase price.

 

***Liquidity Needs***

 

Our primary short-term liquidity needs are topay our quarterly distributions and to fund general working capital requirementsand current drydocking expenditures while our long-term liquidity needs areprimarily associated with expansion and future maintenance and replacementcapital 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.

 

We believe that cash flows from operationsand borrowings under our credit facility described below will be sufficient tomeet our short-term liquidity needs for the at least the next twelve months. Ifour plans or assumptions change or are inaccurate, or we make any additionalacquisitions, we may need to raise additional capital to finance our ongoingcapital expenditure projects on a long-term basis. There can be no assurancethat we will be able to raise additional funds on favorable terms.

 

***ITEM 3.******  Quantitative and Qualitative Disclosures AboutMarket Risk***

 

Our marketrisk is affected primarily by changes in interest rates. We are exposed to theimpact of interest rate changes primarily through our variable-rate borrowingsunder our credit facility. Significant increases in interest rates couldadversely affect our operating margins, results of operations and our abilityto service our indebtedness. Based on the average $5.8 million of floating ratedebt outstanding during the six months ended June 30, 2005, the impact ofa 1% increase in LIBOR would result in an increase in interest expense of $29thousand.

 

We utilize interest rate swaps to reduce ourexposure to market risk from changes in interest rates. The principal objectiveof such contracts is to minimize the risks and/or costs associated with ourvariable rate debt. All derivative instruments held by us are designated ashedges and, accordingly, the gains and losses from changes in derivative fairvalues are recognized as comprehensive income as required by SFAS 133.Gains and losses upon settlement are recognized in the statement of operations.We are exposed to credit-related losses in the event of nonperformance bycounterparties to these financial instruments; however, counterparties to theseagreements are major financial institutions, and the risk of loss due tononperformance is considered by management to be minimal. We do not hold orissue interest rate swaps for trading purposes.

 

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We had two open interest rate swap agreementsas of June 30, 2005.  The intent ofthese agreements is to reduce interest rate risk by swapping an unknownvariable interest rate for a fixed rate. The following is a summary of theeconomic terms of these agreements at June 30, 2005:

 
| Notional  amount       |   | $          | 29,875,000 |   |
|------------------------|--------|------------|------------|--------|
| Fixed rate paid        |   | 3.15       | %          |
| Variable rate received |   | 3.49       | %          |
| Effective date         |   | 12/31/2002 |       |
| Expiration date        |   | 12/29/2006 |       |
|                   |   |       |       |
|                   |   |       |       |
| Notional amount        |   | $          | 60,437,500 |   |
| Fixed rate paid        |   | 3.9075     | %          |
| Variable rate received |   | 3.49       | %          |
| Effective date         |   | 4/19/2004  |       |
| Expiration date        |   | 12/31/2008 |       |

 

**ITEM 4.******  *Controls and Procedures***

 

As of the end of theperiod covered by this report, our management, including the Chief ExecutiveOfficer and Chief Financial Officer, carried out an evaluation of theeffectiveness of the design and operation of the Company’s disclosure controlsand procedures. Based on that evaluation, the Company’s Chief Executive Officerand Chief Financial Officer concluded that our disclosure controls andprocedures are effective in alerting them to material information, on a timelybasis, required to be included in our periodic SEC filings. During our lastfiscal quarter, there were no changes in our internal control over financialreporting that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

 

**PART II—OTHER INFORMATION**

 

## ***ITEM 1.***  LegalProceedings

 

The Partnership issubject to various claims and lawsuits in the ordinary course of business formonetary relief principally from personal injuries, collision or other casualtyand to claims arising under vessel charters. Although the outcome of any individual claim or action cannot bepredicted with certainty, we believe that any adverse outcome, individually orin the aggregate, would be substantially mitigated by applicable insurance orindemnification from previous owners of our assets, and would not have amaterial adverse effect on our financial position, results of operations orcash flows.  We are subject todeductibles with respect to our insurance coverage which range up to $150,000per incident, and we provide on a current basis for estimated paymentsthereunder.

 

## ***ITEM 2.***  Unregistered Sales of Equity Securities andUse of Proceeds

 

None.

 

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## ***ITEM6***.   Exhibits

 
| **Exhibit Number** | ** ** | ** ** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|--------------------|------------|------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1                |       | —     |       | First  Amended and Restated Limited Liability Company Agreement of US Shipping  General Partner LLC                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|               |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.1               |       | —     |       | 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. |
|               |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 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.                                                                                                                                                                                                                                                                                                                                                                                                                                |

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

Date: August 12,2005

 
|   | 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  (principal executive officer) |
|   |                         |
|   |                         |
|   | By:                          | /s/ Albert  E. Bergeron |   |
|   |                         | Albert E.  Bergeron |
|   |                         | Vice  President—Chief Financial Officer |
|   |                         | (principal  financial and accounting officer) |

 

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