** **

**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D.C. 20549**

** **

**FORM 10-K**

** **

**FORANNUAL AND TRANSITION REPORTS**

 

**PURSUANTTO SECTION 13 OR 15(d) OF THE**

**SECURITIESEXCHANGE ACT OF 1934**

** **

**(Mark One)**

** **

**x**** ANNUAL REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

** **

**For the fiscal year ended December 31, 2007**

** **

**Commission File Number  001-33806**

** **

**OSGAMERICA L.P.**

(Exact name of registrant as specified in its charter)

 

| **DELAWARE**                                                          | ** ** | **11-3812936**                    |
|-----------------------------------------------------------------------|------------|-----------------------------------|
| (State or other jurisdiction of incorporation or organization)        |       | (IRS Employer Identification No.) |
|                                                                  |       |                              |
| Two Harbour Place, 302 Knights Run Avenue, Suite 1200, Tampa, FL |       | 33602                             |
| **(Address of principal executive offices)**                          |       | **(Zip Code)**                    |

 

**(813) 209-0600**

Registrant’s telephone number, including areacode

 

**None**

Former name, former address and former fiscal year, if changed sincelast report

* *

*Securities registered pursuant to Section 12(g) ofthe Act: **NONE***

* *

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act.    Yes o    No x

 

Indicateby check mark if the registrant is not required to file reports pursuant to Section 13or Section 15(d) of the ExchangeAct.    Yes o    No x

 

Indicateby check mark whether the registrant: (1) has filed all reports requiredto be 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 x     No o

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to thebest of registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K.   o

 

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

 

Large acceleratedfiler o Acceleratedfiler o Non-acceleratedfiler x Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the ExchangeAct).    Yes o    No x

 

The registrant’s Common Units were not publicly traded as of the lastbusiness day of the registrant’s most recently completed second quarter. Theaggregate market value of the registrants common units held by non-affiliatesas of June 30, 2007 was $0. As of March 10, 2008, 15,002,250 CommonUnits and 15,000,000 Subordinated Units were outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE: None

 

 

----

 

## TABLE OF CONTENTS

 
| ** **        | ** **                                                                                                             | **Page**   |
|-------------------|------------------------------------------------------------------------------------------------------------------------|------------|
| **PART I**   | ** **                                                                                                             | ** ** |
| Item 1.           | Business                                                                                                               | 4          |
| Item 1A.          | Risk Factors                                                                                                           | 19         |
| Item 1B.          | Unresolved Staff  Comments                                                                                             | 40         |
| Item 2.           | Properties                                                                                                             | 40         |
| Item 3.           | Legal Proceedings                                                                                                      | 40         |
| Item 4.           | Submission of  Matters to a Vote of Security Holders                                                                   | 41         |
| ** **        | ** **                                                                                                             | ** ** |
| **PART II**  | ** **                                                                                                             | ** ** |
| Item 5.           | Market for  Registrant’s Common Equity, Related Securityholder Matters and Issuer  Purchases of Equity Securities | 41         |
| Item 6.           | Selected Financial  Data                                                                                               | 44         |
| Item 7.           | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                            | 46         |
| Item 7A.          | Quantitative  and Qualitative Disclosures about Market Risk                                                            | 60         |
| Item 8.           | Financial  Statements and Supplementary Data                                                                           | 61         |
| Item 9.           | Changes in and  Disagreements With Accountants on Accounting and Financial Disclosure                                  | 94         |
| Item 9A(T).       | Controls and  Procedures                                                                                               | 94         |
| Item 9B.          | Other Information                                                                                                      | 94         |
| ** **        | ** **                                                                                                             | ** ** |
| **PART III** | ** **                                                                                                             | ** ** |
| Item 10.          | Directors,  Executive Officers and Corporate Governance                                                                | 94         |
| Item 11.          | Executive  Compensation                                                                                                | 98         |
| Item 12.          | Security  Ownership of Certain Beneficial Owners and Management and Related  Securityholder Matters                    | 101        |
| Item 13.          | Certain  Relationships and Related Transactions, and Director Independence                                             | 102        |
| Item 14.          | Principal  Accounting Fees and Services                                                                                | 107        |
| ** **        | ** **                                                                                                             | ** ** |
| **PART IV**  | ** **                                                                                                             | ** ** |
| Item  15.         | Exhibits, Financial  Statement Schedules                                                                               | 108        |
| Signatures        |                                                                                                                   | 111        |

 

2

----

 

**FORWARD-LOOKING STATEMENTS**

 

Statements included inthis report which are not historical facts (including statements concerningplans and objectives of management for future operations or economicperformance, or assumptions related thereto) are forward-looking statements. Inaddition, we may from time to time make other oral or written statements whichare also forward-looking statements.

 

Forward-lookingstatements appear in a number of places and include statements with respect to,among other things:

 

·    ourability to make cash distributions on the units;

 

·    plannedcapital expenditures and availability of capital resources to fund capitalexpenditures;

 

·    delaysor cost overruns in the building of new vessels, the double-hulling of ourremaining single-hull vessels and scheduled shipyard maintenance;

 

·    futuresupply of, and demand for, oil and refined petroleum products either globallyor in particular regions;

 

·    risksinherent in marine transportation and vessel operation, including accidents anddischarge of pollutants;

 

·    thecost and availability of insurance coverage;

 

·    relianceon a limited number of customers for revenue;

 

·    futurespot market charter rates;

 

·    competitionthat could affect our market share and revenues;

 

·    potentialreductions in the supply of tank vessels due to restrictions set forth by theOil Pollution Act of 1990 (“OPA 90”);

 

·    continuation of federal laws restrictingU.S. point to point maritime shipping to U.S. vessels;

 

·    changesin domestic refined petroleum product consumption;

 

·    changes in U.S. refining capacity;

 

·    thelikelihood of a repeal of, or a delay in the phase-out requirements for,single-hull vessels mandated by OPA 90;

 

·    ourability to maintain long-term relationships with our customers;

 

·    expectedfinancial flexibility to pursue acquisitions and other expansion opportunities;

 

·    ourexpected cost of complying with OPA 90;

 

·    estimatedfuture maintenance capital expenditures;

 

·    ourability to attract and retain experienced, qualified and skilled crewmembers;

 

·    expecteddemand in the domestic tank vessel market in general and the demand for ourtank vessels in particular;

 

·    changesin the demand for lightering services;

 

·    customers’increasing emphasis on environmental and safety concerns;

 

·    ourfuture financial condition or results of operations and our future revenues andexpenses; and

 

·    ourbusiness strategy and other plans and objectives for futureacquisitions/operations.

 

These forward-lookingstatements are made based upon management’s current plans, expectations,estimates, assumptions and beliefs concerning future events impacting us and thereforeinvolve a number of risks and uncertainties. We caution that forward-lookingstatements are not guarantees and that actual results could differ materiallyfrom those expressed or implied in the forward-looking statements. Please read “RiskFactors” in Item 1A. of this Annual Report for a list of important factors thatcould cause our actual results of operations or financial condition to differfrom the expectations reflected in these forward-looking statements.

 

3

----

 

**PART I**

 

**ITEM 1. BUSINESS**

 

**Our Partnership**

#####  

OSG America L.P. (“OSP”, “We” or “Us”) is the largest operator, basedon barrel-carrying capacity, of U.S. flag product carriers and bargestransporting refined petroleum products. We were formed in 2007 by OverseasShipholding Group, Inc. (“OSG”) (NYSE: OSG), a market leader in providingglobal energy transportation services. We plan to use the expertise, customerbase and reputation of OSG to expand our marine transportation service. Ourfleet of product carriers and barges consists of eleven product carriers, sevenarticulated tug barges (“ATBs”), including one that is in the process of beingconverted to a double hull configuration and one conventional tug-barge unit (“CTB”),with an aggregate carrying capacity of approximately 5.3 million barrels.Alaska Tanker Company, LLC (“ATC”), a joint venture in which we have a 37.5%ownership interest, transports crude oil from Alaska to the continental UnitedStates using a fleet of five crude-oil tankers with an aggregate carryingcapacity of 6.3 million barrels. OSG owns a 75.5% interest in OSP,including a 2% interest through our general partner, which OSG owns andcontrols.

 

The majority of our vessels transport refined petroleum products in theU.S. “coastwise” trade over three major trade routes:

 

·                  from refineries located onthe Gulf Coast to Florida, Atlantic Coast and the West Coast;

·                  from refineries located onthe East Coast to New England; and

·                  from refineries located onthe West Coast to Southern California and Oregon.

 

The Gulf Coast to Florida trade route is the most important of thesetrade routes due to the absence of pipelines that service Florida and Florida’sgrowing demand for refined petroleum products. We also provide lighteringservices on the East Coast by transporting crude oil from large crude-oiltankers to refineries in the Delaware River Basin.

 

Our market is protected from direct foreign competition by the MerchantMarine Act of 1920 (the “Jones Act”), which mandates that all vesselstransporting cargo between U.S. ports must be built in the United States,registered under the U.S. flag, manned by U.S. crews and owned and operated byU.S. organized companies that are controlled and at least 75% owned by U.S.citizens (or owned by other entities meeting U.S. citizenship requirements toown vessels operating in the U.S. coastwise trade and, in the case of limitedpartnerships, where the general partner meets U.S. citizenship requirements forthe U.S. coastwise trade). Charter rates for Jones Act vessels havehistorically been more stable than those of similar vessels operating in theinternational shipping markets. We currently operate 16 of our 18 operatingvessels in the U.S. coastwise trade in accordance with the Jones Act and all ofour future scheduled newbuild deliveries will qualify to operate under theJones Act.

 

OSG has assigned to us its agreements to bareboatcharter five newbuild product carriers from subsidiaries of Aker AmericanShipping, Inc. (“Aker”) upon their delivery from the shipyard between 2008and early 2010. These five product carriers have already been time chartered tocustomers for fixed periods ranging from 3-7 years, which can be furtherextended at the customer’s option. We also have the opportunity to increase thesize of our fleet through the exercise of options granted to us by OSG to:

 

·                  purchase up to sixnewbuild double-hulled ATBs, scheduled for delivery from Bender Shipbuilding &Repair Co., Inc. (“Bender”) between late 2008 and late 2010; and

·                  acquire the right tobareboat charter up to two newbuild double-hulled product carriers and up totwo newbuild double-hulled shuttle tankers from Aker, scheduled for deliverybetween late 2009 and early 2011.

 

The options to purchase the newbuild ATBs from OSG andthe rights to bareboat charter the newbuild product carriers and shuttletankers from Aker will be exercisable prior to the first anniversary of thedelivery of each vessel. The exercise of any of the options will be subject tothe negotiation of a purchase price.

 

4

----

 

The following chart details the potential growth ofour fleet and its aggregate carrying capacity:

 
| ** **       | ** ** | ** **                    | ** ** | ** **         | ** ** | ** **          | ** ** | ** **   | ** ** | ** **         | ** ** | **Optional**  | ** ** | ** ** | ** ** | ** **  | ** ** | ** **         | ** ** |
|------------------|------------|-------------------------------|------------|--------------------|------------|---------------------|------------|--------------|------------|--------------------|------------|---------------|------------|------------|------------|-------------|------------|--------------------|------------|
| ** **       | ** ** | ** **                    | ** ** | ** **         | ** ** | ** **          | ** ** | **Product**  | ** ** | ** **         | ** ** | ** **    | ** ** | ** ** | ** ** |
| ** **       | ** ** | ** **                    | ** ** | ** **         | ** ** | **After Scheduled** | ** ** | **Carriers** | ** ** | ** **         | ** ** | ** **    | ** ** |
| ** **       | ** ** | **At December 31, 2007** | ** ** | **Scheduled**      | ** ** | **Deliveries**      | ** ** | **and**      | ** ** | **Phase-out**      | ** ** | **Total**     | ** ** |
| ** **       | ** ** | ** **                    | ** ** | **Capacity**       | ** ** | **Deliveries**      | ** ** | ** **   | ** ** | **Capacity**       | ** ** | **Barges**    | ** ** | **2011-**  | ** ** | ** **  | ** ** | **Capacity**       | ** ** |
| ** **       | ** ** | **Vessels(1)**                | ** ** | **(barrels)**      | ** ** | **2008-2010**       | ** ** | **Vessels**  | ** ** | **(barrels)**      | ** ** | **2008-2011** | ** ** | **2013**   | ** ** | **Vessels** | ** ** | **(barrels)**      | ** ** |
| ** **       | ** ** | ** **                    | ** ** | **(in thousands)** | ** ** | ** **          | ** ** | ** **   | ** ** | **(in thousands)** | ** ** | ** **    | ** ** | ** ** | ** ** | ** **  | ** ** | **(in thousands)** | ** ** |
| Product Carriers |       | 11                            |       | 3,464              |       | 5                   |       | 16           |       | 5,084              |       | 4             |       | (4         | )          | 16          |       | 5,056              |       |
| ATBs(2)          |       | 7                             |       | 1,618              |       | —              |       | 7            |       | 1,618              |       | 6             |       | —     |       | 13          |       | 3,529              |       |
| CTBs(2)          |       | 1                             |       | 172                |       | —              |       | 1            |       | 172                |       | —        |       | —     |       | 1           |       | 172                |       |
| Total Fleet      |       | 19                            |       | 5,254              |       | 5                   |       | 24           |       | 6,874              |       | 10            |       | (4         | )          | 30          |       | 8,757              |       |

 

----

(1)         Does not include the fivecrude-oil tankers operated by ATC.

(2)         Bender is constructingfor us two 8,000 horsepower tugs, each with its own ATB coupler system, thatare scheduled for delivery in 2008 and 2009. The first tug will allow us toreplace the only conventional tug in our fleet and allow us, after minormodifications to the barge, to convert our only CTB into an ATB.

 

In 2007, approximately 72% of our revenues were fromfixed-rate contracts, which include time-charters, Contracts of Affreightment (“COA”),and Consecutive Voyage Charters (“CVC”), and the remaining 28% of our revenueswere from single voyage contracts. While the term contracts have an originalfixed term of between one and seven years and currently have an average of twoyears before they expire, many of our customers are seeking longer-termcontracts. Time charters on the five newbuild product carriers that will bedelivered to us between 2008 and early 2010 have an average term of threeyears. We believe that our strong customer relationships provide a foundationfor stable revenue and long term growth of our business.

 

##### **Business Strategy**

#####  

Our primary business objective is to continue to grow our distributablecash flow per unit by executing the following strategies:

 

·                  *IncreaseMarket Share.* We operate the largest fleet of U.S. flag product carriers and barges,based on barrel-carrying capacity, transporting refined petroleum products. Ourbareboat charter of five newbuild product carriers from Aker and, assuming weexercise all of our options with OSG to bareboat charter two newbuild productcarriers and two newbuild shuttle tankers from Aker and to purchase sixnewbuild ATBs to be constructed by Bender, will further strengthen our leadingposition in the Jones Act trade. We will continue to evaluate strategicacquisitions in order to meet the demand for U.S. flag vessels in a manner thatwill increase our distributable cash flow.

 

·                  *Capitalizeon Relationship with OSG.* We intend to use OSG’s customer relationships with leadingintegrated oil companies and independent refiners to secure longer-termcontracts for our vessels.

 

·                  *GenerateStable Cash Flows With High-Quality Charterers.* Our customers arepredominantly leading integrated oil companies and independent refiners. Webelieve that entering into medium to long-term charters with these customerswill provide us with relatively stable cash flows.

 

·                  *Expandinto Related Segments.* We believe that our high-quality Jones Act vessels, ourreputation for dependable service and our relationship with OSG will enable OSPto expand into new segments, such as shuttle tankers in the Gulf of Mexico. Inaddition, three of the six newbuild ATBs that we have options to purchase fromOSG are already chartered to Sunoco for lightering business in the DelawareBay.

 

·                  *EmphasizeSafety.*We have an excellent vessel safety record and reputation for customer serviceand support. We believe that by maintaining a high standard for operationalsafety and environmental compliance, we will be able to maintain our leadingmarket position.

 

·                  *MaintainFinancial Strength and Flexibility.* We intend to maintain financial strength andflexibility so as to enable us to pursue acquisition opportunities as theyarise. We have access to $200 million under our senior secured revolvingcredit facility for working capital and acquisitions.

 

5

----

 

##### We are aDelaware limited partnership formed on May 14,2007. On November 15, 2007, we completed an initial public offering of7,500,000 common units at $19.00 per unit. The common units issued to thepublic represent a 24.5% limited partner interest. OSG America LLC, a whollyowned subsidiary of Overseas Shipholding Group, Inc., is our sole generalpartner and has a 2% general partner interest. Other subsidiaries of OSG hold a73.5% limited partnership interest.

#####  

Our principal executiveoffices are located at Two Harbour Place, 302 Knights Run Avenue, Suite 1200,Tampa, FL 33602, and our phone number is (813) 209-0600.

 

##### **Industry**

#####  

##### **Fleet**

#####  

Our fleet consists of nineteen U.S. flag product carriers and bargescomposed of eleven product carriers, seven ATBs and one CTB with an aggregatecarrying capacity of approximately 5.3 million barrels.

 

We have:

 

·                  agreements to bareboatcharter five newbuild product carriers from subsidiaries of Aker upon theirdelivery from the shipyard between 2008 and early 2010;

·                  options to purchase fromOSG up to six newbuild ATBs, upon their delivery from Bender between late 2008and late 2010; and

·                  options to acquire fromOSG the right to bareboat charter up to two newbuild double-hulled productcarriers and up to two newbuild double-hulled shuttle tankers from Aker, upontheir delivery from the shipyard between late 2009 and early 2011.

 

If we purchase and bareboat charter all of thesenewbuild vessels, and after adjusting for the phase out of the four single-hullvessels, our fleet will increase from 19 to 30 product carriers and barges andour aggregate carrying capacity will increase from 5.3 million to8.8 million barrels. We believe that employing a fleet consisting ofproduct carriers and ATBs allows us to effectively meet the requirements ofvarious customers in a number of different markets.

 

The following table sets forth information concerning our initial fleetof eleven product carriers, seven ATBs and one CTB as of December 31,2007:

 
| ** **                        | ** ** | ** **                          | ** ** | ** **         | ** ** | **Owned /**     | ** ** | ** **     | ** ** | ** **                  | ** ** |
|-----------------------------------|------------|-------------------------------------|------------|--------------------|------------|-----------------|------------|----------------|------------|-----------------------------|------------|
| ** **                        | ** ** | **Year Built /**                    | ** ** | **Cargo Capacity** | ** ** | **Bareboat-In** | ** ** | ** **     | ** ** | **Charter-Out**             | ** ** |
| **Vessel Name**                   | ** ** | **Rebuilt**                         | ** ** | **DWT**            | ** ** | **Barrels(1)**  | ** ** | **Expiration** | ** ** | **Charterer(2)**            | ** ** | **Expiration** | ** ** |
| Single-hulled  Product Carriers   |       |                                |       |               |       |            |       |           |       |                        |       |   |   |
| *Overseas  Puget Sound*           |       | 1983                                |       | 50,861             |       | 356,000         |       | Owned          |       | Tesoro TC                   |       | Feb 2008(4) |   |
| *Overseas  New Orleans*           |       | 1983                                |       | 42,954             |       | 306,000         |       | Oct 2011       |       | CITGO TC                    |       | Jan 2008 |   |
| *Overseas  Galena Bay*            |       | 1982                                |       | 50,116             |       | 356,000         |       | Owned          |       | SeaRiver TC                 |       | Jan 2009 |   |
| *Overseas  Philadelphia*          |       | 1982                                |       | 43,387             |       | 306,000         |       | Nov 2011       |       | Morgan Stanley TC |       | Jan 2008 |   |
|                              |       |                                |       |               |       |            |       |           |       |                        |       |   |   |
| Double-hulled  Product Carriers   |       |                                |       |               |       |            |       |           |       |                        |       |   |   |
| *Overseas  Diligence*             |       | 1977                                |       | 39,732             |       | 269,000         |       | Owned          |       | SVC                         |       | — |   |
| *Overseas  Integrity*             |       | 1975                                |       | 39,948             |       | 269,000         |       | Owned          |       | Sunoco COA                  |       | June 2008 |   |
| *Overseas  Maremar*               |       | 1998                                |       | 47,225             |       | 315,000         |       | Owned          |       | SVC/COA                     |       | Dec 2009 |   |
| *Overseas  Luxmar*                |       | 1998                                |       | 45,999             |       | 315,000         |       | Owned          |       | SVC/COA                     |       | Dec 2009 |   |
| *Overseas  Houston*               |       | 2007                                |       | 46,815             |       | 324,000         |       | Feb 2014(3)    |       | Shell TC                    |       | Mar 2010(4) |   |
| *Overseas  Long Beach*            |       | 2007                                |       | 46,817             |       | 324,000         |       | Jun 2014(3)    |       | BP TC                       |       | Jul 2014(4) |   |
| *Overseas  Los Angeles*           |       | 2007                                |       | 46,815             |       | 324,000         |       | Nov 2014(3)    |       | BP TC                       |       | Nov 2014(4) |   |
|                              |       |                                |       |               |       |            |       |           |       |                        |       |   |   |
| Double-hulled  ATBs (Barge / Tug) |       |                                |       |               |       |            |       |           |       |                        |       |   |   |
| *M 209 /  OSG Enterprise*         |       | 1980 / 2005                         |       | 25,321             |       | 206,000         |       | Owned          |       | Marathon TC                 |       | Nov 2008 |   |
| *OSG 214  / OSG Honour*           |       | 1975 / 2004                         |       | 26,410             |       | 207,000         |       | Owned          |       | Marathon TC                 |       | Nov 2008 |   |
| *OSG 254  / OSG Intrepid*         |       | 1970 / 2002                         |       | 31,605             |       | 250,000         |       | Owned          |       | Valero TC                   |       | Aug 2010 |   |
| *M 252 /  Navigator*              |       | 1972 / 2002                         |       | 30,933             |       | 250,000         |       | Owned          |       | Chevron CVC                 |       | June 2009 |   |
| *M 244 /  Seafarer(5)*            |       | 1971 / 2001                         |       | 29,042             |       | 236,000         |       | Owned          |       | Chevron CVC                 |       | June 2009 |   |
| *OSG 242  / OSG Columbia*         |       | 1981 / 2007                         |       | 25,680             |       | 234,299         |       | Owned          |       | SVC                         |       | — |   |
| *OSG 243  / OSG Independence(6)*  |       | 1982 / Being  Retrofitted |       | 25,216             |       | 234,299         |       | Owned          |       | Being Retrofitted           |       | N/A |   |
| Double-hulled  CTBs (Barge / Tug) |       |                                |       |               |       |            |       |           |       |                        |       |   |   |
| *M 192 /  Freedom(7)*             |       | 1979 / 1998                         |       | 21,914             |       | 172,000         |       | Owned          |       | Sunoco TC                   |       | Feb 2008(4) |   |

 

----

(1)          Barrelsat 98% capacity.

 

6

----

 

(2)         TC: Time Charter, COA:Contract of Affreightment, CVC: Consecutive Voyage Charter, SVC: Spot VoyageCharter.

(3)         Bareboat-In expirationdate shown is the expiration date of initial bareboat charter period (end ofminimum commitment period). The term of each bareboat charter may be extendedat our option for varying periods up to the entire useful life of the vessel.

(4)         Charter-Out expirationdates refer to end of the firm charter period. Charterer has option to extendfor varying additional periods.

(5)         Upon delivery of our new8,000 horsepower tug *OSG Endurance,*weplan to sell *Seafarer*.

(6)         This ATB is currentlyundergoing expansion and conversion to double-hull configuration and isscheduled to re-enter service in the second quarter of 2008.

(7)         Upon delivery of our new8,000 horsepower tug *OSG Courageous,*weplan to sell *Freedom*.

 

**Newbuilds**

 

OSG has contributed to us, without any furtherobligation to OSG, the membership interests in subsidiaries that have enteredinto bareboat charters for five Jones Act product carriers to be constructed byAker Philadelphia Shipyard, Inc. (“APSI”) and scheduled for deliverybetween 2008 and early 2010; and subsidiaries that have entered intoshipbuilding contracts with Bender for the construction of two tugs. Withrespect to the five product carriers we are committed to bareboat charter fromAker, we are only required to pay charter hire once the product carriers havebeen delivered. Please read “Bareboat Charters from Aker of Our Newbuilds.”With respect to the tugs we are committed to purchase, we will be responsiblefor all remaining payments due under the shipbuilding contracts, which weexpect will be approximately $23 million.

 

The following table sets forth information concerningthe five newbuild product carriers to be constructed by Aker that we haveagreed to bareboat charter from subsidiaries of Aker and two tugs underconstruction by Bender that we have agreed to acquire, which will replace twoolder tugs currently included in our initial fleet shown above.

 
| ** **                      | ** ** | ** **   | ** ** | ** **              | ** ** | ** **      | ** ** | ** **       | ** ** | ** **       | ** ** |
|---------------------------------|------------|--------------|------------|-------------------------|------------|-----------------|------------|------------------|------------|------------------|------------|
| ** **                      | ** ** | **Expected** | ** ** | ** **              | ** ** | ** **      | ** ** | ** **       | ** ** | ** **       | ** ** | ** ** | ** ** |
| ** **                      | ** ** | **Delivery** | ** ** | **Cargo Capacity** | ** ** | **Bareboat-In** | ** ** | ** **       | ** ** | **Charter-Out**  | ** ** |
| **Vessel Name**                 | ** ** | **Date**     | ** ** | **DWT**                 | ** ** | **Barrels(1)**  | ** ** | **Expiration**   | ** ** | **Charterer(2)** | ** ** | **Expiration** | ** ** |
| Double-hulled  Product Carriers |       |         |       |                    |       |            |       |             |       |             |       |   |   |
| *Overseas  New York*            |       | 2008         |       | 46,815                  |       | 324,000         |       | May 2015(3) |       | Shell TC         |       | May 2011(4) |   |
| *Overseas  Texas City*          |       | 2008         |       | 46,815                  |       | 324,000         |       | Sep 2015(3)      |       | BP TC            |       | Sep 2011(4) |   |
| *Overseas  Boston*              |       | 2009         |       | 46,815                  |       | 324,000         |       | Jan 2014(3)      |       | Tesoro TC        |       | Jan 2012(2) |   |
| *Overseas  Nikiski*             |       | 2009         |       | 46,815                  |       | 324,000         |       | May 2014(3) |       | Tesoro TC        |       | May 2012(4) |   |
| *Overseas  Anacortes*           |       | 2010         |       | 46,815                  |       | 324,000         |       | May 2015(3) |       | Tesoro TC        |       | May 2013(4) |   |
|                            |       |         |       |                    |       |            |       |             |       |             |       |   |   |
| 8,000 Horsepower  Tugs          |       |         |       |                    |       |            |       |             |       |             |       |   |   |
| *OSG  Courageous*               |       | 2008         |       |                    |       |            |       |             |       |             |       |   |   |
| *OSG  Endurance*                |       | 2009         |       |                    |       |            |       |             |       |             |       |   |   |

 

----

(1)         Barrels at 98% capacity.

(2)         TC: Time Charter.

(3)         Bareboat-In expirationdate shown is the expiration date of firm charter period (end of minimumcommitment period). The term of each bareboat charter may be extended at ouroption for varying periods up to the entire useful life of the vessel.

(4)         Charter-Out expirationdates refer to end of the firm charter period. Charterer has option to extendfor varying additional periods.

 

7

----

 

**Optional Vessels**

 

Pursuant to our omnibus agreement with OSG, we haveoptions to purchase up to six newbuild ATBs scheduled for delivery from Benderbetween late 2008 and late 2010 and to acquire from OSG the right to bareboatcharter up to two newbuild double-hulled product carriers and up to twonewbuild double-hulled shuttle tankers from Aker, scheduled for deliverybetween late 2009 and early 2011. The following table sets forth informationconcerning the six newbuild ATBs for which we have options to purchase and twonewbuild double-hulled product carriers and two newbuild double-hulled shuttletankers for which we have options to bareboat charter:

 
| ** **                        | ** ** | ** **   | ** ** | ** **         | ** ** | ** **      | ** ** | ** **     | ** ** | ** **       | ** ** |
|-----------------------------------|------------|--------------|------------|--------------------|------------|-----------------|------------|----------------|------------|------------------|------------|
| ** **                        | ** ** | **Expected** | ** ** | ** **         | ** ** | ** **      | ** ** | **Owned/**     | ** ** | ** **       | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **Delivery** | ** ** | **Cargo Capacity** | ** ** | **Bareboat-In** | ** ** | ** **     | ** ** | **Charter-Out**  | ** ** |
| **Vessel Name**                   | ** ** | **Date**     | ** ** | **DWT**            | ** ** | **Barrels(1)**  | ** ** | **Expiration** | ** ** | **Charterer(2)** | ** ** | **Expiration** | ** ** |
| Double-hulled  Product Carriers   |       |         |       |               |       |            |       |           |       |             |       |   |   |
| *Overseas  Martinez*              |       | 2010         |       | 46,815             |       | 324,000         |       | Jan 2015 (3)   |       | Tesoro TC        |       | Jan 2013(4) |   |
| *Overseas  Tampa*                 |       | 2011         |       | 46,815             |       | 324,000         |       | Mar 2021(3)    |       | —           |       | — |   |
|                              |       |         |       |               |       |            |       |           |       |             |       |   |   |
| Double-hulled  Shuttle Tankers    |       |         |       |               |       |            |       |           |       |             |       |   |   |
| *Overseas  Chinook*               |       | 2010(5)      |       | 46,815             |       | 324,000         |       | Sep 2019(3)    |       | Petrobras TC     |       | Jan 2015(4) |   |
| *Overseas  Cascade*               |       | 2011(5)      |       | 46,815             |       | 324,000         |       | Nov 2020(3)    |       | Petrobras TC     |       | Mar 2015(4) |   |
|                              |       |         |       |               |       |            |       |           |       |             |       |   |   |
| Double-hulled  ATBs (Barge / Tug) |       |         |       |               |       |            |       |           |       |             |       |   |   |
| *OSG 350  / OSG Vision*           |       | 2008         |       | 45,556             |       | 347,000         |       | Owned          |       | Sunoco COA       |       | Oct 2018 |   |
| *OSG 351  / OSG Quest*            |       | 2009         |       | 45,556             |       | 347,000         |       | Owned          |       | Sunoco COA       |       | Oct 2018 |   |
| *OSG 352  / OSG Horizon*          |       | 2009         |       | 45,556             |       | 347,000         |       | Owned          |       | Sunoco COA       |       | Oct 2018 |   |
| *OSG 296  / OSG Endeavor*         |       | 2009         |       | 37,187             |       | 290,000         |       | Owned          |       | —           |       | — |   |
| *OSG 297  / OSG Mariner*          |       | 2010         |       | 37,187             |       | 290,000         |       | Owned          |       | —           |       | — |   |
| *OSG 298  / OSG Discovery*        |       | 2010         |       | 37,187             |       | 290,000         |       | Owned          |       | —           |       | — |   |

 

----

(1)         Barrels at 98% capacity.

(2)         TC: Time Charter, COA:Contract of Affreightment.

(3)         Bareboat-In expirationdate shown is the expiration date of initial bareboat charter period (end ofminimum commitment period). The term of each bareboat charter may be extendedat our option for varying periods for up to the entire useful life of thevessel.

(4)         Charter-Out expirationdates refer to end of the firm charter period. Charterer has option to extendfor varying additional periods.

(5)         Scheduled delivery dateshown is for the completion of the conversion of the product carrier to ashuttle tanker.

 

**BareboatCharters from Aker of Our Newbuilds**

 

*General*

We believe that employing a fleet of both owned andbareboat chartered vessels provides us operational and financial flexibility.Our vessels that are bareboat chartered provide us with several advantagesincluding:

 

·                  they do notrequire any initial capital investment and the bareboat hire payments commenceonly when the vessels have been delivered to us, thus allowing us to maintain amore conservative capital structure and to generate higher returns on capitalfor our unitholders;

·                  they provide uswith significant choices and flexibility through our unlimited options toextend the term of the charter;

·                  they allow us tocontrol the size of our fleet to optimize utilization of our vessels; and

·                  they provide usthe opportunity to upgrade our fleet, as more technologically advanced vesselsare constructed.

 

In June 2005, OSG entered into bareboat chartersfor ten Jones Act product carriers to be constructed by APSI and scheduled fordelivery between 2007 and 2010. Following completion of construction the vesselsare sold to leasing subsidiaries of American Shipping Corporation, a subsidiaryof Aker and an affiliate of APSI, that in turn bareboat charter the vessels toOSG. In February 2007, OSG agreed in principle to bareboat charter up tosix additional Jones Act product carriers scheduled for delivery between 2010and 2011. In October 2007, OSG entered into bareboat charters for twoadditional vessels, the *Overseas Cascade*and the *Overseas Chinook,* and theprior agreement in principle for six additional vessels was terminated.  The bareboat charters of eight of theoriginal ten vessels have been assigned to us and we have 

 

8

----

 

options to acquire from OSG the right to bareboatcharter up to all four of the remaining vessels, which include the *Overseas Cascade* and the *Overseas Chinook*.

 

*Termsof the Bareboat Charters*

 

The initial terms of thebareboat charters vary in length from five, seven and ten years.  We have the right to extend the initial termsfor an unlimited number of times for renewal periods of one, three or fiveyears upon 12 months’ advance notice, provided, however, that our right to aone-year extension may only be exercised once. Under the bareboat charters, we are required to pay charter hire on a “hell-or-high-water”basis. This means that, except in the case of an “Event of Loss” as defined inthe bareboat charter, we will be required to pay the agreed bareboat charterhire whether or not the vessel is available to us for charter to our customers.We are also responsible for all operating costs, including the cost of repairs,maintenance, drydocking, spares, stores, hull and machinery insurance, war riskinsurance and protection and indemnity insurance coverage for each vessel forthe benefit of the owner and its lenders. The bareboat charter rate for each option period is subject to increasebased upon the increase, if any, in the interest rate payable by Aker on therelated vessel debt above a stated amount.

 

We have also providedAker a guaranty of the payment and performance of the obligations of oursubsidiaries under the bareboat charters, other than any obligations relatingto or arising in connection with any environmental laws or liabilities.Further, we have provided Aker with a limited indemnity of losses with respectto each of the vessels that our subsidiaries bareboat charter from Aker arisingout of any environmental liability excluded from our guaranty if the lossesarose from an incident not fully covered by insurance and the unavailability orinsufficiency of insurance is determined to have occurred as a result of abreach by us of the provisions of the bareboat charter. Our indemnity islimited to an amount equal to the lesser of (1) the outstanding principalamount of Aker’s loans solely attributable to the vessel and (2) anotional loan balance attributable to the vessel.

 

*ProfitSharing*

 

We have time chartered-out the eight vessels we havebareboat chartered-in from Aker to OSG Product Tankers, LLC, an entity that isindirectly owned by us and Aker and in which OSG has no direct equity interest.OSG Product Tankers, LLC has in turn time chartered the vessels to customersfor fixed terms of between three and seven years, which terms can be furtherextended at the customer’s option.  Theeffect of the ownership structure of OSG Product Tankers, LLC and the otherlimited liability companies owned by OSG and Aker is to share profits betweenus and Aker, or OSG and Aker, respectively, at a rate of 51%/49%, respectively.

 

The time charter hire paid by OSG Product Tankers, LLCto us is equal to the sum of the bareboat charter hire paid by us to Aker, ourcost of operating the vessels, a management fee and a fixed charge payable tous. Profit is calculated as the difference between the time charter hire paidby customers to OSG Product Tankers, LLC and the time charter hire paid by OSGProduct Tankers, LLC to us. During any period that the amount of time charterhire paid by the customer to OSG Product Tankers, LLC is insufficient to paythe full amount of the time charter hire payable by OSG Product Tankers, LLC,we have agreed to advance the amount of any such shortfall to OSG ProductTankers, LLC. In general, advances are repaid to us quarterly, provided thatsuch obligation to repay the advances is subject to reduction at the end of thecalendar year in which the advances are made by the amount of the fixed chargepaid to us during such year. If any advances remain unpaid at the end of thefollowing calendar year, such advances will terminate without being repaid.Aker is not entitled to receive profit sharing while any advances areoutstanding.

 

In the event we exerciseour options to acquire the right to bareboat charter one or both of the *Overseas Martinez* and the *Overseas Tampa*, we will similarly timecharter-out these vessels to OSG Product Tankers, LLC. Until such time as weexercise our options, these two vessels will be time chartered by OSG to OSGProduct Tankers Martinez, LLC (“New Martinez Time Charterer”), a limitedliability company indirectly owned by OSG and Aker and in which we have noequity interest.  If we exercise any ofour options to acquire the right to bareboat charter one or both of thenewbuild shuttle tankers from Aker, the *OverseasCascade* and the *Overseas Chinook*,we will time charter-out these vessels to OSG Shuttle Tankers Chinook, LLC , alimited liability company indirectly owned by us and Aker and in which OSG hasno direct equity interest.  During thetime that we have not exercised our options to acquire the right to thebareboat charters of the *Overseas Martinez,Overseas Tampa, Overseas Cascade*or*OverseasChinook*, OSG has agreed to make advances to New Martinez TimeCharterer and the limited liability company organized by OSG and Aker to be thetime charterer of the Overseas Cascade and the Overseas Chinook (such newlyformed entity together with the New Martinez Time Charterer, the “New OSG TimeCharterers”) to fund the difference between time charter hire paid to such NewOSG Time Charterer by its customers and the 

 

9

----

 

amount of time charterhire payable by such New OSG Time Charterer. OSG’s advances with respect to aNew OSG Time Charterer are subject to reduction and termination by the amountof the fixed charge paid to OSG by such New OSG Time Charterer in the samemanner as our advances to OSG Product Tankers, LLC.

 

To maintain the economicsof the profit sharing arrangement with Aker with respect to the vessels we havebareboat chartered-in from Aker, we and OSG have agreed with Aker that for solong as we have not exercised the options to acquire the right to bareboatcharter-in both the *Overseas Martinez*and the *Overseas Tampa*, allcalculations of advances and profit sharing shall be made as if OSG ProductTankers, LLC and New Martinez Time Charterer were a single entity. Thisarrangement may result in, among other things, both us and OSG making orreceiving repayment of greater or lesser advances than would be the case absentthis agreement. However, we have agreed with OSG for each to reimburse theother in such amount as may be necessary so that the distributions we receiveand the advances we make are the same as would have been the case absent suchagreement with Aker.  A similar situationcould arise if we exercise our option to acquire the right to bareboatcharter-in from Aker one but not both of the *OverseasCascade* and *Overseas Chinook*.

 

*PoolingAgreement*

 

We are party to a pooling agreement with OSG, OSG ShipManagement, Inc. (“OSGM”), New Martinez Time Charterer and certain othersubsidiaries of OSG under which the TCE revenues from all Jones Act productcarriers owned or operated by OSG (and certain of its subsidiaries), us and theNew Martinez Time Charterer are allocated among the pool vessels according toan agreed-upon formula. The formula gives effect to each product carrier’sperformance, taking into account factors such as carrying capacity, speed, fuelconsumption, and the number of days that the vessel was available foremployment during the relevant time period. The formula is subject to reviewand adjustment by the parties every six months. The pooling arrangement was established to provide for the commonmarketing, commercial operation and employment of our product carriers, therebyeliminating any conflict of interest that might arise from OSG’s commercialmanagement of product carriers from which it earns 100% of the profit and theproduct carriers bareboat chartered from Aker, from which it earns 51% of theprofit. The pooling agreement does not have an established term of duration,but product carriers will cease to be subject to the agreement when it is nolonger controlled by a pool member.

 

All of our existing and future tank vessels engaged inthe Jones Act trade of transporting refined petroleum products are subject tothe pooling agreement.  However, as of December 31,2007 only nine of our eighteen tank vessels participated in the pool becauseunder the terms of the pooling agreement, only those vessels not subject to an existingtime charter at the delivery of the Overseas Houston were required to beincluded in the pool.  The vesselssubject to a time charter at such time will participate in the pool upon theexpiration of such time charter (or any renewals or extensions of such timecharter).

 

*Aker’s Debt and Deferred PrincipalObligation*

 

Under the bareboat charters for the first ten vesselsordered from Aker, the bareboat charterer has the right to help Aker improvethe terms of its debt financing for the vessels, including without limitation,by reducing the interest rate or extending the principal amortization scheduleand, if successful, to reap the benefit through a reduced bareboat charter rateduring the term in which the benefit is obtained.

 

To the extent that a longer principal amortizationschedule results in an increased amount of debt outstanding at the end of theinitial or optional terms, a Deferred Principal Obligation (“DPO”) is createdin the form of an interest-bearing obligation to be amortized in equalquarterly installments over the remaining useful life of the vessel and addedto the bareboat charter hire paid. Additional profit sharing earned by Akerwill reduce the DPO dollar for dollar during the initial term of the bareboatcharters. If the charterer fails to renew the bareboat charter, the remainingDPO becomes payable upon redelivery of the vessel.

 

In August 2005, OSG assisted Aker with afinancing of the first five vessels which gave rise to a DPO that accrues on adaily basis over the seven year initial term of the five charters to a maximumliability of $7 million per vessel, or $35 million in total. As a result of theassignment of these bareboat charters to us, we will pay the reduced bareboatrate and assume the DPO liability. If the charters are not extended, theliability is immediately payable upon redelivery of the vessels to Aker. If, onthe other hand, the charters are extended, the liability is repaid over 18years; but, if at any time during those 18 years the charters are discontinued,the remaining balance of the liability is immediately payable upon redeliveryof the vessels. The DPO liability that accrues on each of the five vessels eachyear during the initial term is reduced by the increase in profit sharing paidby OSG Product Tankers, LLC to Aker resulting from the reduction in thebareboat rate. We will account for the DPO liability that accrues each year asadditional bareboat charter hire expense.

 

10

----

###### ** **

###### **Maritime Security Program (“MSP”)**

######  

The Maritime Administration of the Department ofTransportation administers the MSP, which is intended to support the operationof up to 60 U.S. flag vessels in the foreign commerce of the United States tomake available a fleet of active, commercially viable, privately owned vesselsto the Department of Defense during times of war or national emergency.

 

Payments are made under the MSP to vessel operators,including OSG and us, to help offset the high cost of employing a U.S. crew.These payments equal $2.6 million per ship per year for 2007 and 2008,$2.9 million per ship per year for 2009 through 2011 and $3.1 millionper ship per year for 2012 through 2015.

 

We own and operate two foreign-built U.S. flag productcarriers, the *Overseas Maremar*and*Overseas Luxmar,*that are enteredin the MSP. These two product carriers are not eligible to operate in the JonesAct trade because they were not built in the United States.

 

###### **Management of Ship Operations,Administration and Safety**

######  

OSG provides to us, through its subsidiary OSGM,expertise that allows for the safe, efficient and cost-effective operation forour vessels. Pursuant to the management agreement and an administrativeservices agreement entered into with OSGM we have access to:

 

·                  Human resources,financial and other administrative functions, including:

 

·                  bookkeeping, audit andaccounting services;

·                  administrative andclerical services;

·                  banking and financialservices; and

·                  client and investorrelations services.

 

·                  Technical andcommercial management services including:

 

·                  commercial managementof our vessels;

·                  vessel maintenance andcrewing;

·                  purchasing andinsurance; and

·                  shipyard supervision.

 

For more information on the management andadministrative services agreements we have with OSGM, please read “CertainRelationships and Related Transactions—Management Agreement” and “CertainRelationships and Related Party Transactions—Administrative Services Agreement.”

 

###### **Our Investment in Alaska TankerCompany, LLC**

######  

We own a 37.5% interest in Alaska Tanker Company, LLC(“ATC”). ATC is a joint venture that was formed in 1999 by OSG, KeystoneAlaska, LLC and BP Oil Shipping USA, Inc. (“BP”) to consolidate themanagement of BP’s Alaskan crude oil shipping operations. As a result, ATC hasthe exclusive right to transport all of BP’s Alaskan oil and natural gas. ATCcurrently bareboat charters and operates five crude-oil tankers that transportAlaskan crude oil for BP from the Trans Alaska Pipeline terminus in Valdez,Alaska to a number of refineries on the West Coast. Four of these vessels are185,000 dwt “Alaska Class” tankers, which were purpose-built for the Alaskacrude trade by NASSCO, a San Diego shipyard owned by General DynamicsCorporation, between 2004 and 2006. These four vessels have double-hulls andredundant propulsion and steering systems. ATC is time chartering these fourvessels to BP until 2023. The fifth vessel is a double-hulled crude-oil tankerof 125,000 dwt that was built in 1979 and is subject to a time charter to BPexpiring at the end of 2011.

 

The time charter revenue ATC receives under each timecharter is equal to the sum of:

 

·                  the bareboat hire itpays to the vessel owner;

·                  the actual vesseloperating costs it incurs;

·                  full reimbursement ofactual overhead expenses as allocated on a per-vessel basis; and

·                  incentive hire for theachievement of certain operational and safety benchmarks.

 

The incentive hire earned by ATC effectivelyconstitutes its net income and is distributed to its members, based upon theirownership interest in ATC, once a year in the first quarter of the subsequentyear. The dividend paid to all members in respect of the year ended December 31,2007, was $15.3 million.

 

11

----

 

**OurCustomers**

 

Ourtwo largest customers in 2007 based on gross revenue were Chevron and Marathon,each of which accounted for more than 10% of our consolidated revenues forthose periods. No other customer accounted for more than 10% of ourconsolidated revenues for those periods. See Note B to the consolidatedfinancial statements in Item 8 of this report.

 

**PreventativeMaintenance**

 

OSGMis responsible for the maintenance of our fleet. OSGM has a computerizedpreventative maintenance program that tracks U.S. Coast Guard and AmericanBureau of Shipping inspection schedules and establishes a system for thereporting and handling of routine maintenance and repair.

 

Vesselsutilize a computerized maintenance system that provides for daily inputs, whichare used to note conditions that may require maintenance or repair. Vesselsuperintendents are responsible for reviewing these entries, inspectingidentified discrepancies, assigning a priority classification and generatingwork orders. Work orders establish job type, assign personnel responsible forthe task and record target start and completion dates. Vessel superintendentsinspect repairs completed by the crew, supervise outside contractors as neededand conduct follow-up inspections. Drills and training exercises are conductedin conjunction with these inspections, which are typically more comprehensivein scope. In addition, an operations duty officer is available on a 24-hourbasis to handle any operational issues. In addition, a qualified individual isprepared to respond on scene whenever required and is trained in spill controland emergency response.

 

TheAmerican Bureau of Shipping and the U.S. Coast Guard establish drydockingschedules. Prior to sending a vessel to a shipyard, we develop comprehensivework lists to ensure all required work is completed. Shipyard facilities bid onthese work lists, and jobs are awarded based on price and time to complete.Vessels then clean to prepare for the shipyard. Once the vessel is gas-free, acertified marine chemist issues paperwork certifying that no dangerous vaporsare present. The vessel proceeds to the shipyard where the vessel superintendentand certain crew members assist in performing the required work. The drydockperiod is considered complete when all work has been tested to the satisfactionof American Bureau of Shipping or U.S. Coast Guard inspectors or both and us.

 

###### **Safety**

######  

###### *General*

OSGM is responsible for managing our health and safetyprograms. OSGM is committed to operating our vessels in a manner that protectsthe safety and health of our employees, the general public and the environment.Its primary goal is to minimize the number of safety and health relatedaccidents involving our vessels and considerable effort is devoted to avoidingpersonal injuries and reducing occupational health hazards and preventingaccidents that may cause damage to our personnel, equipment or the environment.OSGM is committed to reducing harmful emissions from our vessels and to thesafe management of waste generated by cargo residues and tank cleaning.

 

OSGM’s policy is to follow all applicable laws andregulations and actively participate with government, trade organizations andthe public in creating responsible laws, regulations and standards to safeguardthe workplace, the community and the environment. OSGM identifies areas thatmay require special training, including new initiatives that are evolvingwithin the industry. Its Marine Personnel department is responsible for alltraining, whether conducted in-house or at an independent training facility.

 

###### *Vessel Characteristics*

All of our vessels are subject to U.S. Coast Guardinspection and classification by the ABS. In addition, air quality regulationsrequire our vessels to be fitted to prevent the release of any cargo fumes orvapors into the atmosphere. Each of our product carriers and barges thattransports refined petroleum products has been outfitted with a vapor recoverysystem that connects the cargo tanks to the shore terminal via pipe and hose toreturn to the plant the vapors generated while loading. Our product carriersand barges have alarms that indicate when the tank is full (98% of capacity) inorder to alert the operator of the risk of overfilling one or more tanks.

 

###### *Safety Management Systems*

OSGM has developed and implemented a Safety ManagementSystem (“SMS”) for our entire fleet that is ISO 9001:2000 and ISO 14001:2004certified. It incorporates the requirements of the International SafetyManagement (“ISM”) system and the American Waterways Operators ResponsibleCarrier Program. The SMS is designed to be a framework for continuouslyimproving our operational and safety performance by incorporating industry bestpractices in the areas of management and administration and equipment andinspection. The program is designed to complement and expand on existinggovernmental 

 

12

----

 

regulations requiring, in many instances, that our safety and trainingstandards exceed those required by federal law or regulation.

 

All of our vessels are currently certified under thestandards of the ISM system. The ISM standards were promulgated by theInternational Maritime Organization (“IMO”) several years ago and have beenadopted through treaty by many IMO member countries, including the UnitedStates.

 

###### *Major Oil Company Vetting Process*

Shipping, especially the carriage of crude oil andrefined petroleum product carriers and barges operating in the Jones Act trade,has been, and will remain heavily regulated by the federal government, the IMOand classification societies such as the American Bureau of Shipping.Furthermore, concerns for the environment and public image have led the majoroil companies to develop and implement a strict due diligence process whenselecting their commercial shipping partners to ensure risk exposure is managedusing pre-defined acceptance criteria. The vetting process has therefore evolvedinto a sophisticated and comprehensive assessment of both the vessel and thevessel operator.

 

While numerous factors are considered and evaluatedprior to a commercial decision, major oil companies through their association,Oil Companies International Marine Forum (“OCIMF”), have developed andimplemented two basic tools: a Ship Inspection Report Program (“SIRE”) and theTanker Management Self Assessment (“TMSA”) Program.

 

The SIRE ship inspection process is based upon athorough vessel inspection performed by accredited OCIMF inspectors, resultingin a report being generated and available for viewing by all OCIMF members. Thereport is an important element of the ship evaluation undertaken by any majoroil company when a commercial need exists.

 

The TMSA Program, a recent addition to the riskassessment tools used by major oil companies, is composed of a set of keyperformance indicators against which a tanker management company must selfassess their compliance and submit the results to the major oil companies fortheir evaluation. The tanker management company is expected to develop acomprehensive plan for full compliance with both the key performance indicatorsand the best practices identified in the TMSA Program. Major oil companies willthen use the submitted results as a baseline when performing management auditsto determine if the tanker management company is in fact operating inaccordance with expectations.

 

Based upon commercial needs, there are three levels ofassessment used by the major oil companies: (1) terminal use, which willclear a vessel to call at one of the major oil company’s terminals; (2) voyagecharter, which will clear the vessel for a single voyage; and (3) termcharter, which will clear the vessel for use for an extended period of time.The depth, complexity and difficulty of each of these levels of assessmentvary.

 

While for the terminal use and voyage charterrelationships a ship inspection and the operator’s TMSA will be sufficient forthe major oil company’s assessment, a term charter relationship might alsorequire a thorough office audit. The major oil company will then review SIREreports and TMSA submissions, as well as the vessel’s status with the U.S.Coast Guard and the American Bureau of Shipping.

 

OSG and OSGM have undergone and successfully completednumerous audits by major international oil companies in the past and we arewell positioned to be a carrier of choice in the Jones Act trade.

 

###### **Classification, Inspection andCertification**

######  

In accordance with standard industry practice, all ofour vessels have been certified as being “in-class” by the American Bureau ofShipping. The American Bureau of Shipping is one of several internationallyrecognized classification societies that inspect vessels at regularly scheduledintervals to ensure compliance with structural standards and certain applicablesafety regulations. Most insurance underwriters require an “in-class”certification by a classification society before they will extend coverage to avessel. The classification society certifies that the pertinent vessel has beenbuilt and maintained in accordance with the rules of the society andcomplies with applicable rules and regulations of the vessel’s country ofregistry and the international conventions of which that country is a member.Inspections are conducted on our vessels by a surveyor of the classificationsociety in three types of surveys of varying frequency and thoroughness: (1) annualsurveys, (2) an intermediate survey every two to three years, and (3) aspecial survey every four to five years. As part of the intermediate survey, avessel may be required to be drydocked or have an underwater survey every 24 to36 months for inspection of its underwater parts and for any necessaryrepair work related to such inspection.

 

Our vessels are also inspected at periodic intervalsby the U.S. Coast Guard to ensure compliance with federal safety and securityregulations. All of our cargo carrying vessels carry Certificates of Inspectionissued by the U.S. Coast Guard.

 

13

----

 

Our vessels and shoreside operations are alsoinspected and audited periodically by our customers, in some cases as aprecondition to chartering our vessels. We maintain all necessary approvals requiredfor our vessels to operate in their normal trade. We believe that the highquality of our vessels, our crews and our shoreside staff are advantages whencompeting against other vessel operators.

 

###### **Insurance and Risk Management**

######  

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

 

Our hull and machinery insurance covers risks of actualor constructive loss from collision, fire, grounding, engine breakdown andother casualties up to an agreed value per vessel. Our war-risks insurancecovers risks of confiscation, seizure, capture, vandalism, sabotage and otherwar-related risks. Our commercial loss-of-hire insurance policy covers us forloss of revenue during extended vessel off-hire periods due to casualtiescovered by our hull and machinery coverage. We believe that this type ofcoverage reduces our exposure to large drops in revenue due to catastrophicevents.

 

Our protection and indemnity insurance coversthird-party liabilities and other related expenses from, among other things,injury or death of crew, passengers and other third parties, claims arisingfrom collisions, damage to cargo, damage to third-party property, past asbestosexposure and pollution arising from oil or other substances. Our currentprotection and indemnity insurance coverage for pollution is $1 billionper incident and is provided by the UK Club and GARD, each of which is a memberof the International Group of P&I Clubs. The protection and indemnitymutual assurance associations that comprise the International Group of P&IClubs insure approximately 90% of the world’s commercial tonnage and haveentered into a pooling agreement to reinsure each association’s liabilities.Each protection and indemnity association has capped its exposure to thispooling agreement at approximately $5.45 billion per non-pollutionincident. As a member of the UK Club and GARD, we are subject to periodicassessments payable to the associations based on our claims record, as well asthe claims record of all other members of the individual associations andmembers of the UK Club and GARD.

 

###### **Regulation**

######  

Our operations are subject to significantinternational, federal, state and local regulation, the principal provisions ofwhich are described below.

 

###### ***Environmental***

######  

*General.*   Governmentenvironmental regulation significantly affects the ownership and operation ofour vessels. Our vessels are subject to international conventions, federal,state and local laws and regulations relating to safety and health andenvironmental protection, including the generation, storage, handling,emission, transportation and discharge of hazardous and non-hazardousmaterials. We have incurred, and will continue to incur, substantial costs tomeet environmental requirements. Although we believe that we are in substantialcompliance with applicable safety and health and environmental laws andregulations, we cannot predict the ultimate cost of complying with theserequirements or the impact of these requirements on the resale value or usefullives of our vessels. The recent trend in environmental legislation is towardmore stringent requirements and we believe this trend will continue. Inaddition, a future serious marine incident occurring in U.S. or internationalwaters that results in significant oil pollution or otherwise causessignificant environmental impact could result in additional legislation orregulation.

 

Various governmental and quasi-governmental agenciesrequire us to obtain permits, licenses and certificates for the operation ofour vessels. While we believe that we have all permits, licenses andcertificates necessary for the conduct of our operations, frequently changingand increasingly stringent requirements, future non-compliance or failure tomaintain necessary permits or approvals could require us to incur substantialcosts or temporarily suspend operation of one or more of our vessels.

 

We maintain operating standards for all of our vesselsthat emphasize operational safety, quality maintenance, continuous training ofour crews, officers and shoreside staff, care for the environment andcompliance with U.S. regulations. Our vessels are subject to both scheduled andunscheduled inspections by a variety of governmental and private entities, eachof which may have unique requirements. These entities include the local portauthorities (U.S. Coast Guard or other port authorities), classification societiesand charterers, particularly terminal operators and oil companies.

 

14

----

 

We manage our exposure to losses from potentialdischarges of pollutants through the use of well maintained, managed andequipped vessels, a comprehensive safety and environmental program, including amaritime compliance program, and our insurance program. Moreover, we believe wewill be able to accommodate reasonably foreseeable environmental regulatorychanges. However, the risks of substantial costs, liabilities and penalties areinherent in marine operations, including potential criminal prosecution andcivil penalties for discharge of pollutants. As a result, there can be noassurance that any new regulations or requirements or any discharge ofpollutants by us will not have a material adverse effect on us.

 

*The OilPollution Act of 1990**.*** The Oil Pollution Act of 1990 (“OPA 90”) established an extensiveregulatory and liability regime for the protection and cleanup of the environmentfrom oil spills. OPA 90 affects all vessels trading in U.S. waters, includingthe exclusive economic zone extending 200 miles seaward. OPA 90 sets forthvarious technical and operating requirements for vessels operating in U.S.waters. In general, all newly-built or converted vessels carrying crude oil andpetroleum-based products in U.S. waters must be built with double hulls.Existing single-hulled, double-sided or double-bottomed vessels must be phasedout of service by 2015 based on their tonnage and age. Our double-hull ATBswere successfully rebuilt to comply with OPA 90 using OSG’s patenteddouble-hulling process. The majority of our current fleet is double-hulled interms of barrel-carrying capacity. Our four non-double hull product carriersare due to be phased out under OPA 90 according to the following schedule:

 
| **Vessel Name**     | ** ** | **OPA 90 Retrofit/Phase-Out  Date** |
|--------------------------|------------|-----------------------------------------------|
| *Overseas  Philadelphia* |       | May 2012                                 |
| *Overseas  Galena Bay*   |       | October 2012                             |
| *Overseas  Puget Sound*  |       | May 2013                                 |
| *Overseas  New Orleans*  |       | June 2013                                |

 

Our bareboat charters for *Overseas New Orleans* and *OverseasPhiladelphia* expire in October 2011 and November 2011,respectively, at which time we plan to return these product carriers to theirowner because they are poor candidates for retrofitting due to their size andsingle-hull configuration. While the remaining two vessels, *Overseas Puget Sound* and *Overseas Galena Bay,* are better candidatesfor retrofitting because they are larger and have double-bottoms, we have notdecided whether to double-hull these vessels. We will base our final decisionon the cost of shipyard work for retrofitting these vessels, market conditions,charter rates, the availability and cost of financing and other customaryfactors governing investment decisions.

 

Under OPA 90, owners or operators of vessels operatingin U.S. waters must file vessel spill response plans with the U.S. Coast Guardand operate in compliance with these plans. These vessel response plans must,among other things:

 

·                  address a “worst case”scenario and identify and ensure, through contract or other approved means, theavailability of necessary private response resources;

·                  describe crew trainingand drills; and

·                  identify a qualifiedindividual with specific authority and responsibility to implement removal actionsin the event of an oil spill.

 

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

 

*EnvironmentalSpill and Release Liability**.*** OPA 90 and various state laws have substantially increased the statutoryliability of owners and operators of vessels for the discharge or substantialthreat of a discharge of petroleum and the resulting damages, both as to thelimits of liability and the scope of damages. OPA 90 imposes joint and several strictliability on responsible parties, including owners, operators and bareboatcharterers, for all containment and clean-up costs and other damages arisingfrom spills attributable to their vessels. A complete defense is available onlywhen the responsible party establishes that it exercised due care and tookprecautions against foreseeable acts or omissions of third parties and when thespill is caused solely by an act of God, act of war (including civil war andinsurrection) or a third party other than an employee or agent or party in acontractual relationship with the responsible party. These limited defenses maybe lost if the responsible party fails to report the incident or reasonablycooperate with the appropriate authorities or refuses to comply with an orderconcerning clean-up activities. Even if the spill is caused solely by a thirdparty, the owner or operator must pay removal costs and damage claims and thenseek reimbursement from the third party or the trust fund established under OPA90. Finally, in certain circumstances involving oil spills from vessels, OPA 90and other environmental laws may impose criminal liability on personnel and thecorporate entity.

 

15

----

 

OPA 90 previously limited the liability of eachresponsible party for a product carrier or barge that is over 3,000 gross tonsto the greater of $1,200 per gross ton or $10 million per discharge.However, amendments to OPA 90 signed into law on July 11, 2006 increasedthese limits on the liability of responsible parties to the greater of $1,900per gross ton or $16 million per double-hull product carrier or barge thatis over 3,000 gross tons. This limit does not apply where the spill is causedby gross negligence or willful misconduct of, or a violation of an applicablefederal safety, construction or operating regulation by, a responsible party orits agent or employee or a person acting pursuant to a contractual relationshipwith the responsible party. The right to limitation will also be lost if theresponsible party fails to report an oil spill, fails to cooperate withgovernmental authorities in spill removal efforts or fails to comply with agovernmental spill removal order.

 

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

 

·                  natural resourcedamages and related assessment costs;

·                  real and personal property damages;

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

·                  net cost of public services necessitated by aspill response, such as protection from fire, safety or health hazards;

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

·                  loss of subsistence use of natural resources.

 

OPA 90 imposes financial responsibility requirementsfor petroleum product carriers and barges operating in U.S. waters and requiresowners and operators of such vessels to establish and maintain with the U.S.Coast Guard evidence of their financial responsibility sufficient to meet theirpotential liabilities, as discussed below. Under the regulations, we maysatisfy these requirements through evidence of insurance, a surety bond, aguarantee, letter of credit, qualification as a self-insurer or other evidenceof financial responsibility. We have received certificates of financialresponsibility from the U.S. Coast Guard for all of our vessels subject to thisrequirement.

 

OPA 90 expressly provides that individual states areentitled to enforce their own pollution liability laws, even if imposinggreater liability than OPA 90. There is no uniform liability scheme among thestates. Some states have schemes similar to OPA 90 for limiting liability tovarious amounts, while some rely on common law fault-based remedies and othersimpose strict and/or unlimited liability on an owner or operator. Virtually allcoastal states have enacted their own pollution prevention, liability andresponse laws, whether statutory or through court decisions, with many providingfor some form of unlimited liability. We believe that the liability provisionsof OPA 90 and similar state laws have greatly expanded potential liability inthe event of an oil spill, even when the vessel owner or operator is not atfault. Some states have also established their own requirements for financialresponsibility.

 

We are also subject to potential liability arisingunder the U.S. Comprehensive Environmental Response, Compensation, andLiability Act (“CERCLA”), which applies to the discharge of hazardoussubstances (other than petroleum), whether on land or at sea. Specifically,CERCLA provides for liability of owners and operators of vessels for cleanupand removal of hazardous substances and provides for additional penalties inconnection with environmental damage. Liability under CERCLA for releases ofhazardous substances from vessels is limited to the greater of $300 per grosston or $5 million per discharge unless attributable to willful misconductor neglect, a violation of applicable standards or rules or upon failureto provide reasonable cooperation and assistance, in which case liability isunlimited. CERCLA liability for releases from facilities other than vessels isgenerally unlimited.

 

OPA 90 also requires owners and operators of vesselsto establish and maintain with the U.S. Coast Guard evidence of financialresponsibility sufficient to meet the limit of their potential strict liabilityunder the statute. The U.S. Coast Guard has enacted regulations requiringevidence of financial responsibility consistent with the previous limits ofliability described above for OPA 90 and CERCLA, which combined limit forvessels was increased from $1,500 per gross ton to $2,200 per gross toneffective October 9, 2006, when the increased liability limits under OPA90 went into effect. Under the regulations, evidence of financialresponsibility may be demonstrated by insurance, surety bond, self-insurance,guaranty, or an alternative method subject to approval by the Director of theU.S. Coast Guard.  In addition, OPA 90and CERCLA each preserve the right to recover damages under other existinglaws, including maritime tort law.

 

*WaterDischarges.*  The federal Water Pollution Control Act, alsoreferred to as the Clean Water Act, prohibits the discharge of pollutants,including oil or hazardous substances, in U.S. navigable waters without apermit and imposes strict liability in the form of penalties for unauthorizeddischarges. The Clean Water Act also imposes substantial liability for thecosts of removal, remediation and damages relating to such discharges andcomplements the remedies available under the more recent OPA 90 and CERCLA,discussed above. The Environmental Protection Agency (“EPA”) historicallyexempted the discharge of ballast water and other substances incidental to thenormal operation of vessels in U.S. ports from Clean Water Act permittingrequirements. However, on March 30, 2005, a U.S. District Court ruled thatthe EPA exceeded its authority in creating an exemption for ballast water. On September 18,2006, the court issued an order invalidating the 

 

16

----

 

exemption in the EPA’s regulations for all dischargesincidental to the normal operation of a vessel as of September 30, 2008and directing the EPA to develop a system for regulating all vessel dischargesby that date. The EPA has appealed this decision. However, if the exemption isultimately repealed, we would be subject to Clean Water Act permit requirementsthat could include ballast water treatment obligations, which would increasethe cost of our operations. For example, this could require the installation ofcostly equipment on our vessels to treat ballast water before it is discharged,or the implementation of other port facility disposal arrangements orprocedures at potentially substantial cost.

 

*SolidWaste.*  Our operations occasionally generate andrequire the transportation, treatment and disposal of both hazardous andnon-hazardous solid wastes that are subject to the requirements of the federalResource Conservation and Recovery Act (“RCRA”) and comparable state and localrequirements. In August 1998, the EPA added four petroleum refining wastesto the list of RCRA hazardous wastes. In addition, in the course of our vesseloperations, we engage contractors to remove and dispose of waste material,including tank residue. In the event that such waste is found to be “hazardous”under either RCRA or the Clean Water Act and is disposed of in violation ofapplicable law, we could be found jointly and severally liable for the cleanupcosts and any resulting damages. Finally, the EPA does not currently classify “usedoil” as “hazardous waste,” provided certain recycling standards are met.However, some states in which we pick up or deliver cargo have classified “usedoil” as “hazardous” under state laws patterned after RCRA. The cost of managingwastes generated by vessel operations has increased in recent years understricter state and federal standards. Additionally, from time to time wearrange for the disposal of hazardous waste or hazardous substances at offsitedisposal facilities. If such materials are improperly disposed of by thirdparties, we might still be liable for clean up costs under CERCLA or theequivalent state laws.

 

*AirEmissions.*  The federal Clean Air Act of 1970 (“CAA”) asamended, requires the EPA to promulgate standards applicable to emissions ofvolatile organic compounds and other air contaminants. Our vessels are subjectto vapor control and recovery requirements for certain cargoes when loading,unloading, ballasting, cleaning and conducting other operations in regulatedport areas. Each of our product carriers and barges operating in the transportof clean oil has been outfitted with a vapor recovery system that satisfiesthese requirements. In addition, in December 1999 the EPA issued a final rule regardingemissions standards for marine diesel engines. The final rule appliesemissions standards to new engines beginning with the 2004 model year. In thepreamble to the final rule, the EPA noted that it may revisit the applicationof emissions standards to rebuilt or remanufactured engines if the industrydoes not take steps to introduce new pollution control technologies. Finally,the EPA recently entered into a settlement that will expand this rulemaking toinclude certain large diesel engines not previously addressed in the finalrule. Adoption of such standards could require modifications to some existingmarine diesel engines and may require us to incur material capitalexpenditures.

 

Lightering activities in Delaware are subject to TitleV of the CAA. We are the only marine operator with a Title V permit to engagein lightering operations in Delaware. The State of Delaware is innon-compliance with EPA requirements for volatile organic compounds (“VOC”) andwe are the State of Delaware’s largest single source of VOCs. The DelawareDepartment of Natural Resources and Environment Control (“DNREC”) is currentlyengaged in rulemaking to address emissions of VOCs from lightering operationsand OSGM is working closely with DNREC to craft regulations that reduceemissions. In cooperation with DNREC, we have engaged in a pilot projectinvolving vapor balancing between our product carrier *Overseas Integrity* and a “ship to belightered.” In addition, we continue to evaluate other vapor reductiontechniques and OSG has incorporated vapor reduction technologies in the designof three new ATBs that we have the option to purchase.

 

The CAA also requires states to draft State ImplementationPlans (“SIP”) designed to attain national health-based air quality standards inprimarily major metropolitan and/or industrial areas. Where states fail topresent approvable SIPs or SIP revisions by certain statutory deadlines, thefederal government is required to draft a Federal Implementation Plan. SeveralSIPs regulate emissions resulting from barge loading and degassing operationsby requiring the installation of vapor control equipment. As stated above, ourvessels are already equipped with vapor control systems that satisfy theserequirements. Although a risk exists that new regulations could requiresignificant capital expenditures and otherwise increase our costs, we believe,based upon the regulations that have been proposed to date, that no materialcapital expenditures beyond those currently contemplated and no materialincrease in costs are likely to be required as a result of the SIPs program.

 

In addition, in September 1997 the IMO adoptedAnnex VI to the International Convention for the Prevention of Pollution fromShips to address air pollution from ships. Annex VI was ratified in May 2004and became effective in May 2005. Annex VI sets limits on sulfur oxide andnitrogen oxide emissions from vessel exhausts and prohibits deliberateemissions of ozone depleting substances, such as chlorofluorocarbons. Webelieve that all of our vessels are currently compliant in all materialrespects with these requirements. Annex VI also includes a global cap on thesulphur content of fuel oil and allows for special areas to be established withmore stringent controls on sulphur emissions.

 

17

----

 

###### ***CoastwiseLaws***

 

The majority of our operations are conducted in theU.S. domestic trade and governed by the coastwise laws of the United States,which we refer to as the Jones Act. The Jones Act restricts marinetransportation between points in the United States to vessels built in anddocumented under the laws of the United States (“U.S. flag”) and owned and mannedby U.S. citizens. Generally, an entity is deemed a U.S. citizen for thesepurposes so long as:

 

·                  it is organized underthe laws of the United States or of a state;

·                  its chief executiveofficer, by whatever title, its chairman of its board of directors and allpersons authorized to act in the absence or disability of such persons are U.S.citizens;

·                  no more than aminority of the number of its directors (or equivalent persons) necessary toconstitute a quorum are non-U.S. citizens;

·                  at least 75% of thestock or equity interest and voting power in the entity is beneficially ownedby U.S. citizens free of any trust, fiduciary arrangement or other agreement,arrangement or understanding whereby voting power may be exercised directly orindirectly by non-U.S. citizens; and

·                  in the case of alimited partnership, the general partner meets U.S. citizenship requirementsfor U.S. coastwise trade.

 

Because we could lose our privilege of operating ourvessels in the Jones Act trade if non-U.S. citizens were to own or control inexcess of 25% of our outstanding partnership interests, our partnershipagreement restricts foreign ownership and control of our partnership intereststo not more than a fixed percentage (currently 15%), which is ten percentagepoints less than the percentage that would prevent us from being a U.S. citizenfor purposes of the Jones Act.

 

There have been repeated efforts to repeal orsignificantly change the Jones Act. In addition, the U.S. government recentlygranted limited short-term waivers to the Jones Act following HurricanesKatrina and Rita, which allowed foreign vessels to operate in the Jones Acttrade. Although we believe it is unlikely that the Jones Act will besubstantially modified or repealed, there can be no assurance that Congresswill not substantially modify or repeal such laws.

 

***Other***

 

Our vessels are subjectto the jurisdiction of the U.S. Coast Guard, the National Transportation SafetyBoard, the U.S. Customs Service and the U.S. Maritime Administration, as wellas subject to rules of private industry organizations such as the AmericanBureau of Shipping. These agencies and organizations establish safety standardsand are authorized to investigate vessels and accidents and to recommendimproved maritime safety standards. Moreover, to ensure compliance withapplicable safety regulations, the U.S. Coast Guard is authorized to inspectvessels at will.

 

###### ***Workplace Injury Liability***

######  

The Supreme Court has ruled that application of stateworkers’ compensation statutes to maritime workers is unconstitutional.Injuries to maritime workers are therefore covered by the Jones Act, a separatestatute that regulates the U.S. coastwise trade. The Jones Act permits seamento sue their employers for job-related injuries. In addition, seamen may suefor work-related injuries under the maritime law doctrine of unseaworthiness.Because we are not generally protected by the limits imposed by state workers’compensation statutes, we potentially have greater exposure for claims made bythese employees as compared to employers whose employees are covered by stateworkers’ compensation laws.

 

###### ***Occupational Safety and HealthRegulations***

######  

Our vessel operations are subject to occupationalsafety and health regulations issued by the U.S. Coast Guard. These regulationscurrently require us to perform monitoring, medical testing and recordkeepingwith respect to personnel engaged in the handling of the various cargoestransported by our vessels. We believe we are currently in compliance in allmaterial respects with such occupational safety and health requirements.

 

###### ***Security***

######  

In 2002, Congress passed the Maritime TransportationSecurity Act of 2002 (“MTS Act”) which, together with the IMO’s recent securityproposals, requires specific security plans for our vessels and more rigorouscrew identification requirements. We have implemented vessel security plans andprocedures for each of our vessels pursuant to rules implementing the MTSAct issued by the U.S. Coast Guard. The U.S. Coast Guard has performed securityaudits on our entire fleet and each vessel was found to be in compliance withour security plans. The U.S. Coast Guard issued security certificates for eachof our vessels, including our tugboats, even though the tugboats are notrequired to be certified under current regulations.

 

18

----

######  

###### ***Vessel Condition***

######  

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

 

##### **ITEM 1A. RISK FACTORS**

#####  

The following importantrisk factors could cause actual results to differ materially from thosecontained in this forward-looking statements made in this report or presentedelsewhere by management from time to time. If any of the circumstances or events described below actually arise oroccur, our business, financial condition or operating results could bematerially adversely affected.  In thatcase, we might not be able to pay distributions on our common units and thetrading price of our common units could decline.

 

###### **Risks Inherent in Our Business**

######  

***We must make substantial capital expenditures to maintain the operatingcapacity of our fleet, which will reduce our cash available for distribution.In addition, our general partner is required to deduct estimated maintenancecapital expenditures from operating surplus each quarter, which may result inless cash available to unitholders than if actual maintenance capitalexpenditures were deducted.***

 

We must make substantial capital expenditures tomaintain the operating capacity of our fleet, which we estimate will averageapproximately $36 to $37 million per year over the three years ended December 31,2010 based on the average remaining life of our existing vessels assuming thatthe optional vessels are acquired or deliver in accordance with the currentschedule. These capital expenditures include expenditures for drydocking ourvessels, modifying our vessels and acquiring new vessels to replace existingvessels as they reach the end of their useful lives. These expenditures couldincrease as a result of changes in:

 

·                  the cost of shipyardlabor and materials;

·                  customer requirementsto modify the vessels;

·                  increases in the sizeof our fleet or the cost of replacement vessels; and

·                  governmentalregulations and maritime self-regulatory organization standards relating tosafety, security or the environment.

 

These capital expenditures will reduce the amount ofcash available for distribution to our unit holders. In addition, our actualmaintenance capital expenditures will vary significantly from quarter toquarter based on, among other things, the number of vessels drydocked duringthat quarter.

 

Our partnership agreement requires our general partnerto deduct estimated, rather than actual, maintenance capital expenditures fromoperating surplus each quarter to reduce fluctuations in operating surplus. Theamount of estimated maintenance capital expenditures deducted from operatingsurplus is subject to review and change by the board of directors of ourgeneral partner at least once a year, provided that any change must be approvedby our conflicts committee. In years when estimated maintenance capitalexpenditures are higher than actual maintenance capital expenditures, theamount of cash available for distribution to unit holders will be lower than ifactual maintenance capital expenditures were deducted from operating surplus.If our general partner underestimates the appropriate level of estimatedmaintenance capital expenditures, we may have less cash available fordistribution in future periods when actual capital expenditures exceed ourprevious estimates.

 

19

----

 

***Capital expenditures and othercosts necessary to maintain our vessels tend to increase with the age of thevessel.***

 

Capital expenditures andother costs necessary to maintain our vessels tend to increase and becomeharder to estimate as a vessel becomes older. Accordingly, it is likely thatthe operating costs of our vessels will increase as they age. In the future,market conditions may not justify these expenditures or enable us to operateour older vessels profitably during the remainder of their economic lives. Inaddition, changes in governmental regulations, safety or other equipmentstandards, as well as compliance with standards imposed by maritime self-regulatoryorganizations and customer requirements or competition, may require us to makeadditional capital expenditures on these older vessels.

 

***The capacity of our fleet will be reduced when four of our vessels arephased-out due to OPA 90. Delays or the failure in the delivery of newbuilds wehave agreed to bareboat charter will result in the failure to replace thiscapacity and the reduction of our operating results. The cost of bringingcertain of our vessels into compliance with OPA 90 will be significant and maycause us to reduce the amount of our cash distributions or prevent us fromincreasing the amount of our cash distributions.***

 

OPA 90 provides for the scheduled phase-out of allsingle-hull product carriers and barges carrying oil in U.S. waters. This lawwill force the retirement of these vessels unless they are retrofitted with adouble hull. Our four single-hull product carriers are due to be phased-outaccording to the following schedule:

 
| **Vessel Name**     | ** ** | **OPA 90  Retrofit/Phase-out Date** |
|--------------------------|------------|------------------------------------------|
| *Overseas  Philadelphia* |       | May 2012                            |
| *Overseas  Galena Bay*   |       | October 2012                        |
| *Overseas  Puget Sound*  |       | May 2013                            |
| *Overseas  New Orleans*  |       | June 2013                           |

 

The bareboat charters for *Overseas Philadelphia* and *OverseasNew Orleans* expire in October 2011 and November 2011,respectively, at which time we plan to return these product carriers to theirowner as they are poor candidates for retrofitting due to their size. *Overseas Galena Bay* and *Overseas Puget Sound* are better candidatesfor retrofitting because they are larger, but we have not yet decided whetherwe will double-hull these vessels. We will base our final decision on the costof shipyard work for retrofitting these vessels, market conditions, charterrates, the availability and cost of financing and other customary factorsgoverning investment decisions. If it is not economical for us to retrofitthese vessels, it will be necessary for us to take them out of servicetransporting petroleum-based products.

 

Although we have agreed to bareboat charter newbuildproduct carriers from subsidiaries of Aker American Shipping, Inc. (“Aker”),which could replace the four product carriers that may be retired due to OPA90, there is no assurance that Aker will complete the construction of thesevessels. In the event that Aker does not deliver any or all of these vessels,the capacity of our fleet will be reduced, which will adversely affect ouroperating results and the amount of cash available for distribution.

 

In order to bring our only single-hulled ATB (*OSG 243*) into compliance with OPA 90,it must be retrofitted with a double hull. We estimate that the cost will beapproximately $30 million, of which approximately $4 million remainsto be spent. If we decide to retrofit *OverseasGalena Bay* and *Overseas PugetSound*, the board of directors of our general partner, with approvalby the conflicts committee, may elect to increase our estimated maintenancecapital expenditures, which would reduce our operating surplus and our cashavailable for distribution.

 

***We intend to finance the purchase of the newbuild ATBs for which wehave options to purchase from OSG with a combination of debt and equitysecurities. Depending on how we finance the acquisition of these ATBs, ourability to make cash distributions may be diminished or our unitholders couldsuffer dilution of their holdings. In addition, if we expand the size of ourfleet, we generally will be required to make significant installment paymentsfor newbuild vessels prior to their delivery and generation of revenue.***

 

We intend to make substantial capital expenditures toincrease the size of our fleet. We have options to purchase from OSG up to sixnewbuild ATBs to be constructed by Bender Shipbuilding & Repair Co., Inc.(“Bender”). The total delivered cost of a newbuild 347,000 barrel/12,000horsepower ATB is approximately $100 million and the total delivered costof a newbuild 290,000 barrel/12,000 horsepower ATB is approximately $95million. The actual purchase price to be paid upon the exercise of theseoptions will be subject to negotiation with OSG and the approval of ourconflicts committee.

 

20

----

 

OSG is currently incurring all costs for theconstruction and delivery of the six newbuild ATBs. Upon exercise of any of oursix options, we could finance the purchase in whole or in part by issuingadditional common units, which would dilute your ownership interest in us. Wecould also use cash from operations, incur borrowings or issue debt securitiesto fund these capital expenditures. Use of cash from operations will reducecash available for distributions. Our ability to obtain bank financing or issuedebt securities may be limited by our financial condition at the time of anysuch financing and adverse market conditions resulting from, among otherthings, general economic conditions, contingencies and uncertainties that arebeyond our control. Even if we are successful in obtaining necessary funds, theterms of such financing could limit our ability to pay cash distributions. Inaddition, incurring additional debt may significantly increase our interestexpense, which could have a material adverse effect on our ability to make cashdistributions.

 

If we purchase additional newbuilds, it is likely thatwe will be required to make installment payments prior to their delivery. Wetypically must pay approximately 5% of the purchase price of a vessel upon signingthe purchase contract, even though delivery of the completed vessel will notoccur until much later (approximately two and a half years for current orders).If we finance these acquisition costs by issuing debt or equity securities, wewill increase the aggregate amount of interest (in the case of debt) or cashrequired to pay the minimum quarterly distributions (in the case of units) wemust make prior to generating cash from the newbuilds.

 

Our failure to obtain the funds for necessary futurecapital expenditures would limit our ability to continue to operate some of ourvessels or construct or purchase new vessels.

 

***Our ability to acquire additionalnewbuild product carriers may be limited.***

 

While we have a commercial relationship with Aker andits affiliate, Aker Philadelphia Shipyard, Inc. (“APSI”) through ourbareboat charter of newbuild product carriers from Aker, no assurance can begiven that we or OSG will continue such relationship with Aker or APSI. If therelationship with Aker ends, our ability to acquire additional Jones Actcompliant newbuild product carriers (other than the newbuild product carriersthat have been agreed to be transferred to us and those that we have the optionto acquire) on commercially attractive terms may be adversely affected becausethere is a limited number of U.S. shipyards that are capable of constructingproduct carriers. Such a result could have an adverse effect on our ability togrow our business.

 

***OSG’sability to obtain business from the Military Sealift Command (“MSC”) or otherU.S. government agencies may be adversely affected by a determination by theMSC that OSG is not presently responsible for a single contract.***

 

OSG Product Tankers, LLC(“Product Tankers”), our wholly owned indirect subsidiary, participated in aRequest for Proposals issued by the MSC, an agency of the United StatesDepartment of the Navy, to time charter to the MSC two Jones Act compliantproduct carriers.  On July 6, 2007,the MSC advised Product Tankers that the MSC could not find Product Tankerspresently “responsible” under the Federal Acquisition Regulation and,therefore, ineligible to time charter the vessels to the MSC.  The MSC based its decision on the December 2006guilty plea by OSG to violations related to the handling of bilge water andoily mixtures from the engine rooms on certain of its international flagvessels.  The MSC reached this decisionnotwithstanding an earlier decision by the United States MaritimeAdministration of the Department of Transportation (“Mar Ad”) on June 25,2007 not to suspend or debar OSG from business with the U.S. government.  The federal agencies, including the UnitedStates Department of Navy, had agreed that Mar Ad would serve as the leadagency in any administrative action regarding discretionary suspension ordebarment of OSG from federal contracts under the Federal AcquisitionRegulation.  On July 25, 2007,Product Tankers filed a protest of the MSC’s decision in the United StatesCourt of Federal Claims, asserting that the MSC decision was arbitrary,capricious, and unsupported by the administrative record.

 

No assurance can be giventhat the MSC decision will be overturned by the United States Court of FederalClaims.  Although the MSC decisionspecifically addresses only the single contract, if the decision is notoverturned, it may have an adverse effect on our ability to obtain businessfrom the U.S. government because of our affiliation with OSG.  For 2007, neither we nor OSG did any businesswith the MSC and, accordingly, did not generate any shipping revenues from theMSC.  Historically, OSG has not sought togenerate significant revenues from conducting business with the MSC or otheragencies and departments within the U.S. government, nor does OSG intend to inthe future.  The only business wecurrently conduct with the U.S. government is the participation by two of ourvessels in the Maritime Security Program (“MSP”), which is intended to supportthe operation of up to 60 U.S. flag vessels in the foreign commerce of theUnited States to make available a fleet of privately owned vessels to theDepartment of Defense during times of war or national emergency.  Payments are made under the MSP to vesseloperators, including OSG, to help offset the high cost of employing a U.S.crew.  Mar Ad, the agency which decidednot to suspend or debar OSG, administers the MSP.  To date, the MSC decision has not had anadverse effect on OSG’s ability to obtain business from commercial customers.

 

21

----

 

***AmericanShipping Corporation (“Aker”) has informed OSG that as a result of OSG’s orderof three articulated tug barges (“ATBs”) from Bender Shipbuilding &Repair Co., Inc. (“Bender”), Aker is exercising a right it claims to haveunder its agreement with OSG to impose a five year extension of the term ofeach of the bareboat charters for the ten Jones Act product carriers thatsubsidiaries of OSG are chartering from subsidiaries of Aker.***

 

Aker and OSG are partiesto an agreement containing two provisions.  In one of the provisions, if during the periodending in September 2015, OSG or any of its affiliates purchases, chartersor contracts for a U.S. flag product carrier or ocean-going tank barge from ashipyard other than Aker Philadelphia Shipyard, Inc. (“APSI”), then, atAker’s option, the charter terms of all the bareboat charters from subsidiariesof Aker may be extended for five additional years at the prevailing rate fromthe date of contract signing with the supplier of the relevant product carrieror tank barge.  In the second provisionwhich OSG maintains is separate and independent, if APSI contracts to build anew U.S. flag product carrier or ocean-going tank barge for any party otherthan OSG or its affiliates, then, at OSG’s option, the initial term of all thebareboat charters from subsidiaries of Aker may be reduced to three years fromthe effective date of such bareboat charters and all option periods may bereduced to the lesser of one year or the remaining option period at the time,and all later option periods may be reduced to twelve months exercisable with12 months’ prior notice.

 

In February 2007,Aker and OSG entered into an agreement (the “Amendment Agreement”) in whichthey, among other things, agreed to use their best efforts to negotiate in goodfaith for six product carriers and agree upon the documentation of theamendment of, among other things, the foregoing agreement to provide that theprovisions summarized above do not apply to ocean-going tank barges, such asATBs, with Aker being given an opportunity to participate in the competitivebidding in connection with any such order placed by OSG for an ocean-going tankbarge.  After the Amendment Agreement wassigned, OSG informed APSI that it desired to contract for three ocean-goingtank barges and offered APSI the opportunity to participate in a competitivebidding process for the tank barges. APSI declined the opportunity to bid, following which OSG ordered threeATBs from Bender.  Subsequently, theAmendment Agreement expired on August 31, 2007 without Aker and OSGotherwise documenting their agreement on the matters provided in the AmendmentAgreement.

 

On October 25, 2007,Aker informed OSG that Aker was exercising its alleged right to extend thebareboat charters for an additional five year period as a result of OSG’s orderof the three ATBs from Bender.  Aker alsoclaims that OSG has lost its rights in the separate and independent provisionto reduce the bareboat charter terms of the vessels to three years if APSIcontracts to build product carriers or ocean-going tank barges for thirdparties.

 

OSG disputes Aker’s claimbecause, among other reasons, OSG believes that Aker waived, contracted away,and is otherwise estopped from asserting, its right under its agreement withrespect to the order for the tank barges and further that Aker violated itsagreement with OSG to use its best efforts to negotiate in good faith and agreeupon the documentation of the clear agreement concerning ATBs contained in theAmendment Agreement.

 

On January 11, 2008,Aker sent OSG a notice demanding arbitration of Aker’s claims against OSG.  OSG denies Aker’s claims in thearbitration.  The parties to thearbitration are now in the process of scheduling the discovery and other eventsin the arbitration leading to a hearing on the merits.  A five-year extension of the initial term ofthe bareboat charters would lengthen the period OSG is required to charterthese vessels.  If OSG would not haveexercised its option to charter each vessel for the five year extension period,this mandatory extension could have an adverse effect on OSG, thequantification of such adverse effect being dependent upon market conditionsduring such five year period.  Noassurance can be given that OSG’s positions with respect to Aker’s claims willbe upheld in arbitration.

 

***Our debt levels may limit ourflexibility to obtain additional financing and to pursue other businessopportunities.***

 

Our level of debt could have important consequencesfor us, including the following:

 

·                  our ability to obtainadditional financing, if necessary, for capital expenditures, acquisitions orother purposes may be impaired or may not be available on favorable terms;

·                  we will need a substantialportion of our cash flow to make principal and interest payments on our debt,thereby reducing the funds that would otherwise be available for cashdistributions; and

·                  our debt level may limitour flexibility in responding to changing business and economic conditions.

 

Our ability to service our debt will depend upon,among other things, our future financial and operating performance, which will,in turn, be affected by prevailing economic conditions and financial, business,regulatory and other factors, some of which are beyond our control. If ouroperating results are not sufficient to service our current or futureindebtedness, we will be forced to take actions such as reducing distributions,reducing or delaying our acquisitions, investments or capital expenditures,selling assets, restructuring or refinancing our debt or seeking additionalequity capital or bankruptcy protection. We may not be able to effect any ofthese remedies on satisfactory terms, or at all.

 

22

----

 

***Our secured term loans and oursenior secured revolving credit facility will contain restrictive covenants,which may limit our business and financing activities.***

 

The covenants in our secured term loans and our seniorsecured revolving credit facility and any future credit or loan agreement couldadversely affect our ability to finance future operations or capital needs orto engage, expand or pursue our business activities. For example, our seniorsecured revolving credit facility requires the consent of our lenders or limitsour ability to, among other things:

 

·                  incur or guaranteeindebtedness;

·                  charge, pledge or encumberour vessels;

·                  change the flag, class,management or ownership of our vessels;

·                  change the commercial andtechnical management of our vessels;

·                  sell, lease, transfer orchange the beneficial ownership or control of our vessels; and

·                  subordinate ourobligations thereunder to any general and administrative costs relating to thevessels.

 

Our ability to comply with the covenants in oursecured term loans and our senior secured revolving credit facility may beaffected by events beyond our control including economic, financial andindustry conditions. If economic conditions deteriorate, our ability to complywith these covenants may be impaired. If we breach any of the covenants, all ora significant portion of our obligations may become immediately due and payableand our lenders’ commitment to make further loans to us may terminate. We maynot have or be able to obtain sufficient funds to make these acceleratedpayments. For more information regarding our financing arrangements, pleaseread “Management’s Discussion and Analysis of Financial Condition and Resultsof Operations—Liquidity and Sources of Capital.”

 

***Decreases in U.S. refiningactivity, particularly in the Gulf Coast region, could adversely affect ourability to grow our fleet, revenues and profitability.***

 

The demand for our services is heavily influenced bythe level of refinery capacity in the United States, particularly in the GulfCoast region. Any decline in refining capacity on the Gulf Coast, even on atemporary basis, may significantly reduce the demand for waterborne movementsof refined petroleum products. For example, following Hurricanes Katrina andRita in 2005, movements of refined petroleum products from the Gulf Coast weresignificantly curtailed in 2005 and 2006, with repairs to hurricane-damagedGulf Coast refineries being completed in late 2006. While the EnergyInformation Administration of the U.S. Department of Energy (“EIA”) hasestimated that incremental capacity expansions will increase the capacity ofGulf Coast refineries by 1.6 million barrels per day by 2016, it ispossible that some or all of the proposed refinery expansions may be delayed ornot completed. While we expect that these refinery expansions will increasedemand for waterborne transportation of refined petroleum products and weintend to acquire additional product carriers and barges to meet this expectedincrease in demand if refining capacity is not expanded or decreases fromcurrent levels, demand for our vessels could decrease, which could affect ourability to grow our fleet, revenues and profitability.

 

***Delays in deliveries of newbuildproduct carriers or in the double-hulling of our remaining single-hulled ATBwill affect our ability to grow and could harm our operating results.***

 

We are scheduled to take delivery between 2008 andearly 2010 of five newbuild product carriers that we have agreed to bareboatcharter from Aker. We also have options to purchase from OSG up to six newbuildATBs, which are scheduled for delivery between late 2008 and late 2010, and toacquire from OSG the right to bareboat charter from Aker up to two newbuildproduct carriers and up to two newbuild shuttle tankers, which are scheduledfor delivery between late 2009 and early 2011. If the delivery of these vesselsis delayed or canceled, the expected revenues from these vessels will bedelayed or eliminated.

 

Delivery of any of our vessels could be delayed orcanceled because of:

 

·                  in the case of the sixATBs that we have options to purchase, the failure by OSG to make constructionpayments on a timely basis or otherwise comply with its construction contractswith Bender;

·                  quality control orengineering problems;

·                  changes in governmentalregulations or maritime self-regulatory organization standards;

·                  work stoppages orother labor disturbances at the shipyard;

·                  bankruptcy or otherfinancial problems of the shipbuilder;

 

23

----

 

·                  weather interference orcatastrophic event, such as a major hurricane or fire;

·                  the shipbuilder failing todeliver the vessels in accordance with our vessel specifications;

·                  our requests for changesto the original vessel specifications;

·                  shortages of or delays inthe receipt of necessary construction materials, such as steel;

·                  our inability to financethe acquisition of any vessels; or

·                  our inability to obtainrequisite permits or approvals.

 

***Drydocking of our vessels mayrequire substantial expenditures and may result in the vessels being off-hirefor significant periods of time, which could affect our ability to make cashdistributions.***

 

Each of our vessels undergoes scheduled and, onoccasion, unscheduled shipyard maintenance. The U.S. Coast Guard requires ourvessels to be drydocked for inspection and maintenance twice every five years.In addition, vessels may have to be drydocked in the event of accidents orother unforeseen damage or for capital improvements. Because costs fordrydocking our fleet are difficult to estimate and may be higher than wecurrently anticipate, we may not have sufficient available cash to pay theminimum quarterly distribution in full. In addition, vessels in drydock willnot generate any income, which will reduce our revenue and cash available tomake distributions on our units.

 

In addition, the time when a vessel is out of servicefor maintenance is determined by a number of factors including regulatorydeadlines, market conditions, shipyard availability and customer requirements.Because U.S. shipyards have limited availability for drydocking a vessel, theymay not have the capacity to perform drydock maintenance on our vessels at thetimes required, particularly in the event of an unscheduled drydock due toaccident. This may require us to have the work performed at an overseasshipyard and result in the vessel being off-hire for a longer period of time.

 

***We have high levels of fixedcosts that will be incurred regardless of our level of business activity.***

 

Our business has high fixed costs that continue evenif our vessels are not in service. In addition, low utilization due to reduceddemand or other causes or a significant decrease in charter rates could have asignificant negative effect on our operating results and financial condition.

 

***We may not be able to renew timecharters when they expire or obtain new time charters.***

 

Of our product carriers and barges currently employedunder time charters or other term contracts, the time firm employment on four mayexpire within the next 12 months. There can be no assurance that any of ourexisting time charters will be renewed or renewed at favorable rates. Inaddition, if the time charters for five of our product carriers that we haveagreed to bareboat charter from subsidiaries of Aker are not renewed or are notrenewed at favorable rates and we cannot obtain new time charters at favorablerates or the market for such product carriers is otherwise unfavorable, we maydecide not to extend the bareboat charters for such product carriers. In thatevent, we would return any such vessel and may be required to repay the balanceof the DPO liability upon delivery of such vessel. Please read “Business—BareboatCharters from Aker of Our Newbuilds—Aker’s Debt and Deferred Principal Obligation.”

 

***An increase in the supply ofJones Act vessels without an increase in demand for such vessels could causecharter rates to decline, which could have a material adverse effect on ourrevenues and profitability.***

 

The supply of vessels generally increases withdeliveries of new vessels and decreases with the scrapping of older vessels. Asof December 31, 2007, the Jones Act product carrier and barge order bookconsisted of firm orders for 35 vessels over 16,000 dwt, or 40% of the existingcoastwise fleet, with options granted for an additional four product carriers.In the year 2007 to date, firm orders for an additional five product carriersand six ATBs above 16,000 dwt have been placed. No assurance can be giventhat the order book will not increase further in proportion to the existingfleet. If the number of newbuild vessels delivered exceeds the number ofvessels being scrapped, capacity will increase. In addition, any retrofittingof existing product carriers and barges may result in additional capacity thatthe market will not be able to absorb at the anticipated demand levels. Ifsupply increases and demand does not, the charter rates for our vessels coulddecline significantly.

 

24

----

 

***We may be unable to make orrealize expected benefits from acquisitions and implementing our growthstrategy through acquisitions may harm our business, financial condition andoperating results.***

 

Our growth strategy is based upon the expansion of ourfleet. Our ability to grow our fleet depends upon a number of factors, many ofwhich we cannot control. These factors include our ability to:

 

·                  reach agreement with OSGon the fair value of the ATBs that we have the right to purchase or the productcarriers and shuttle tankers that we have the right to bareboat charter;

·                  identify vessels orbusinesses for acquisition from third parties;

·                  consummate any suchacquisitions;

·                  obtain required financingfor acquisitions; and

·                  integrate any acquiredvessels or businesses successfully with our existing operations.

 

Any acquisition of a vessel or business may not beprofitable and may not generate returns sufficient to justify our investment.In addition, our acquisition growth strategy exposes us to risks that may harmour business, financial condition and operating results, including the risksthat we may:

 

·                  fail to realizeanticipated benefits (such as new customer relationships) or increase cashflow;

·                  decrease our liquidity byusing a significant portion of our available cash or borrowing capacity tofinance acquisitions;

·                  significantly increase ourinterest expense and indebtedness if we incur additional debt to financeacquisitions;

·                  incur or assumeunanticipated liabilities, losses or costs associated with the business orvessels acquired;

·                  incur other significantcharges, such as impairment of goodwill or other intangible assets, asset devaluationor restructuring charges; or

·                  distract management fromits duties and responsibilities as it devotes substantial time and attention tothe integration of the acquired businesses or vessels.

 

***Wedepend on OSG and its affiliates to assist us in operating and expanding ourbusiness.***

 

Pursuant to a managementagreement between us and OSG’s subsidiary, OSG Ship Management, Inc. (“OSGM”),OSGM will provide us with significant commercial and technical managementservices (including the commercial and technical management of our vessels,vessel maintenance, crewing, purchasing, insurance and shipyard supervision).Please read ‘‘Certain Relationships and Related Transactions—ManagementAgreement’’ for a description of this agreement. In addition, pursuant to anadministrative services agreement between us and OSGM, OSGM will provide uswith significant administrative, financial and other support services. Pleaseread ‘‘Certain Relationships and Related Transactions—Administrative ServicesAgreement’’ for a description of this agreement. Our operational success andability to execute our growth strategy will depend significantly upon thesatisfactory performance by OSGM of these services and our business will beharmed if OSGM fails to perform these services satisfactorily, cancels eitherof these agreements or stops providing these services. We may also contractwith OSG for the construction of newbuilds for our fleet and to arrange theconstruction-related financing.

 

        Our ability to enter into new charters and expand ourcustomer relationships will depend largely on our ability to use advantageouslyour relationship with OSG and its reputation and relationships in the shippingindustry, including with customers, shipyards and suppliers. If OSG suffersmaterial damage to its reputation or relationships, it may harm our ability to:

 

·renew existing charters upon their expiration;

·obtain new charters;

·interact successfully with shipyards during periods when the services ofshipyards are in high demand;

·obtain financing on commercially acceptable terms;

·maintain satisfactory relationships with suppliers and other third parties; or

·effectively operate our vessels.

 

25

----

 

***Our growth depends on our abilityto compete successfully against other shipping companies to expandrelationships with existing customers and obtain new customers.***

 

        Whilelonger-term time charters have the potential to provide income atpre-determined rates over the duration of the charters, the competition forsuch charters is intense and obtaining such charters generally requires alengthy and time consuming screening and bidding process that may extend formonths. In addition to the quality, age and suitability of the vessel,longer-term time charters tend to be awarded based upon a variety of factorsrelating to the vessel operator, including the operator’s:

 

·                  environmental, health andsafety record;

·                  compliance with regulatoryand industry standards;

·                  reputation for customerservice and technical and operating expertise;

·                  shipping experience andquality of ship operations, including cost-effectiveness;

·                  ability to finance vesselsat competitive rates and overall financial stability;

·                  relationships withshipyards and the ability to obtain suitable berths;

·                  construction managementexperience;

·                  willingness to acceptoperational risks pursuant to the charter; and

·                  competitiveness of the bidprice.

 

***We derive our revenues fromcertain major customers and the loss of any of these customers or time charterswith any of them could result in a significant loss of revenues and cash flow.***

 

During the three years ended December 31 2007, wederived revenues from certain major customers, each one representing more than10% of revenues. In 2007, revenues from two customers aggregated 29% of totalrevenues. At any given time in the future, the cash reserves of our customersmay be diminished or exhausted and we cannot assure you that the customers willbe able to make charter payments to us. If our customers are unable to makecharter payments to us, our results of operations and financial condition willbe materially adversely affected. In addition, we could lose a charterer or thebenefits of a time charter because of disagreements with a customer or if acustomer exercises specific limited rights to terminate a charter. The loss ofany of our customers or time charter with them, or a decline in payments underour charters, could have a material adverse effect on our business, results ofoperations and financial condition and our ability to pay cash distributions.

 

***A decrease in the demand for ourlightering services resulting from the deepening of the Delaware River orconditions affecting the Delaware Bay refineries could adversely affect ourbusiness and results of operations.***

 

We perform lightering services for inbound crude-oiltankers carrying crude oil up the Delaware River to refineries in the DelawareBay. For example, shipping revenues for the *OverseasIntegrity* constituted 7.9%, or $16.8 million, of our shippingrevenues for the year ended December 31, 2007, and 8.5%, or $16.2 million,of shipping revenues for the year ended December 31, 2006. Legislationapproved by Congress in 1992 authorized the Army Corps of Engineers to deepenthe Delaware River between the river’s mouth and the port of Philadelphia. Forvarious reasons, including opposition from environmental groups and fundingdifficulties, the dredging project has not begun. If this project is funded,the required environmental permits are obtained and the refineries dredge theirprivate channels, it would significantly reduce our lightering business byallowing arriving crude-oil tankers to proceed up the river with larger loads.In addition, our lightering business would be adversely affected if any of theDelaware Bay refineries ceased or scaled back its operations.

 

***Certain potential customers willnot use vessels older than a specified age, even if they have been recentlyrebuilt.***

 

All of our existing tug-barge units were originally constructedmore than 25 years ago. While all of these tug-barge units were rebuiltand double-hulled since 1998 and are “in-class,” meaning the vessel has beencertified by a classification society as being built and maintained inaccordance with the rules of that classification society and complies withthe applicable rules and regulations of the vessel’s country of registryand applicable international conventions, some potential customers have statedthat they will not charter vessels that are more than 20 years old, evenif they have been rebuilt. Although there has to date been no materialdifference in time charter rates earned by a vessel of a specified age and arebuilt vessel of the same age measured from the date of rebuilding, noassurance can be given that most customers will continue to view rebuiltvessels as 

 

26

----

 

comparableto newbuild vessels. If more customers differentiate between rebuilt andnewbuild vessels, time charter rates for our rebuilt ATBs will likely beadversely affected.

 

***The U.S. flag shipping industryis unpredictable, which may lead to lower charter hire rates and lower vesselvalues.***

 

The nature, timing and degree of changes in U.S. flagshipping industry conditions are unpredictable and may adversely affect thevalues of our vessels and may result in significant fluctuations in the amountof charter hire we earn, which could result in significant fluctuations in ourquarterly results. Charter rates and vessels values may fluctuate over time dueto changes in the demand for U.S. flag product carriers and barges.

 

The factors that influence the demand for U.S. flagproduct carriers and barges include:

 

·                  the level of crude oilrefining in the United States;

·                  the demand for refinedpetroleum products in the United States;

·                  environmental concerns andregulations;

·                  new pipeline constructionand expansions;

·                  weather; and

·                  competition fromalternative sources of energy.

 

***Decreased utilization of ourvessels due to bad weather could have a material adverse effect on ouroperating results and financial condition.***

 

Unpredictable weather patterns tend to disrupt vesselscheduling and supplies of refined petroleum products and our vessels and theircargoes are at risk of being damaged or lost because of bad weather. Inaddition, adverse weather conditions can cause delays in the delivery ofnewbuilds and in transporting cargoes. Under our spot voyage charters, we bearthe risk of delays due to weather conditions.

 

***A decrease in the cost ofimporting refined petroleum products could cause demand for U.S. flag productcarrier and barge capacity and charter rates to decline, which would decreaseour revenues and our ability to pay cash distributions on our units.***

 

The demand for U.S. flag product carriers and bargesis influenced by the cost of importing refined petroleum products.Historically, charter rates for vessels qualified to participate in the U.S.coastwise trade under the Jones Act have been higher than charter rates forforeign flag vessels. This is due to the higher construction and operatingcosts of U.S. flag vessels under the Jones Act requirements that such vesselsmust be built in the United States and manned by U.S. crews. This has made itless expensive for certain areas of the United States that are underserved bypipelines or which lack local refining capacity, such as in the Northeast, toimport refined petroleum products carried aboard foreign flag vessels than toobtain them from U.S. refineries. If the cost of importing refined petroleumproducts decreases to the extent that it becomes less expensive to importrefined petroleum products to other regions of the East Coast and the WestCoast than producing such products in the United States and transporting themon U.S. flag vessels, demand for our product carriers and barges and thecharter rates for them could decrease.

 

Our business would be adversely affected if we failedto comply with the Jones Act provisions on coastwise trade. We are subject tothe Jones Act and other federal laws that restrict maritime cargotransportation between points in the United States only to vessels operatingunder the U.S. flag, built in the United States, at least 75% owned andoperated by U.S. citizens (or owned and operated by other entities meeting U.S.citizenship requirements to own vessels operating in the U.S. coastwise tradeand, in the case of limited partnerships, where the general partner meets U.S.citizenship requirements) and manned by U.S. crews. We are also responsible formonitoring the ownership of our common units and other partnership interests toensure compliance with the Jones Act. If we do not comply with theserestrictions, we would be prohibited from operating our vessels in the U.S.coastwise trade and, under certain circumstances, we would be deemed to haveundertaken an unapproved foreign transfer resulting in severe penalties,including permanent loss of U.S. coastwise trading rights for our vessels,fines or forfeiture of vessels.

 

***Our business would be adverselyaffected if the Jones Act provisions on coastwise trade were modified orrepealed or if changes in international trade agreements were to occur.***

 

If the restrictions contained in the Jones Act wererepealed or altered, the maritime transportation of cargo between U.S. portscould be opened to foreign-flag or foreign-built vessels. The Secretary of theDepartment of Homeland Security, or the 

 

27

----

 

Secretary, is vested with the authority and discretionto waive the coastwise laws if the Secretary deems that such action isnecessary in the interest of national defense. On two occasions during 2005,the Secretary, at the direction of the President of the United States, issuedlimited waivers of the Jones Act for the transportation of refined petroleumproducts in response to the extraordinary circumstances created by HurricanesKatrina and Rita and their effect on Gulf Coast refineries and petroleumproduct pipelines. Any waiver of the coastwise laws, whether in response tonatural disasters or otherwise, could result in increased competition fromforeign product carrier and barge operators, which could reduce our revenuesand cash available for distribution.

 

During the past several years, interest groups have lobbiedCongress to repeal or modify the Jones Act in order to facilitate foreign-flagcompetition for trades and cargoes currently reserved for U.S. flag vesselsunder the Jones Act. Foreign-flag vessels generally have lower constructioncosts and generally operate at significantly lower costs than we do in U.S.markets, which would likely result in reduced charter rates. We believe thatcontinued efforts will be made to modify or repeal the Jones Act. If theseefforts are successful, foreign-flag vessels could be permitted to trade in theUnited States coastwise trade and significantly increase competition with ourfleet, which could have a material adverse effect on our business, results ofoperations, financial condition and ability to make cash distributions.

 

Additionally, the Jones Act restrictions on theprovision of maritime cabotage services are subject to certain exceptions undercertain international trade agreements, including the General Agreement onTrade in Services and the North American Free Trade Agreement. If maritimecabotage services were included in the General Agreement on Trade in Services,the North American Free Trade Agreement or other international tradeagreements, the transportation of maritime cargo between U.S. ports could be openedto foreign-flag or foreign-manufactured vessels.

 

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

 

Increasingly stringent federal, state and local lawsand regulations governing worker health and safety, insurance requirements andthe manning, construction, operation and transfer of vessels significantlyaffect our operations. Many aspects of the marine transportation industry aresubject to extensive governmental regulation by the U.S. Coast Guard, theDepartment of Transportation, the Department of Homeland Security, theEnvironmental Protection Agency, the National Transportation Safety Board, theU.S. Customs Service and the U.S. Maritime Administration, as well asregulation by private industry organizations, such as the American Bureau ofShipping. The U.S. Coast Guard and the National Transportation Safety Board setsafety standards and are authorized to investigate vessel accidents and recommendimproved safety standards. The U.S. Coast Guard is authorized to inspectvessels at will.

 

Our operations are also subject to federal, state,local and international laws and regulations that control the discharge ofpollutants into the environment or otherwise relate to environmentalprotection. In order to maintain compliance with environmental laws andregulations, we incur, and expect to continue to incur, substantial costs inmeeting maintenance and inspection requirements, developing and implementingemergency preparedness procedures and obtaining insurance coverage or otherrequired evidence of financial ability sufficient to address pollutionincidents. Environmental requirements can also:

 

·                  impair the economic valueof our vessels;

·                  make our vessels lessdesirable to potential charterers;

·                  require a reduction incargo capacity, ship modifications or operational changes or restrictions;

·                  lead to decreases inavailable insurance coverage for environmental matters; and

·                  result in the denial ofaccess to certain jurisdictional waters or ports, or detention in certainports.

 

If we fail to comply with applicable environmentallaws or regulations, such non-compliance could result in substantial civil orcriminal fines or penalties and other sanctions, including in certaininstances, seizure or detention of our vessels.

 

In addition, some environmental laws impose strictliability for remediation of spills and releases of oil and hazardoussubstances, which could subject us to liability even if we are neithernegligent nor at fault. Under OPA 90, owners, operators and bareboat charterersare jointly and severally strictly liable for the discharge of oil within the200-mile exclusive economic zone around the United States. In addition, an oilspill or other release of hazardous substances could result in significantliability, including fines, penalties, criminal liability and costs for naturalresource damages under other federal and state laws, third party personalinjury or property damage claims or other civil actions. The potential for oilspills or other releases could increase as we increase the size of our fleet.Most states bordering on a navigable waterway have also enacted 

 

28

----

 

legislation providing for potentially unlimitedliability for the discharge of pollutants within their waters. For moreinformation, please read “Business—Regulation.”

 

We believe that regulation of the shipping industrywill continue to become more stringent and more expensive for us and ourcompetitors. In addition, a serious marine incident occurring in U.S. watersthat results in significant oil pollution could result in additionallegislation or regulation. Future environmental requirements may be adoptedthat could limit our ability to operate or require us to incur substantialadditional costs.

 

***Marine transportation isinherently risky and an incident involving significant loss of environmentalcontamination by any of our vessels could harm our reputation and business.***

 

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

 

·                  marine disasters;

·                  bad weather;

·                  mechanical failures;

·                  grounding, fire,explosions and collisions;

·                  human error; and

·                  war and terrorism.

 

An accident involving any of our vessels could resultin any of the following:

 

·                  death or injury topersons, loss of property or environmental damage;

·                  delays in the delivery ofcargo;

·                  loss of revenues from ortermination of charter contracts;

·                  governmental fines,penalties or restrictions on conducting business;

·                  higher insurance rates;and

·                  damage to our reputationand customer relationships.

 

***Our insurance may be insufficientto cover losses that may occur to our property or result from our operations.***

 

The operation of vessels that carry crude oil orrefined petroleum products is inherently risky. Although we carry insurance toprotect against most of the accident-related risks involved in the conduct ofour business, risks may arise for which we are not adequately insured. Forexample, a catastrophic spill could exceed our insurance coverage and have amaterial adverse effect on our operations. Any particular claim may not be paidby our insurance and any claims covered by insurance would be subject todeductibles, the aggregate amount of which could be material. Any uninsured orunderinsured loss could harm our business and financial condition. In addition,our insurance may be voidable by the insurers as a result of certain of ouractions, such as our ships failing to maintain certification with applicablemaritime self-regulatory organizations. Furthermore, even if insurance coverageis adequate to cover our losses, we may not be able to obtain a replacementship in a timely manner in the event of a loss.

 

In addition, we may not be able to procure adequateinsurance coverage at commercially reasonable rates in the future. In the past,new and stricter environmental regulations have led to higher costs forinsurance covering environmental damage or pollution and new regulations couldlead to similar increases, or even make this type of insurance unavailable.Changes in the insurance markets attributable to terrorist attacks may alsomake certain types of insurance more difficult to obtain. The insurance thatmay be available to us in the future may be significantly more expensive thanour existing coverage.

 

Certain of our insurance coverage is maintainedthrough mutual protection and indemnity associations and, as a member of suchassociations, we may be required to make additional payments over and abovebudgeted premiums if member claims exceed the reserves of the association. Wemay be subject to calls or premiums in amounts based not only on our own claimrecords, but also the claim records of all other members of protection andindemnity associations through which we obtain insurance coverage for tortliability. Our payment of these calls could result in significant additionalexpenses.

 

***Increased competition frompipelines could result in reduced profitability.***

 

We compete with pipelines that carry refined petroleumproducts. Long-haul transportation of refined petroleum products is generallyless costly by pipeline than by vessel. The construction of new pipelines tocarry refined petroleum products into the markets we serve, including pipelinesegments that connect with existing pipelines, the expansion of existingpipelines and the conversion of pipelines that do not currently carry refinedproducts, could adversely affect our ability to compete in particularlocations. For example, although a previous proposal to build a refined petroleumproducts pipeline through the 

 

29

----

 

Gulfof Mexico from Mississippi to Tampa, Florida was abandoned in 2006, theconstruction of any such pipeline in the future could decrease demand for ourproduct carriers and barges and cause our charter rates to decline.

 

***An increase in the price of fuelmay adversely affect our business and results of operations.***

 

The cost of fuel for our vessels is a significantcomponent of our voyage expenses under our voyage charters and we have recentlyexperienced significant increases in the cost of fuel used in our operations.While we have been able to pass a portion of these increases on to ourcustomers pursuant to the terms of our charters, there can be no assurancesthat we will be able to pass on any future increases in fuel prices. If fuelprices continue to increase and we are not able to pass such increases on toour customers, our business, results of operations, financial condition andability to make cash distributions may be adversely affected.

 

***Over time, vessel values mayfluctuate substantially and, if these values are lower at a time when we areattempting to dispose of a vessel, we may incur a loss.***

 

Vessel values for our fleet can fluctuatesubstantially over time due to a number of different factors, including:

 

·                  the prevailing and expected levels ofcharter rates in the Jones Act market;

·                  the age of our vessels;

·                  the capacity of U.S. pipelines;

·                  the capacity of U.S. refineries;

·                  the number of vessels in the JonesAct fleet;

·                  the efficiency of the Jones Act fleet;and

·                  the cost of retrofitting or modifyingexisting vessels as a result of technological advances in vessel design orequipment, changes in applicable environmental or other regulations orstandards or otherwise.

 

Our inability to dispose of a vessel at a certainvalue could result in a loss on its sale. Declining vessel values couldadversely affect our liquidity by limiting our ability to raise cash byarranging debt secured by our vessels or refinancing such debt. Decliningvessel values could also result in a breach of loan covenants or trigger eventsof default under relevant financing agreements that require us to maintaincertain loan-to-value ratios. In such instances, if we are unable to pledgeadditional collateral to offset the decline in vessel values, our lenders couldaccelerate our debt and foreclose on our vessels pledged as collateral for theloans.

 

***Maritime claimants could arrestour vessels, which could interrupt our cash flow.***

 

Crew members, suppliers of goods and services to a vessel,shippers of cargo and other parties may be entitled to a maritime lien againstthat vessel for unsatisfied debts, claims or damages. In many jurisdictions, amaritime lien holder may enforce its lien by arresting a vessel throughforeclosure proceedings. The arrest or attachment of one or more of our vesselscould interrupt our cash flow and require us to pay whatever amount may berequired to have the arrest lifted.

 

***The U.S. government couldrequisition our vessels during a period of war or emergency without adequatecompensation.***

 

The U.S. government could requisition one or more ofour vessels for title or for hire. Requisition for title occurs when agovernment takes control of a vessel and becomes its owner. Requisition forhire occurs when a government takes control of a vessel and effectively becomesits charterer at dictated charter rates. Generally, requisitions occur duringperiods of war or emergency, although governments may elect to requisitionvessels in other circumstances. Although we would be entitled to compensationin the event of a requisition of one or more of our vessels, the amount andtiming of payment would be uncertain. Government requisition of one or more ofour vessels may negatively impact our revenues.

 

***Terrorist attacks, increasedhostilities or war could lead to further economic instability, increased costsand disruption of our business.***

 

Terrorist attacks may adversely affect our business,operating results, financial condition, ability to raise capital and futuregrowth. Continuing hostilities in the Middle East may lead to additional armedconflicts or to further acts of terrorism and civil disturbance in the UnitedStates or elsewhere, which may contribute further to economic instability anddisruption of oil and petroleum production and distribution, which could inturn result in reduced demand for our services.

 

30

----

 

In addition, oil andpetroleum facilities, shipyards, vessels, pipelines and oil and gas fieldscould be targets of future terrorist attacks. Any such attacks could lead to,among other things, bodily injury or loss of life, vessel or other propertydamage, increased vessel operational costs, including insurance costs, and theinability to transport oil and petroleum to or from certain locations.Terrorist attacks, war or other events beyond our control that adversely affectthe distribution, production or transportation of oil or petroleum to beshipped by us could entitle our customers to terminate the charters for ourvessels, which would harm our cash flow and our business.

 

Terrorist attacks, or theperception that oil and petroleum facilities and carriers are potentialterrorist targets, could materially and adversely affect expansion of oil andpetroleum infrastructure and the continued supply of oil and petroleum to theUnited States and other countries. Concern that oil and petroleum facilities maybe targeted for attack by terrorists has contributed to significant communityand environmental resistance to the construction of a number of oil andpetroleum facilities, primarily in North America. If a terrorist incidentinvolving an oil and petroleum facility or carrier did occur, the incident mayadversely affect construction of additional oil and petroleum facilities in theUnited States and other countries or the temporary or permanent closing ofvarious oil and petroleum facilities currently in operation.

 

In addition, heightenedawareness of security needs after the terrorist attacks of September 11,2001 has caused the U.S. Coast Guard, the International Maritime Organizationand the states and local ports to adopt heightened security procedures relatingto ports and vessels. Complying with these procedures, as well as theimplementation of security plans for our vessels required by the MaritimeTransportation Security Act of 2002, have increased our costs of security.

 

***We depend on key personnel ofOSGM for the success of our business and some of those persons face conflictsin the allocation of their time to our business.***

 

We depend on the services ofour senior management team and other key personnel of OSGM. We may not be ableto locate or employ on acceptable terms qualified replacements for seniormanagement or key employees if their services were no longer available. Inaddition, OSGM may not be able to hire vessel personnel meeting its standardsif we expand our fleet. As a result of the planned expansion of our fleetthrough the construction of new vessels, OSGM may also need to hire additionalkey technical, support and other qualified personnel to ensure thatconstruction is completed timely and on budget. If OSGM is unsuccessful inattracting such personnel, it could have a material adverse effect on ourbusiness, results of operations and financial condition.

 

In addition, our seniormanagement and many of the other key personnel of OSGM are not required to workfull-time on our affairs and also work for affiliates of our general partner,including OSG. The affiliates of our general partner conduct substantialbusinesses and activities of their own in which we have no economic interest.As a result, these individuals may face conflicts regarding the allocation oftheir time between our business and OSG’s business, resulting in theseemployees spending less time in managing our business and affairs than they docurrently.

 

**Risks Related to Our Common Units**

 

***Following the establishment ofcash reserves and payment of fees and expenses, including payments to ourgeneral partner, we may not have sufficient cash from operations to enable usto pay the minimum quarterly distribution on our common units.***

 

Following the establishmentof cash reserves and the payment of fees and expenses, including payments toour general partner, we may not have sufficient cash available each quarter topay the minimum quarterly distribution of $0.375 per common unit. The amount ofcash we can distribute on our common units principally depends upon the amountof cash we generate from our operations, which may fluctuate from quarter toquarter based on risks inherent in our business, including, among other things:

 

·                  the rates we obtain from charters forour vessels and equity income we may receive from affiliated companies;

·                  the level of our operating costs,such as the cost of crews and insurance;

·                  the level of crude oil refiningactivity in the United States, particularly in the Gulf Coast region;

·                  the number of unscheduled off-hiredays for our vessels and the timing of, and the number of days required for,scheduled drydockings of our vessels;

·                  delays in the delivery of newbuildsand the resulting delay in receipt of revenue from those vessels;

·                  prevailing economic and politicalconditions; and

·                  the effect of governmentalregulations and maritime self-regulatory organization standards on the conductof  our business.

 

31

----

 

The actual amount of cash wewill have available for distribution will also depend on other factors, some ofwhich are beyond our control, such as:

 

·                  the level of capitalexpenditures we make for maintaining our vessels, building new vessels,acquiring existing second-hand vessels and possibly retrofitting vessels tocomply with the Oil Pollution Act of 1990 (“OPA 90”);

·                  our debt servicerequirements and restrictions on distributions contained in our senior securedrevolving credit facility and our secured term loans;

·                  interest rate fluctuations;

·                  the cost of acquisitions,if any;

·                  fluctuations in ourworking capital needs;

·                  our ability to makeworking capital or other borrowings, including borrowings to pay distributionsto unitholders; and

·                  the amount of any cashreserves, including reserves for future capital expenditures and other matters,established by our general partner in its discretion.

 

The amount of cash wegenerate from our operations may differ materially from our profit or loss forthe period, which will be affected by non-cash items. As a result of this andthe other factors mentioned above, we may make cash distributions duringperiods when we record losses and may not make cash distributions duringperiods when we record net income.

 

***OSG controls our general partner,which has sole responsibility for conducting our business and managing ouroperations. Our general partner and its affiliates, including OSG, haveconflicts of interest with us and limited fiduciary duties, and may favor theirown interests to our unitholders’ detriment.***

 

OSG owns a 75.5% interest inus, including a 2% interest through our general partner, which OSG owns andcontrols. Although our general partner has a fiduciary duty to manage us in amanner beneficial to us and our unitholders, the directors and officers of ourgeneral partner have a fiduciary duty to manage our general partner in a mannerbeneficial to its owner, OSG. Furthermore, all of the officers of our generalpartner and four of the directors of our general partner are officers of OSG orits affiliates and, as such, they have fiduciary duties to OSG that may causethem to pursue business strategies that favor OSG or which otherwise are not inthe best interests of us or our unitholders. Therefore, conflicts of interestmay arise between OSG and its affiliates, including our general partner and itsofficers, on the one hand, and us and our unitholders, on the other hand. Inresolving these conflicts of interest, our general partner and its affiliatesmay favor their own interests over the interests of our unitholders. Theseconflicts include, among others, the following:

 

·                  neither our partnershipagreement nor any other agreement requires OSG or its affiliates (other thanour general partner) to pursue a business strategy that favors us and OSG’sofficers and directors have a fiduciary duty to make decisions in the best interestsof the stockholders of OSG, which may be contrary to our interests;

·                  the executive officers andfour of the directors of our general partner also serve as executive officersof OSG;

·                  our general partner isallowed to take into account the interests of parties other than us, such asOSG and its affiliates, in resolving conflicts of interest;

·                  OSG and its affiliateshave the ability to compete with us. Please read “Certain Relationships andRelated Transactions and Director Independence – Omnibus Agreement -Noncompetition”;

·                  our general partner maymake a determination to receive a quantity of our Class B units inexchange for resetting the target distribution levels related to its incentivedistribution rights without the approval of the conflicts committee of our generalpartner or our unitholders;

·                  some officers of OSG whoprovide services to us also will devote significant time to the business ofOSG, and will be compensated by OSG for the services rendered to it;

·                  our general partner haslimited its liability and reduced its fiduciary duties under Delaware law andhas also restricted the remedies available to our unitholders for actions that,without such limitations, might constitute breaches of fiduciary duty and, bypurchasing common units, unitholders will be deemed to have consented to someactions and conflicts of interest that might otherwise constitute a breach offiduciary or other duties under applicable law;

·                  our general partnerdetermines the amount and timing of our cash reserves, asset purchases andsales, borrowings and issuances of additional partnership securities, each ofwhich can affect the amount of cash that is available for distribution to ourunitholders;

·                  our general partnerdetermines the amount and timing of any capital expenditures and, based on theapplicable 

 

32

----

 

facts and circumstances,whether a capital expenditure is classified as a maintenance capitalexpenditure, which reduces operating surplus, or an expansion capitalexpenditure, which does not reduce operating surplus. The determination canaffect the amount of cash that is distributed to our unitholders and theability of the subordinated units to convert to common units;

·                  in some instances, ourgeneral partner may cause us to borrow funds in order to permit the payment ofcash distributions, even if the purpose or effect of the borrowing is to make adistribution on the subordinated units owned by OSG, to make incentive distributionsor to accelerate the expiration of the subordination period;

·                  our general partnerdetermines which costs incurred by it and its affiliates are reimbursable byus;

·                  our partnership agreementdoes not restrict our general partner from causing us to pay it or itsaffiliates for any services rendered to us or from entering into additionalcontractual arrangements with any of these entities on our behalf;

·                  our general partnerintends to limit its liability regarding our contractual and other obligationsand, in some circumstances, is entitled to be indemnified by us;

·                  our general partner mayexercise its limited right to call and purchase our common units if it and itsaffiliates own more than 80% of our common units;

·                  our general partner controlsthe enforcement of obligations owed to us by it and its affiliates; and

·                  our general partnerdecides whether to retain separate counsel, accountants or others to performservices for us.

 

OSG and its affiliates may engage in competition withus. Pursuant to the omnibus agreement to be entered into between us and OSG inconnection with the completion of our initial public offering, OSG and itscontrolled affiliates (other than us, our general partner and our subsidiaries)will agree not to engage in or acquire or invest in any business that providesmarine transportation or distribution services in connection with thetransportation of crude oil and refined petroleum products by water betweenpoints in the United States to which the United States coastwise laws apply, tothe extent such business generates qualifying income for federal income taxpurposes. The omnibus agreement, however, contains significant exceptions thatmay allow OSG or any of its controlled affiliates to compete with us, whichcould harm our business. Please read “Certain Relationships and RelatedTransactions—Omnibus Agreement—Noncompetition.”

 

***We do not have 100% ownership ofsome of our assets and may need the consent of third parties to take certainactions, which may prevent us from operating or dealing with those assets as wedeem them appropriate or necessary.***

 

We do not have 100%ownership of some of our assets, such as the product carriers we bareboatcharter from Aker and our economic interests in Alaska Tanker Company, LLC. Bynot having complete ownership of these and other assets, we may need to obtainprior consent of third parties to take certain commercial actions. If we areunable to obtain such consents on commercially reasonable and satisfactoryterms, our ability to operate or deal with those assets may be adverselyaffected.

 

***Our partnership agreement limitsour general partner’s fiduciary duties to our unitholders and restricts theremedies available to unitholders for actions taken by our general partner thatmight otherwise constitute breaches of fiduciary duty.***

 

Our partnership agreementcontains provisions that reduce the fiduciary standards to which our generalpartner would otherwise be held by Delaware law. For example, our partnershipagreement:

 

·                  permits our generalpartner to make a number of decisions in its individual capacity, as opposed toin its capacity as our general partner, which permits our general partner toconsider only the interests and factors that it desires. In such cases, it hasno duty or obligation to give any consideration to any interest of, or factorsaffecting us, our affiliates or our unitholders. Decisions made by our generalpartner in its individual capacity will be made by its sole owner, OSG, and notby the board of directors of our general partner. Examples include the exerciseof its right to receive Class B units in exchange for resetting the targetdistribution levels related to its incentive distribution rights, the exerciseof its limited call right, its rights to transfer or vote the units it owns,its registration rights and its determination whether or not to consent to anymerger or consolidation of the partnership or amendment of the partnershipagreement;

·                  provides that our generalpartner will not have any liability to us or our unitholders for decisions madein its capacity as general partner so long as it acted in “good faith,” meaningit reasonably believed that the decision was in our best interests;

·                  generally provides thataffiliated transactions and resolutions of conflicts of interest not approvedby the conflicts committee of the board of directors of our general partneracting in good faith and not involving a vote of unitholders must be on termsno less favorable to us than those generally being provided to or availablefrom 

 

33

----

 

unrelated third parties ormust be “fair and reasonable” to us, as determined by our general partner ingood faith, and that, in determining whether a transaction or resolution is “fairand reasonable,” our general partner may consider the totality of therelationships among the parties involved, including other transactions that maybe particularly advantageous or beneficial to us;

·                  provides that our generalpartner and its affiliates and their officers and directors will not be liablefor monetary damages to us or our unitholders for any acts or omissions unlessthere has been a final and non-appealable judgment entered by a court ofcompetent jurisdiction determining that our general partner or those otherpersons acted in bad faith or engaged in fraud or willful misconduct or, in thecase of a criminal matter, acted with knowledge that the conduct was criminal;and

·                  provides that in resolvingconflicts of interest, it will be presumed that in making its decision thegeneral partner or its conflicts committee acted in good faith, and in anyproceeding brought by or on behalf of any limited partner or us, the person bringingor prosecuting such proceeding will have the burden of overcoming suchpresumption.

 

***Cost reimbursements payable toour general partner and its affiliates, which will be determined by our generalpartner, will be substantial and will reduce our cash available fordistribution to our unitholders.***

 

Prior to making anydistribution on the common units, we will reimburse our general partner and itsaffiliates for all expenses they incur on our behalf, including a portion ofthe compensation of our directors and officers who are employees of OSG for thetime they spend on partnership matters, which will be determined by our generalpartner. These expenses will include all costs incurred by our general partnerand its affiliates in providing certain commercial and technical managementservices and administrative, financial and other support services to us andcertain of our subsidiaries, including services rendered to us pursuant to theagreements described below under “Certain Relationships and Related PartyTransactions—Management Agreement” and contain “Certain Relationships andRelated Party Transactions—Administrative Services Agreement.” Thereimbursement of expenses to our general partner and its affiliates couldadversely affect our ability to pay cash distributions to our unitholders. Inaddition, under Delaware partnership law, our general partner has unlimitedliability for our obligations, such as our debts and environmental liabilities,except for our contractual obligations that are expressly made without recourseto our general partner. To the extent our general partner incurs obligations onour behalf, we are obligated to reimburse or indemnify it. If we are unable orunwilling to reimburse or indemnify our general partner, our general partner maytake actions to cause us to make payments of these obligations and liabilities.Any such payments could reduce the amount of cash otherwise available fordistribution to our unitholders.

 

***Holders of our common units havelimited voting rights and are not entitled to elect our general partner or itsdirectors, which could reduce the price at which the common units will trade.***

 

Unlike the holders of commonstock in a corporation, unitholders have only limited voting rights on mattersaffecting our business and, therefore, limited ability to influence management’sdecisions regarding our business. Unitholders did not elect our general partneror its board of directors and will have no right to elect our general partneror its board of directors on an annual or any other continuing basis. The boardof directors of our general partner, including the independent directors, ischosen by OSG. Furthermore, if unitholders are dissatisfied with theperformance of our general partner, their ability to remove our general partneris limited. As a result of these limitations in the rights of our unitholders,the price at which the common units will trade could be diminished because ofthe absence or reduction of a takeover premium in the trading price.

 

***Even if unitholders aredissatisfied, they cannot remove our general partner without its consent.***

 

The vote of the holders of at least 662/3%of all outstanding common and subordinated units voting together as a singleclass is required to remove our general partner. OSG owns 75.5% of our commonunits and subordinated units. Therefore, unitholders will be unable initiallyto remove our general partner without its consent because our general partnerand its affiliates will own sufficient units to prevent its removal.

 

Also, if our general partneris removed without “cause” during the subordination period and units held byour general partner and OSG are not voted in favor of that removal, allremaining subordinated units will automatically be converted into common unitsand any existing arrearages on the common units will be extinguished. Theremoval of our general partner under these circumstances would adversely affectthe common units by prematurely eliminating their distribution and liquidationpreference over the subordinated units, which would otherwise have continueduntil we had met certain distribution and performance targets. “Cause” isnarrowly defined in our partnership agreement to mean that a court of competentjurisdiction has entered a final, non-appealable judgment finding our generalpartner liable for actual fraud or willful or wanton misconduct in its capacityas our general partner. “Cause” does not include most cases of alleged poor 

 

34

----

 

management of the business,so the removal of our general partner because of the unitholders’dissatisfaction with our general partner’s performance in managing ourpartnership will most likely result in the termination of the subordinationperiod and the conversion of all subordinated units to common units.

 

***Our partnership agreementrestricts the voting rights of unitholders owning 20% or more of our commonunits.***

 

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

 

***The control of our generalpartner may be transferred to a third party without unitholder consent.***

 

Our general partner may transfer its general partnerinterest to a third party in a merger or in a sale of all or substantially allof its assets without the consent of the unitholders, so long as the thirdparty satisfies the citizenship requirements of the Jones Act. In addition, ourpartnership agreement does not restrict the ability of OSG or any subsequentmember of our general partner from transferring all or a portion of itsmembership interests in our general partner to a third party as long as thecitizenship requirements of the Jones Act are satisfied. In the event of anysuch transfer, the new member or members of our general partner would be in aposition to replace the board of directors and officers of our general partnerwith their own designees and thereby influence the decisions taken by the boardof directors and officers.

 

***We may issue additional equitysecurities without unitholders’ approval, which would dilute the ownershipinterests.***

 

 Our generalpartner, without the approval of our unitholders, may cause us to issue anunlimited number of additional units or other equity securities, subject to anylimitations imposed by the New York Stock Exchange. The issuance by us ofadditional common units or other equity securities may have the followingeffects:

 

·                  our unitholders’ proportionateownership interest in us will decrease;

·                  the amount of cash available to paydistributions on each unit may decrease;

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

·                  the ratio of taxable income todistributions may increase;

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

·                  the market price of the common unitsmay decline.

 

***OSG may sell units in the publicor private markets, which may have adverse effects on the price of our commonunits.***

 

OSG holds 7,500,000 common units and 15,000,000subordinated units, representing a 73.5% limited partner interest in us. All ofthe subordinated units will convert into common units at the end of thesubordination period, which could occur as early as the first business dayafter September 30, 2010, and all of the subordinated units may convertinto common units earlier than such date if additional tests are satisfied. OSGmay, from time to time, sell all or a portion of its common units orsubordinated units in the public or private markets. Sales of any of theseunits, or the anticipation of such sales, could lower the market price of ourcommon units and may make it more difficult for us to sell our equitysecurities in the future at a time and at a price that we deem appropriate.

 

We have granted registrationrights to our general partner and its affiliates, including OSG, and theirassignees. These registration rights continue for two years following anywithdrawal or removal of our general partner. These unitholders have the right,subject to some conditions, to require us to file registration statementscovering any of our common, subordinated or other equity securities owned bythem or to include those securities in registration statements that we may filefor ourselves or our unitholders. By exercising their registration rights andselling a large number of common units or other securities, these unitholderscould cause the price of our common units to decline.

 

35

----

 

***We have a holding companystructure in which our subsidiaries conduct our operations and own ouroperating assets, which may affect our ability to make distributions to ourunitholders.***

 

We have a holding companystructure and our operating subsidiaries conduct all of our operations and ownall of our operating assets. We have no significant assets other than ourownership interests in our subsidiaries and our equity investments. As aresult, our ability to make distributions on our common units depends on theperformance of our subsidiaries and our equity investments and their ability todistribute funds to us. The ability of our subsidiaries and joint ventures tomake distributions to us may be restricted by, among other things, theprovisions of existing and future indebtedness, applicable state partnershipand limited liability company laws and other laws and regulations. If we areunable to obtain the funds necessary to make distributions on our common units,we may be required to adopt one or more alternatives, such as borrowing fundsto make distributions on our common units. We cannot assure our unitholdersthat we would be able to borrow funds to make distributions on our commonunits.

 

***Our partnership agreementcurrently limits the ownership of our partnership interests by individuals orentities that are not U.S. citizens. This restriction could limit the liquidityof our common units.***

 

In order to ensurecompliance with Jones Act citizenship requirements, the board of directors ofour general partner has adopted a requirement that at least 85% of the interestsin our partnership must be held by U.S. citizens. This requirement may have anadverse impact on the liquidity or market value of our common units becauseholders will be unable to sell units to non-U.S. citizens. Any purportedtransfer of common units in violation of these provisions will be ineffectiveto transfer the common units or any voting, dividend or other rights associatedwith them.

 

***In establishing cash reserves,our general partner may reduce the amount of cash available for distributions toour unitholders.***

 

Our partnership agreementrequires our general partner to deduct cash reserves from our operating surplusthat it determines are necessary to fund our future operating expenditures.These reserves will affect the amount of cash available for distribution to ourunitholders. Our general partner may establish reserves for distributions onthe subordinated units, but only if those reserves will not prevent us fromdistributing the full minimum quarterly distribution, plus any arrearages, on thecommon units for the following four quarters. Our partnership agreementrequires our general partner each quarter to deduct from operating surplusestimated maintenance capital expenditures, as opposed to actual expenditures,which could reduce the amount of available cash for distribution. The amount ofestimated maintenance capital expenditures deducted from operating surplus issubject to review and change by the board of directors of our general partnerat least once a year, provided that any change must be approved by theconflicts committee. In addition, see above “Risks Inherent in Our Business—Wemust make substantial capital expenditures to maintain the operating capacityof our fleet, which will reduce our cash available for distribution. In addition,our general partner is required to deduct estimated maintenance capitalexpenditures from operating surplus each quarter, which may result in less cashavailable to unitholders than if actual maintenance capital expenditures werededucted.”

 

***Our general partner has a limitedcall right that may require our unitholders to sell their common units at anundesirable time or price and is not required to obtain a fairness opinion inconnection with the exercise of its call right.***

 

If at any time our generalpartner and its affiliates own more than 80% of the common units, our generalpartner will have the right, but not the obligation, to acquire all, but notless than all, of the common units held by unaffiliated persons at a price notless than their then-current market price as determined in accordance with ourpartnership agreement. Our general partner may assign this right to any of itsaffiliates or to us. As a result, our unitholders may be required to sell their common unitsat an undesirable time or price and may not receive any return on theirinvestment. Our unitholders may also incur a tax liability upon a sale of theirunits. Our general partner is not obligated to obtain a fairness opinionregarding the value of the common units to be repurchased by it upon exerciseof the limited call right. There is no restriction in our partnership agreementthat prevents our general partner from issuing additional common units andexercising its call right. If our general partner exercised its limited call right,the effect would be to take us private and, if the units were subsequentlyderegistered, we would no longer be subject to the reporting requirements ofthe Securities Exchange Act of 1934.

 

OSG owns common unitsrepresenting a 24.5% limited partner interest in us, together with 15,000,000subordinated units representing an additional 49% limited partnership interestin us. At the end of the subordination period, assuming no additional issuancesof common units, and conversion of our subordinated units into common units,OSG will own common 

 

36

----

 

units representing a 73.5%limited partner interest in us. Our general partner and its affiliates may ownenough of our common units to enable our general partner to exercise its callright.

 

***Our general partner may elect tocause us to issue Class B units and general partner units to it inconnection with a resetting of the target distribution levels related to ourgeneral partner’s incentive distribution rights, without the approval of theconflicts committee of our general partner or our unitholders. This couldresult in lower distributions to our common unitholders.***

 

Our general partner has theright, at any time when there are no subordinated units outstanding and it hasreceived incentive distributions at the highest level to which it is entitled(48%) for each of the prior four consecutive quarters, to reset the initialcash target distribution levels at higher levels based on the distribution atthe time of the exercise of the reset election. Following a reset election byour general partner, the minimum quarterly distribution amount will be reset toan amount equal to the average cash distribution amount per common unit for thetwo quarters immediately preceding the reset election (we refer to this amountas the “reset minimum quarterly distribution”) and the target distributionlevels will be reset to correspondingly higher levels based on percentageincreases above the reset minimum quarterly distribution amount.

 

In connection with resettingthese target distribution levels, our general partner will be entitled toreceive a number of Class B units and general partner units. The Class Bunits will be entitled to the same cash distributions per unit as our commonunits and will be convertible into an equal number of common units. The numberof Class B units to be issued will be equal to the number of units whoseaggregate quarterly cash distributions equaled the average of the distributionsto our general partner on the incentive distribution rights in the prior twoquarters. The number of general partner units to be issued will be an amountthat will maintain our general partner’s ownership interest immediately priorto the reset election. We anticipate that our general partner would exercisethis reset right in order to facilitate acquisitions or internal growthprojects that would not be sufficiently accretive to cash distributions percommon unit without such conversion. It is possible, however, that our generalpartner could exercise this reset election at a time when it is experiencing,or may be expected to experience, declines in the cash distributions itreceives related to its incentive distribution rights and may therefore desireto be issued our Class B units rather than retain the right to receiveincentive distributions based on the initial target distribution levels. As aresult, a reset election may cause our common unitholders to experiencedilution in the amount of cash distributions that they would have otherwisereceived had we not issued new Class B units and general partner units toour general partner in connection with resetting the target distribution levelsrelated to our general partner’s incentive distribution rights.

 

***If we make distributions out ofcapital surplus, as opposed to operating surplus, such distributions willconstitute a return of capital and will result in a reduction in the minimumquarterly distribution and the target distribution levels.***

 

Our partnership agreementtreats a distribution of capital surplus as the repayment of the initial unitprice, which is a return of capital. The initial offering price less anydistributions of capital surplus per unit is referred to as the “unrecoveredcapital.” Each time a distribution of capital surplus is made, the minimumquarterly distribution and the target distribution levels will be reduced inthe same proportion as the corresponding reduction in the unrecovered capitalper unit, which would adversely affect the amount of distributions you wouldreceive. Because distributions of capital surplus will reduce the minimumquarterly distribution, after any of these distributions it may be easier forour general partner to receive incentive distributions and for the subordinatedunits to convert into common units. However, any distribution of capitalsurplus before the minimum quarterly distribution is reduced to zero cannot beapplied to the payment of the minimum quarterly distribution or any arrearages.We do not anticipate that we will make any distributions from capital surplus.

 

***Unitholders may not have limitedliability if a court finds that unitholder action constitutes control of ourbusiness.***

 

As a limited partner in a partnership organized underDelaware law, our unitholders could be held liable for our obligations to thesame extent as a general partner if a court or government agency determinedthat:

 

·                  we were conductingbusiness in a state but had not complied with that particular state’spartnership statute; or

·                  our unitholders’ right toact with other unitholders to remove or replace the general partner, to approvesome amendments to our partnership agreement or to take other actions under ourpartnership agreement constitute “control” of our business.

 

Our general partner generallyhas unlimited liability for the obligations of the partnership, such as itsdebts and environmental liabilities, except for those contractual obligationsof the partnership that are expressly made without recourse 

 

37

----

 

to our general partner. Inaddition, the limitations on the liability of holders of limited partnerinterests for the obligations of a limited partnership have not been clearlyestablished in some other jurisdictions in which we do business.

 

***We can borrow money to paydistributions, which would reduce the amount of borrowing capacity available tooperate our business.***

 

Our partnership agreementwill allow us to make working capital borrowings to pay distributions.Accordingly, we can make distributions on all our units even though cashgenerated by our operations may not be sufficient to pay such distributions.Any working capital borrowings by us to make distributions will reduce theamount of working capital borrowings available for operating our business. Formore information, please read “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations—Liquidity and Sources of Capital—SeniorSecured Revolving Credit Facility.”

 

***Restrictions in our debtagreements will limit our ability to pay distributions upon the occurrence ofcertain events.***

 

Our senior secured revolvingcredit facility and our secured term loans limit our ability to paydistributions upon the occurrence of the following events, among others:

 

·                  failure to pay anyprincipal, interest, fees, expenses or other amounts when due;

·                  breach or lapse of anyinsurance with respect to the vessels;

·                  breach of certainfinancial covenants;

·                  failure to observe anyother agreement, security instrument, obligation or covenant beyond specifiedcure periods in certain cases;

·                  default under otherindebtedness;

·                  bankruptcy or insolvencyevents;

·                  failure of anyrepresentation or warranty to be materially correct;

·                  a change of control, asdefined in the applicable debt agreement; and

·                  any other event ofdefault, as defined in the applicable debt agreement.

 

Any subsequent refinancingof our current debt or any new debt could have similar restrictions.

 

***Increases in interest rates maycause the market price of our common units to decline.***

 

An increase in interest rates may cause acorresponding decline in demand for equity investments in general and inparticular for yield-based equity investments such as our common units. Anysuch increase in interest rates or reduction in demand for our common unitsresulting from other relatively more attractive investment opportunities maycause the trading price of our common units to decline.

 

***Unitholders may have liability torepay distributions that were wrongfully distributed to them.***

 

Under some circumstances, unitholders may have torepay amounts wrongfully returned or distributed to them. We may not make adistribution to our unitholders if the distribution would cause our liabilitiesto exceed the fair value of our assets. Delaware law provides that for a periodof three years from the date of the impermissible distribution, limitedpartners who received the distribution and who knew at the time of thedistribution that it violated Delaware law will be liable to the limitedpartnership for the distribution amount. Purchasers of units who become limitedpartners are liable for the obligations of the transferring limited partner tomake contributions to the partnership that are known to the purchaser at thetime it became a limited partner and for unknown obligations if the liabilitiescould be determined from the partnership agreement. Liabilities to partners onaccount of their partnership interest and liabilities that are non-recourse tothe partnership are not counted for purposes of determining whether adistribution is permitted.

 

**Tax Risks**

 

***Our tax treatment depends on ourstatus as a partnership for federal income tax purposes and not being subjectto entity-level taxation by states. If the IRS was to treat us as a corporationor if we were to become subject to entity-level taxation for state taxpurposes, then our cash available for distribution to you would besubstantially reduced.***

 

38

----

 

The anticipated after-taxbenefit of an investment in our common units depends largely on our beingtreated as a partnership for federal income tax purposes. We have notrequested, and do not plan to request, a ruling from the IRS on this matter.

 

If we were treated as acorporation for federal income tax purposes, we would pay federal income tax onour income at the corporate tax rate, which is currently a maximum of 35%.Distributions to our unitholders would generally be taxed again as corporate distributions and noincome, gains, losses, deductions or credits would flow through to ourunitholders. Because a tax would beimposed upon us as a corporation, our cash available for distribution to ourunitholders would be substantiallyreduced. Treatment of us as a corporation would result in a material reductionin the anticipated cash flow and after-tax return to our unitholders, likely causing a substantial reduction inthe value of the common units.

 

Current law may change,causing us to be treated as a corporation for federal income tax purposes orotherwise subjecting us to entity-level taxation. For example, due towidespread state budget deficits in recent years, several states have beenevaluating ways to subject partnerships to entity-level taxation through theimposition of state income tax, franchise tax or other forms of taxation. Ifany state were to impose a tax upon us as an entity, the cash available fordistribution to our unitholders would be reduced. Our partnership agreementprovides that if a law is enacted or existing law is modified or interpreted ina manner that subjects us to taxation as a corporation or otherwise subjects usto entity-level taxation for federal, state or local income tax purposes, thenthe minimum quarterly distribution amount and the target distribution amountswill be adjusted to reflect the impact of that law on us.

 

***The tax treatment of publiclytraded partnerships or an investment in our common units could be subject topotential legislative, judicial or administrative changes and differinginterpretations, possibly on a retroactive basis.***

 

The present U.S. federalincome tax treatment of publicly traded partnerships, including us, or aninvestment in our common units may be modified by administrative, legislativeor judicial interpretation at any time. For example, in response to certainrecent developments, members of Congress are considering substantive changes tothe definition of qualifying income under Section 7704(d) of theInternal Revenue Code. It is possible that these efforts could result inchanges to the existing U.S. tax laws that affect publicly traded partnerships,including us. Any modification to the U.S. federal income tax laws andinterpretations thereof may or may not be applied retroactively. We are unableto predict whether any of these changes, or other proposals, will ultimately beenacted. Any such changes could negatively affect the value of an investment inour common units.

 

***If the IRS contests the federalincome tax positions we take, the market for our common units may be adverselyaffected and the costs of any contest will be borne by our unitholders and ourgeneral partner.***

 

We have not requested anyruling from the IRS with respect to our treatment as a partnership for federalincome tax purposes. The IRS may adopt positions that differ from the positionswe take and it may be necessary to resort to administrative or courtproceedings to sustain some or all of the positions we take. A court may notagree with some or all of the positions we take. Any contest with the IRS maymaterially and adversely affect the market for our common units and the priceat which they trade. In addition, the costs of any contest with the IRS willresult in a reduction in cash available for distribution to our unitholders andour general partner and thus will be borne indirectly by our unitholders andour general partner.

 

Our unitholders will be required to pay taxes on theirshare of our income even if they do not receive any cash distributions from us.Our unitholders will be required to pay federal income taxes and, in somecases, state and local income taxes on their share of our taxable income,whether or not they receive cash distributions from us. Our unitholders may notreceive cash distributions from us equal to their share of our taxable incomeor even equal to the actual tax liability that result from their share of ourtaxable income.

 

The first cash distributionwas paid by us in February 2008 based upon the period from November 14,2007 to December 31, 2007. Our unitholders will, however, be required toinclude in income their allocable share of our income for the taxable periodfrom completion of this offering until December 31, 2007, without regardto whether they receive corresponding cash distributions.

 

Tax gain or loss on the disposition of our commonunits could be different than expected. If our unitholders sell their commonunits, they will recognize gain or loss equal to the difference between theamount realized and the tax basis in those common units. Prior distributions toour unitholders in excess of the total net taxable income they were allocatedfor a common unit, which decreased their tax basis in that common unit, will,in effect, become taxable income to them if the common unit is sold at a pricegreater than their tax basis in that common unit, even if the price theyreceive is less than their original cost. A substantial portion of 

 

39

----

 

theamount realized, whether or not representing gain, may be taxed as ordinaryincome to our unitholders due to potential recapture items, includingdepreciation recapture.

 

***Tax-exempt entities and foreignpersons face unique tax issues from owning common units that may result inadverse tax consequences to them.***

 

Investment in common unitsby tax-exempt entities, such as individual retirement accounts (“IRAs”) andnon-U.S. persons raises issues unique to them. For example, virtually all ofour income allocated to organizations exempt from federal income tax, includingIRAs and other retirement plans, will be unrelated business taxable income andwill be taxable to them. Distributions to non-U.S. persons will be reduced bywithholding taxes at the highest applicable effective tax rate and non-U.S.persons will be required to file U.S. federal income tax returns and paytax on their share of our taxable income.

 

***We will treat each purchaser ofunits as having the same tax benefits without regard to the units purchased.The IRS may challenge this treatment, which could adversely affect the value ofthe common units.***

 

Because we cannot matchtransferors and transferees of common units, we will adopt depreciation andamortization positions that may not conform to all aspects of existing Treasuryregulations. A successful IRS challenge to those positions could adverselyaffect the amount of tax benefits available to our unitholders. It also could affect the timing of thesetax benefits or the amount of gain from our unitholders sale of common unitsand could have a negative impact on the value of our common units or result inaudit adjustments to our unitholders tax returns.

 

***Our unitholders will likely besubject to state and local taxes and return filing requirements as a result ofinvesting in our common units.***

 

In addition to federalincome taxes, our unitholders will likely be subject to other taxes, such as state and local incometaxes, unincorporated business taxes and estate, inheritance or intangibletaxes that are imposed by the various jurisdictions in which we do business orown property even if you do not live in these jurisdictions. Our unitholderswill likely be required to file state and local income tax returns and paystate and local income taxes in some or all of these various jurisdictions.Further, our unitholders may be subject to penalties for failure to comply withthose requirements. We will initially conduct business in Florida, which doesnot impose an individual income tax. We may own property or conduct business inother states or foreign countries in the future. It is our unitholdersresponsibility to file all of your federal, state and local tax returns.

 

***The sale or exchange of 50% ormore of our capital and profits interests during any 12-month period willresult in the termination of our partnership for federal income tax purposes.***

 

We will be considered tohave terminated our status as a partnership for federal income tax purposes ifthere is a sale or exchange of 50% or more of the total interests in ourcapital and profits within a 12-month period. Our termination would, amongother things, result in the closing of our taxable year for all unitholders andcould result in a deferral of depreciation deductions allowable in computingour taxable income.

 

#### **ITEM 1B. UNRESOLVED STAFF COMMENTS**

####  

        None.

 

#### **ITEM 2. PROPERTIES**

####  

At December 31, 2007, we owned or operated(including newbuilds) an aggregate of 24 vessels. See tables presented underItem 1. Additional information about our fleet is set forth on our website,www.osgamerica.com.

 

#### **ITEM 3. LEGAL PROCEEDINGS**

####  

We are party to routine, marine related claims,lawsuits and labor arbitrations arising in the ordinary course of our business.The claims made in connection with our marine operations are covered byinsurance, subject to applicable policy deductibles that are not material as toany type of insurance coverage. We provide on a current basis for amounts weexpect to pay.

 

40

----

 

**ITEM 4. SUBMISSION OF MATTERS TOA VOTE OF UNITHOLDERS**

 

        None.

 

**PART II**

 

**ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY,RELATED SECURITYHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES**

 

**Market Price of Common Units,Distributions and Related Unit Holder Matters**

 

Our common units are listed on the New York StockExchange under the symbol “OSP”. As of February 4, 2008 there were 15,002,250million common units, representing an aggregate 50% limited partner interest inus, which were held by eight holders of record, representing approximately4,000 beneficial holders.  The followingtable shows, for the period indicated, the high and low sales prices of ourcommon units, as reported on the New York Stock Exchange, and the amount ofcash distribution declared per common unit:

 
| ** **     | ** ** | ** ** | ** ** | ** ** | ** ** | **Cash**                  | ** ** |
|----------------|------------|------------|------------|------------|------------|---------------------------|------------|
| **2007**       | ** ** | **High**   | ** ** | **Low**    | ** ** | **Distribution (1)** | ** ** |
| Fourth Quarter |       | $          | 19.45      |       | $          | 15.49                     |       | $ | 0.1875 |   |
|                |            |            |            |            |            |                           |            |  |  |  |

 

----

(1)          Distributions are shown for the quarter for which theywere declared. An identical per unit cash distribution was paid on the subordinatedunits.

 

The aggregateamount of distributions declared in January 2008 for the year ended 2007on common units, subordinated units and general partner units totaled $5.7million.

 

**Securities Authorized for IssuanceUnder Equity Compensation Plans**

 

EQUITYCOMPENSATION PLAN INFORMATION

** **
| ** **                                                     | ** ** | **Number of Securities to be  Issued upon Exercise of  Outstanding Options,  Warrants and Rights** | ** ** | **Weighted Average  Exercise Price of  Outstanding  Options,  Warrants and Rights** | ** ** | **Number of Securities  Remaining Available  for Future Issuance  under Equity  Compensation Plans  (excluding Securities  reflected in column (a))** | ** ** |
|----------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **Plan Category**                                         | ** ** | **(a)**                                                                                                                                         | ** ** | **(b)**                                                                                                      | ** ** | ** (c)**                                                                                                                                                                                           | ** ** |
|                                                           |       |                                                                                                                                            |       |                                                                                                         |       |                                                                                                                                                                                                    |       |
| Equity  compensation plans approved by security holders        |       | —                                                                                                                                          |       | —                                                                                                       |       | —                                                                                                                                                                                                  |       |
| Equity  compensation plans not approved by security holders(1) |       | —                                                                                                                                          |       | —                                                                                                       |       | 247,250                                                                                                                                                                                                 |       |
|                                                           |       |                                                                                                                                            |       |                                                                                                         |       |                                                                                                                                                                                                    |       |
| Total                                                          |       | —                                                                                                                                          |       | —                                                                                                       |       | 247,250                                                                                                                                                                                                 |       |

 

----

(1) For a description ofthis equity compensation plan please read Note J to Item 8 - FinancialStatements.

 

**Cash Distribution Policy**

 

Within approximately 45 days after the end ofeach quarter, we will distribute all of our available cash (as defined below)to unitholders of record on the applicable record date. We adjusted the minimumquarterly distribution for the period from the completion of the initial publicoffering through December 31, 2007 based on the actual length of thatperiod.

 

41

----

 

We define available cash as, for each fiscal quarter,all cash on hand at the end of the quarter (including our proportionate shareof cash on hand of certain subsidiaries we do not wholly own):

 

·                  less the amount ofcash reserves (including our proportionate share of cash reserves of certainsubsidiaries we do not wholly own) established by our general partner to:

·                  provide for the proper conduct of our business(including reserves for future capital expenditures and for our anticipatedcredit needs);

·                  comply with applicablelaw, any of our debt instruments or other agreements; and

·                  provide funds for distributions to our unitholdersand to our general partner for any one or more of the next four quarters;

·                  plus all cash on hand(including our proportionate share of cash on hand of certain subsidiaries wedo not wholly own) on the date of determination of available cash for thequarter resulting from working capital borrowings made after the end of thequarter for which the determination is made. Working capital borrowings aregenerally borrowings that will be made under our senior secured revolvingcredit facility and in all cases are used solely for working capital purposesor to pay distributions to unitholders and with the intent to repay suchborrowings within 12 months.

 

**Subordination Period**

 

*General.*During thesubordination period, which we define below, the common units will have theright to receive distributions of available cash from operating surplus in anamount equal to the minimum quarterly distribution of $0.375 per quarter, plusany arrearages in the payment of the minimum quarterly distribution on thecommon units from prior quarters, before any distributions of available cashfrom operating surplus may be made on the subordinated units. Distributionarrearages do not accrue on the subordinated units. The purpose of thesubordinated units is to increase the likelihood that during the subordinationperiod there will be available cash from operating surplus for distribution tothe holders of the common units.

 

*Definition ofSubordination Period*.  Except asdescribed below under “Early Termination of Subordination Period,” thesubordination period will extend until the first day of any quarter, beginningafter September 30, 2010, that each of the following tests are met:

 

·                  distributions of available cash from operating surplus on each of theoutstanding common units, subordinated units and general partner units equaledor exceeded the minimum quarterly distribution for each of the threeconsecutive, non-overlapping four-quarter periods immediately preceding thatdate;

 

·                  the adjusted operating surplus generated during each of the threeconsecutive, non-overlapping four-quarter periods immediately preceding thatdate equaled or exceeded the sum of the minimum quarterly distributions on allof the outstanding common units, subordinated units and general partner unitsduring those periods on a fully diluted basis; and

 

·                  there are no arrearages in payment of the minimum quarterlydistribution on the common units.

 

If the unitholders remove our general partner withoutcause, the subordination period may end before September 30, 2010.

 

*Early Termination ofSubordination Period*. The subordination period will be automaticallyterminated and the subordinated units will convert into common units on aone-for-one basis if the following tests are met:

 

·                  distributions ofavailable cash from operating surplus on each of the outstanding common units,subordinated units and general partner units equaled or exceeded $2.25 (150% ofthe annualized minimum quarterly distribution) for any four-quarter period immediatelypreceding the date of determination; and

·                  the adjusted operatingsurplus generated during any four-quarter period immediately preceding the dateof determination equaled or exceeded the sum of a distribution of $2.25 percommon unit (150% of the annualized minimum quarterly distribution) on all ofthe outstanding common and subordinated units on a fully diluted basis; and

·                  there are noarrearages in payment of the minimum quarterly distribution on the commonunits.

 

42

----

 

For purposes of determining whether sufficientadjusted operating surplus has been generated under these conversion tests, theconflicts committee may adjust adjusted operating surplus upwards or downwardsif it determines in good faith that the estimated amount of maintenance capitalexpenditures used in the determination of operating surplus was materiallyincorrect, based on circumstances prevailing at the time of the originaldetermination of that estimate.

 

**Incentive Distribution Rights**

 

Incentive distributionrights are the right to receive an increasing percentage of quarterlydistributions of available cash from operating surplus after the minimumquarterly distribution and the target distribution levels have been achieved.Our general partner currently holds the incentive distribution rights, but maytransfer these rights separately from its general partner interest, subject torestrictions in the partnership agreement.

 

If for any quarter we have distributed available cashfrom operating surplus:

 

·                  to the common andsubordinated unitholders in an amount equal to the minimum quarterlydistribution; and

·                  on outstanding commonunits in an amount equal to any cumulative arrearages in payment of the minimumquarterly distribution;

 

then, we willdistribute any additional available cash from operating surplus for thatquarter between the unitholders and our general partner in the followingmanner:

 

·                  first, 98% to allunitholders, pro rata, and 2% to our general partner, until each unitholderreceives a total of $0.43125 per unit for that quarter (the “first targetdistribution”);

·                  second, 85% to allunitholders, pro rata, and 15% to our general partner, until each unitholderreceives a total of $0.46875 per unit for that quarter (the “second targetdistribution”);

·                  third, 75% to allunitholders, pro rata, and 25% to our general partner, until each unitholderreceives a total of $0.56250 per unit for that quarter (the “third targetdistribution”); and

·                  thereafter, 50% to allunitholders, pro rata, and 50% to our general partner.

 

In each case, the amount of the first targetdistribution, the second target distribution and the third target distributionset forth above is exclusive of any distributions to common unitholders made toeliminate any cumulative arrearages in payment of the minimum quarterlydistribution. The percentage interests set forth above assume that our generalpartner maintains its 2% general partner interest and has not transferred theincentive distribution rights and we do not issue additional classes of equitysecurities.

 

43

----

 

**ITEM 6.SELECTED FINANCIAL DATA**

 

The following unaudited selected financial data for the periods November 15through December 31, 2007 and January 1 through November 14,2007 and for the years ended December 31, 2006 and 2005, and at December 31,2007 and 2006, are derived from the audited financial statements set forth inItem 8, which have been audited by Ernst & Young LLP, independentregistered public accounting firm. The unaudited selected financial data forthe year ended December 31, 2004 and at December 31, 2005, arederived from audited financial statements not appearing in this Annual Report,which have also been audited by Ernst & Young LLP. The unauditedselected financial data for the year ended December 31, 2003 and at December 31,2004 and 2003 are derived from unaudited financial statements not appearing inthis Annual Report.

 
|                                                             | ** ** | ** **                                 | ** ** | **January 1**    | ** ** | **November 15**  | ** ** |
|------------------------------------------------------------------|------------|--------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                       | ** ** | ** **                                 | ** ** | **through**           | ** ** | **through**           | ** ** |
| **In thousands, except net income per** | ** ** | **Year Ended December 31,** | ** ** | **November 14,** | ** ** | **December 31,** | ** ** |
| **unit and operating data**                       | ** ** | **2003**                                   | ** ** | **2004 (1)**     | ** ** | **2005**              | ** ** | **2006** | ** ** | **2007** | ** ** | **2007** | ** ** |
| **Income  Statement Data:**                                      |       | **(unaudited)**                            |       |                  |       |                  |       |   |   |   |   |   |   |
| Shipping  revenues                                               |       | $                                          | 26,051     |                  | $          | 31,799                |       | $ | 49,840 |   | $ | 88,852 |   | $ | 182,871 |   | $ | 31,136 |   |
|                                                             |       |                                       |       |                  |       |                  |       |   |   |   |   |   |   |
| Operating  expenses                                              |       |                                       |       |                  |       |                  |       |   |   |   |   |   |   |
| Voyage  expenses(2)                                              |       | 366                                        |       | 366                   |       | 3,055                 |       | 10,592 |   | 26,670 |   | 4,666 |   |
| Vessel  expenses(3)                                              |       | 10,571                                     |       | 12,077                |       | 19,550                |       | 34,430 |   | 71,407 |   | 11,398 |   |
| Bareboat charter  expenses                                       |       | —                                     |       | —                |       | —                |       | — |   | 10,205 |   | 3,469 |   |
| Depreciation and  amortization                                   |       | 6,303                                      |       | 10,811                |       | 14,553                |       | 21,592 |   | 40,765 |   | 7,001 |   |
| General and  administrative                                      |       | 1,920                                      |       | 3,542                 |       | 4,246                 |       | 7,942 |   | 18,564 |   | 2,899 |   |
| Loss on charter  termination                                     |       | —                                     |       | —                |       | 2,486                 |       | — |   | — |   | — |   |
| Total operating  expenses                                        |       | 19,160                                     |       | 26,796                |       | 43,890                |       | 74,556 |   | 167,611 |   | 29,433 |   |
| Income from  vessel operations                                   |       | 6,891                                      |       | 5,003                 |       | 5,950                 |       | 14,296 |   | 15,260 |   | 1,703 |   |
| Equity in income  of affiliated companies                        |       | 7,584                                      |       | 7,097                 |       | 8,066                 |       | 6,811 |   | 3,192 |   | 2,551 |   |
| Operating income                                                 |       | 14,475                                     |       | 12,100                |       | 14,016                |       | 21,107 |   | 18,452 |   | 4,254 |   |
| Other income  (expense)                                          |       | —                                     |       | 2                     |       | 1                     |       | 9 |   | (8 | ) | 17 |   |
| Interest expense                                                 |       | (8,304                                     | )          | (9,224                | )          | (10,685               | )          | (12,612 | ) | (10,835 | ) | (665 | ) |
| Income before  federal income taxes                              |       | 6,171                                      |       | 2,878                 |       | 3,332                 |       | 8,504 |   | 7,609 |   | 3,606 |   |
| (Provision) /  credit for federal income taxes                   |       | (2,160                                     | )          | (1,007                | )          | (1,325                | )          | (768 | ) | (2,048 | ) | — |   |
| Net income                                                       |       | $                                          | 4,011      |                  | $          | 1,871                 |       | $ | 2,007 |   | $ | 7,736 |   | $ | 5,561 |   | $ | 3,606 |   |
| Net income per  unit (basic and diluted)                         |       |                                       |       |                  |       |                  |       |   |   |   |   |   | $ | 0.12 |   |
|                                                             |       |                                       |       |                  |       |                  |       |   |   |   |   |   |   |
| **Balance  Sheet Data:**                                         |       |                                       |       |                  |       |                  |       |   |   |   |   |   |   |
| Vessels(4)                                                       |       | $                                          | 37,071     |                  | $          | 70,932                |       | $ | 132,160 |   | $ | 418,702 |   | $ | — |   | $ | 426,693 |   |
| Total assets                                                     |       | $                                          | 48,954     |                  | $          | 85,521                |       | $ | 149,134 |   | $ | 610,957 |   | $ | — |   | $ | 651,112 |   |
| Total debt(5)                                                    |       | $                                          | 184,167    |                  | $          | 219,766               |       | $ | 272,927 |   | $ | 660,929 |   | $ | — |   | $ | 89,465 |   |
| Stockholder’s  deficiency                                   |       | $                                          | (157,204   | )                     | $          | (155,133              | )          | $ | (152,026 | ) | $ | (144,290 | ) | $ | — |   | $ | — |   |
| Partners’  capital                                          |       | $                                          | —     |                  | $          | —                |       | $ | — |   | $ | — |   | $ | — |   | $ | 540,697 |   |
|                                                             |       |                                       |       |                  |       |                  |       |   |   |   |   |   |   |
| **Cash  Flow Data:**                                             |       |                                       |       |                  |       |                  |       |   |   |   |   |   |   |
| Net cash  provided by (used in):                                 |       |                                       |       |                  |       |                  |       |   |   |   |   |   |   |
| Operating  activities                                            |       | $                                          | 12,379     |                  | $          | 7,141                 |       | $ | 19,800 |   | $ | 13,299 |   | $ | 28,715 |   | $ | (402 | ) |
| Investing  activities                                            |       | $                                          | —     |                  | $          | (43,012               | )          | $ | (74,116 | ) | $ | (345,483 | ) | $ | (41,113 | ) | $ | (3,643 | ) |
| Financing  activities                                            |       | $                                          | (12,225    | )                     | $          | 35,799                |       | $ | 54,261 |   | $ | 332,399 |   | $ | 12,416 |   | $ | 7,127 |   |
|                                                             |       |                                       |       |                  |       |                  |       |   |   |   |   |   |   |
| **Other  Financial Data:**                                       |       |                                       |       |                  |       |                  |       |   |   |   |   |   |   |
| Time charter  equivalent revenue                                 |       | $                                          | 25,685     |                  | $          | 31,433                |       | $ | 46,785 |   | $ | 78,260 |   | $ | 156,201 |   | $ | 26,470 |   |
| EBITDA                                                           |       | $                                          | 20,778     |                  | $          | 22,913                |       | $ | 28,570 |   | $ | 42,708 |   | $ | 59,209 |   | $ | 11,272 |   |
| Capital expenditures                                             |       |                                       |       |                  |       |                  |       |   |   |   |   |   |   |
| Expenditures for  vessels and equipment                          |       | $                                          | —     |                  | $          | 43,012                |       | $ | 74,116 |   | $ | 4,623 |   | $ | 41,113 |   | $ | 3,643 |   |
| Expenditures for  drydocking                                     |       | $                                          | —     |                  | $          | 2,739                 |       | $ | 115 |   | $ | 5,835 |   | $ | 16,874 |   | $ | 533 |   |
| **Operating  Data:**                                             |       |                                       |       |                  |       |                  |       |   |   |   |   |   |   |
| Total capacity  days                                             |       | 730                                        |       | 1,232                 |       | 1,662                 |       | 2,501 |   | 5,508 |   | 892 |   |
| Revenue days                                                     |       | 729                                        |       | 1,193                 |       | 1,639                 |       | 2,368 |   | 4,748 |   | 771 |   |
| Drydock days                                                     |       | —                                     |       | 37                    |       | 4                     |       | 108 |   | 659 |   | 93 |   |
| Repair days                                                      |       | 1                                          |       | 2                     |       | 19                    |       | 25 |   | 84 |   | 16 |   |
|                                                                  |            |                                            |            |                       |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

44

----

 

----

(1)       Only the statements of operations,changes in stockholder’s deficiency and cash flows have been audited in respectof the year ended December 31, 2004. The balance sheet for the year ended December 31,2004 is unaudited.

(2)       Voyage expenses are all expenses uniqueto a particular voyage, including commissions, port charges, cargo handlingoperations, canal dues and fuel.

(3)       Vessel expenses consist of all expensesrelated to the operation of the vessels, including crewing, repairs andmaintenance, insurance, stores, spares, lubricants and miscellaneous expenses.

(4)       Vessels consist of (a) vessels, atcost, less accumulated depreciation, (b) vessels under capital leases, atcost, less accumulated depreciation, and (c) construction in progress.

(5)       Total debt includes long-term debt,capital lease obligations and advances from affiliates.

 

***Non-U.S. GAAP Financial Measures***

 

Consistent with general practice in the shippingindustry, we use time charter equivalent (“TCE”) revenues, which representshipping revenues less voyage expenses, as a measure to compare revenuesgenerated from voyage charters to revenues generated from time charters. TCErevenues, a non-U.S. GAAP measure, provides additional meaningful informationin conjunction with shipping revenues, the most directly comparable U.S. GAAPmeasure, because it assists our management in making decisions regarding thedeployment and use of our vessels and in evaluating their financial performance.

 

The following tablereconciles TCE revenues to shipping revenues.

 
| ** **            | ** ** | **Year Ended December 31,** | ** ** | **January 1 -  November 14,** | ** ** | **November 15-  December 31,** | ** ** |
|-----------------------|------------|--------------------------------------------|------------|----------------------------------------------|------------|------------------------------------------|------------|
| **In thousands** | ** ** | **2003**                                   | ** ** | **2004**                                     | ** ** | **2005**                                 | ** ** | **2006** | ** ** | **2007** | ** ** | **2007** | ** ** |
| ** **            | ** ** | **(unaudited)**                            | ** ** | ** **                                   | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| TCE revenues          |       | $                                          | 25,685     |                                         | $          | 31,433                                   |       | $ | 46,785 |   | $ | 78,260 |   | $ | 156,201 |   | $ | 26,470 |   |
| Voyage expenses       |       | 366                                        |       | 366                                          |       | 3,055                                    |       | 10,592 |   | 26,670 |   | 4,666 |   |
| Shipping  revenues    |       | $                                          | 26,051     |                                         | $          | 31,799                                   |       | $ | 49,840 |   | $ | 88,852 |   | $ | 182,871 |   | $ | 31,136 |   |

 

EBITDA represents net income plus interest expense,provision for income taxes, and depreciation and amortization expense. EBITDAis presented to provide investors with meaningful additional information thatmanagement uses to monitor ongoing operating results and evaluate trends overcomparative periods.

 

EBITDA assists our management and investors byincreasing the comparability of our fundamental performance from period toperiod and against the fundamental performance of other companies in ourindustry that provide EBITDA information. For a more detailed discussion of ouruse of EBITDA please read Management’s Discussion and Analysis of FinancialCondition and Results of Operations – EBITDA.

 

EBITDA should not be considered a substitute for netincome or cash flow from operating activities and other operations or cash flowstatement data prepared in accordance with U.S. GAAP or as a measure ofprofitability or liquidity. While EBITDA is frequently used as a measure ofoperating results and performance, it is not necessarily comparable to other similartitled captions of other companies due to differences in methods ofcalculation.

 

45

----

 

The following tablereconciles net income to EBITDA.

 
| ** **                          | ** ** | **Year Ended December 31,** | ** ** | **January 1 -  November 14,** | ** ** | **November 15-  December 31,** | ** ** |
|-------------------------------------|------------|--------------------------------------------|------------|----------------------------------------------|------------|------------------------------------------|------------|
| **In thousands**               | ** ** | **2003**                                   | ** ** | **2004**                                     | ** ** | **2005**                                 | ** ** | **2006** | ** ** | **2007** | ** ** | **2007** | ** ** |
| ** **                          | ** ** | **(unaudited)**                            | ** ** | ** **                                   | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                          |       | $                                          | 4,011      |                                         | $          | 1,871                                    |       | $ | 2,007 |   | $ | 7,736 |   | $ | 5,561 |   | $ | 3,606 |   |
| Provision for  federal income taxes |       | 2,160                                      |       | 1,007                                        |       | 1,325                                    |       | 768 |   | 2,048 |   | — |   |
| Interest expense                    |       | 8,304                                      |       | 9,224                                        |       | 10,685                                   |       | 12,612 |   | 10,835 |   | 665 |   |
| Depreciation and  amortization      |       | 6,303                                      |       | 10,811                                       |       | 14,553                                   |       | 21,592 |   | 40,765 |   | 7,001 |   |
| EBITDA                              |       | $                                          | 20,778     |                                         | $          | 22,913                                   |       | $ | 28,570 |   | $ | 42,708 |   | $ | 59,209 |   | $ | 11,272 |   |
|                                     |            |                                            |            |                                              |            |                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The following table reconciles net cash provided byoperating activities to EBITDA.

 
| ** **                                                      | ** ** | **Year Ended December 31,** | ** ** | **January 1 -  November 14,** | ** ** | **November 15-  December 31,** | ** ** |
|-----------------------------------------------------------------|------------|--------------------------------------------|------------|----------------------------------------------|------------|------------------------------------------|------------|
| **In thousands**                                           | ** ** | **2003**                                   | ** ** | **2004**                                     | ** ** | **2005**                                 | ** ** | **2006** | ** ** | **2007** | ** ** | **2007** | ** ** |
| ** **                                                      | ** ** | **(unaudited)**                            | ** ** | ** **                                   | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net cash provided  by operating activities                      |       | $                                          | 12,379     |                                         | $          | 7,141                                    |       | $ | 19,800 |   | $ | 13,299 |   | $ | 28,715 |   | $ | (402 | ) |
| Payments for  drydocking                                        |       | —                                     |       | 2,739                                        |       | 115                                      |       | 5,835 |   | 16,874 |   | 533 |   |
| Interest expense                                                |       | 8,304                                      |       | 9,224                                        |       | 10,685                                   |       | 12,612 |   | 10,835 |   | 665 |   |
| Undistributed  earnings from affiliated companies               |       | (376                                       | )          | (405                                         | )          | 838                                      |       | (1,021 | ) | (3,618 | ) | 2,551 |   |
| Changes in  operating assets and liabilities (except for taxes) |       | 113                                        |       | 844                                          |       | (5,219                                   | )          | 6,732 |   | 3,406 |   | 8,050 |   |
| Federal income  taxes                                           |       | 484                                        |       | 4,066                                        |       | 2,040                                    |       | 4,924 |   | 3,325 |   | — |   |
| Other                                                           |       | (126                                       | )          | (696                                         | )          | 311                                      |       | 327 |   | (328 | ) | (125 | ) |
| EBITDA                                                          |       | $                                          | 20,778     |                                         | $          | 22,913                                   |       | $ | 28,570 |   | $ | 42,708 |   | $ | 59,209 |   | $ | 11,272 |   |

 

**ITEM 7. MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

*The following is a discussion of the historical consolidatedfinancial condition and results of operations of OSG America L.P. and, prior toour November 15, 2007 initial public offering, of our predecessor company,and should be read in conjunction with our historical consolidated financialstatements and notes thereto included elsewhere in this report.*

* *

*Overview*

* *

We are the largest operator, based on barrel-carrying capacity, of U.S.flag vessels transporting refined petroleum products. We were recently formedby Overseas Shipholding Group, Inc., a market leader in providing globalenergy transportation services. We plan to use the expertise, customer base andreputation of OSG to expand its marine transportation service.

 

On November 15, 2007, upon completion of our initial publicoffering, OSG contributed to us entities owning or operating a fleet of tenproduct carriers, seven articulated tug barges (“ATBs”) and one conventionaltug/barge unit, with an aggregate carrying capacity of approximately4.9 million barrels. OSG also contributed to us a 37.5% ownership interestin Alaska Tanker Company, LLC, a joint venture that transports crude oil fromAlaska to the continental United States and which employs a fleet of fivecrude-oil tankers. OSG owns a 75.5% interest in us, including a 2% interestthrough our general partner, which OSG owns and controls. Our membershipinterests in our operating subsidiaries represent our only cash-generatingassets.

 

Our market is protected from direct foreign competition by the MerchantMarine Act of 1920 (“Jones Act”), which mandates that all vessels transportingcargo between U.S. ports must be built in the United States, registered underthe U.S. flag, manned by U.S. crews and owned and operated by U.S. organizedcompanies that are controlled and at least 75% owned by U.S. citizens.Sixteen of the eighteen vessels in our operating fleet at December 31,2007 are operated in the U.S. 

 

46

----

 

coastwise trade inaccordance with the Jones Act and all of our future scheduled newbuilddeliveries will qualify to operate under the Jones Act.

 

Demand for our servicesis driven primarily by demand for refined petroleum products in the areas inwhich we operate. We generate revenue by charging customers for thetransportation and distribution of their products utilizing our tank vesselsand tugboats. These services are generally provided under the following fourbasic types of contractual relationships:

 

·                  time charters, which are contracts to charter a vessel for a fixedperiod of time, generally one year or more, at a set daily rate;

 

·                  contracts of affreightment, which are contracts to providetransportation services for products over a specific trade route, with nodesignation of the specific vessel to be used, generally for one or more years,at a negotiated per barrel rate;

 

·                  voyage charters, which are charters for a single round-trip, that arebased on the current market rate; and

 

·                  bareboat charters, which are longer-term agreements that allow acustomer to operate one of our vessels and utilize its own operating staffwithout taking ownership of the vessel.

 

In addition, a variation of a voyage charter is knownas a “consecutive voyage charter.” Under this arrangement, consecutive voyagesare performed for a specified period of time.

 

The table belowillustrates the primary distinctions among these types of contracts:

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

 

----

(1)             Under a consecutive voyage charter, the customer doesnot pay for idle time.

 

(2)             See “Definitions” below.

 

For contracts of affreightment and voyage charters,revenue is recognized based upon the relative transit time in each period.Although contracts of affreightment and certain contracts for voyage chartersmay be effective for a period in excess of one year, revenue is recognized overthe transit time of individual voyages, which are generally less than ten days induration. For time charters and bareboat charters, revenue is recognizedratably over the contract period.

 

One of the principal distinctions among these types ofcontracts is whether the vessel operator or the customer pays for voyageexpenses, which include commissions, fuel, port charges, pilot fees, tankcleaning costs, canal tolls and cargo handling operations. Some voyage expensesare fixed and the remainder can be estimated. If we, as the vessel operator,pay the voyage expenses, we typically pass these expenses on to our customersby charging higher rates under the contract or, in certain cases, re-billingsuch expenses to them. As a result, although voyage revenue from differenttypes of contracts may vary, the net revenue that remains after subtractingvoyage expenses, which we call net voyage revenue, is comparable across thedifferent types of contracts. Therefore, we principally use TCE revenue, whichis net voyage revenue, rather than voyage revenue, when comparing performancebetween different periods. Since TCE revenue is a non-GAAP measurement, it isreconciled to the nearest GAAP measurement, voyage revenue, under “Results ofOperations” below.

 

**Overview—OSGAmerica Predecessor**

 

For the period January 1through November 14, 2007 and the year ended December 31, 2006, thecombined financial statements presented herein have been carved out of theconsolidated financial statements of OSG. Our financial position, results ofoperations and cash flows reflected in our combined financial statements arenot indicative of those that would have been achieved had we operated as anindependent stand-alone entity for all periods presented or of future results.

 

To the extent thatassets, liabilities, revenues and expenses relate to the OSG America Predecessor(“Predecessor”), they have been identified and carved out of OSG for inclusionin our combined financial statements. OSG’s other assets, liabilities, revenuesand expenses that do not relate to the vessel interests are not included in ourcombined financial statements. In 

 

47

----

 

addition, the preparationof our combined carve-out financial statements required the allocation ofcertain expenses where these items were not identifiable as related to OSGAmerica Predecessor.

 

General andadministrative expenses, consisting primarily of salaries and other employeerelated costs, office rent, legal and professional fees and travel andentertainment expenses were allocated based on the total number of vessels(weighted by operating days) in the respective fleets of OSG AmericaPredecessor and OSG for each of the above periods presented. Managementbelieves that the allocation of general and administrative expenses was basedon a reasonable method.

 

All of the companiesincluded in the Predecessor combined carve-out financial statements have beenincluded in the OSG consolidated group for U.S. income tax purposes for periodsthrough November 14, 2007. The Predecessor financial statements have beenprepared on the basis that OSG was responsible for all taxes related to periodsprior to January 1, 2002. The provisions/ (credits) for income taxes inthe Predecessor’s combined financial statements have been determined on aseparate-return basis for all periods presented.

 

**Definitions**

 

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

 

*AR rates*. American Tanker Rate Schedule commonly referred toas “AR rates” in the industry is published by the Association of Ship Brokersand Agents (USA) Inc. (the “Association”) as a rate reference for shippingcompanies, brokers and their customers engaged in the bulk shipping of oil inthe coastwise trade. AR is a list of calculated (or flat) rates for specificvoyage itineraries for a standard vessel, as defined. AR allows the agreedrevenue per day for any voyage to be expressed as “AR 100” which means the rateas calculated and published by the Association. Thus, a negotiated rate of 50% above the flat rate would, therefore, bequoted as “AR 150” whereas 50% below the flat rate would be quoted as “AR 50”eliminating the use of plus or minus symbols during the negotiations.  Included in this flat rate are defined voyageassumptions, a round trip voyage, allowed laytime for cargo operations, fuelprices and consumption, and estimated port charges for the entire voyage.

 

*Articulated tug barge.* ATB is the abbreviation for Articulated TugBarge, which is a tug-barge combination system capable of operating on the highseas, coastwise and further inland. It combines a normal barge, with a bowresembling that of a ship, but having a deep indent at the stern to accommodatethe bow of a tug. The fit is such that the resulting combination behaves almostlike a single vessel at sea as well as while maneuvering.

 

*Capacity**days*. Total capacity days are equal to thenumber of calendar days in the period multiplied by the total number of vesselsoperating or in drydock during that period.

 

*Daysworked.* Daysworked are equal to total vessel days less drydocking days and days off-hire.Alternatively referred to as revenue days.

 

*Deadweight tons or dwt*. dwt is the abbreviation for deadweighttons, representing principally the cargo carrying capacity of a vessel, butincluding the weight of consumables such as fuel, lube oil, drinking water andstores.

 

*Depreciationand amortization*.We incur expenses 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.  Depreciationand amortization is determined as follows:

 

·                  Vessels and equipment are recorded atcost, including capitalized interest and transaction fees where appropriate,and depreciated to salvage value using the straight-line method.

 

·                  Both domestic and internationalregulatory bodies require that petroleum carrying shipping vessels be drydockedfor major repair and maintenance twice every five years. In addition, vesselsmay have to be drydocked in the event of accidents or other unforeseen damage.We capitalize expenditures incurred for drydocking and amortize theseexpenditures generally over two and a half years.

 

*Double hull.* Hull construction design in which avessel has an inner and an outer side and bottom separated by void space,usually two meters in width.

 

*Drydockingdays*. Drydockingdays are days designated for the cleaning, positioning, inspection and surveyof vessels, and resulting maintenance work, as required by the U.S. Coast Guardand the American Bureau of Shipping to maintain the vessels’ qualification towork in the U.S. coastwise trade. Drydocking days also include unscheduledinstances where vessels may have to be drydocked in the event of accidents orother unforeseen damage.

 

48

----

 

*Generaland administrative expenses*. General and administrative expenses consist ofemployment costs for shore side staff and cost of facilities, as well as legaland professional fees, audit, travel and entertainment and other administrativecosts.

 

*Lightering.* The process of off-loading crude oil orpetroleum products from deeply laden inbound tankers into smaller tankersand/or barges.

 

*Offhire.* The time during which a vessel is notavailable for service.

 

*Shippingrevenue*. Shippingrevenue includes revenue from time charters, contracts of affreightment,consecutive voyage charters and spot charters. Voyage revenue is impacted bychanges in utilization rates and by the mix of business among the types ofcontracts described in the preceding sentence.

 

*Timecharter equivalent*.Time charter equivalent (“TCE”) revenues arevoyage revenues less voyage expenses. TCE serves as an industry standard formeasuring and managing fleet revenue and comparing results between geographicalregions and among competitors.

 

*Vesseloperating expenses*.We pay the vessel operating expenses regardless of whether we are operatingunder a time charter, contract of affreightment, consecutive voyage charter orspot charter. The most significant direct vessel operating expenses are crewingcosts, vessel maintenance, lubricants, stores and spares and marine insurance.

 

*Voyageexpenses*. Voyageexpenses include items such as commissions, fuel, port charges, pilot fees,tank cleaning costs, canal tolls and other costs which are unique to aparticular voyage. These costs can vary significantly depending on the voyagetrade route. Depending on the form of contract, either we or our customer isresponsible for these expenses. Typically, our freight rates are higher when wepay 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.

 

***Acquisition ofMaritrans Inc.***

* *

On November 28, 2006, OSG acquired Maritrans Inc. (“Maritrans”),a leading U.S. flag crude oil and petroleum product shipping company that ownedand operated one of the largest fleets of double-hulled vessels serving theEast Coast and Gulf Coast trades. The operating results of certain wholly ownedsubsidiaries of Maritrans, which were carved out of the consolidated financialstatements of Maritrans, have been included in our financial statementscommencing November 29, 2006. The Maritrans’ fleet consisted of sevenATBs, one of which was in the process of being double-hulled, one conventionaltug/barge unit and two product carriers, all operating under the U.S. flag.

 

***Future Business***

* *

We have entered into agreements with OSG Ship Management, Inc. (“OSGM”)for the provision of technical and commercial management of our vessels and foradministrative and accounting services. These agreements were effective November 15,2007.

 

In June 2005, OSG signed agreements to bareboat charter ten JonesAct product carriers from a subsidiary of Aker American Shipping, Inc. (“Aker”).In February 2007, OSG agreed in principle to bareboat charter up to sixadditional Jones Act product carriers, which eventually resulted in OSGconcluding agreements to bareboat charter two vessels. The bareboat charters oneight of these twelve vessels have been assigned to us. We have committed tobareboat charter five of the eight vessels for initial terms of seven years andthe other three vessels for initial terms of five years. We have extensionoptions for the remaining lives of these vessels. Three of these vessels, the *Overseas Houston,**Overseas Long Beach* and *Overseas**Los Angeles*,have already been delivered from the shipyard, in February, June, and November 2007,respectively. The remaining five vessels that we have committed to bareboatcharter are scheduled to be delivered from the shipyard between 2008 and early2010.

 

We have options to purchase from OSG up to six ATBs, to be constructedby Bender Shipbuilding & Repair Co., Inc. (“Bender”) andscheduled for delivery between late 2008 and late 2010. We also have options toacquire from OSG the right to bareboat charter up to four of the remainingnewbuild vessels to be constructed by Aker Philadelphia Shipyard Inc.,scheduled for delivery between late 2009 and early 2011.

 

49

----

 

**Critical Accounting Policies**

 

Our financial statements have been prepared inaccordance with accounting principles generally accepted in the United States (“U.S.GAAP”), which require us to make estimates in the application of our accountingpolicies based on the best assumptions, judgments and opinions of management.The following is a discussion of the accounting policies that involve a highdegree of judgment and the methods of their application. For a completedescription of all of our material accounting policies, see Note A to ourconsolidated financial statements included elsewhere in this Annual Report on Form 10-K.

 

***Revenue Recognition***

 

We generate a portion of our shipping revenues fromvoyage charters. A voyage charter agreement with a customer consists of sailingto the load port (the positioning leg), loading the cargo, sailing to thedischarge port and discharging the cargo. The charter agreement requires therelevant vessel to proceed to the port or place as ordered by charterer inaccordance with the contract. The vessel is, therefore, employed from the timeit receives a contract until the last discharge point and a contract is notcancellable in the positioning leg, provided we fulfill our contractualcommitment.  We generally enter into a charteragreement with a customer for the vessel’s next voyage prior to the time ofdischarge for its previous voyage. Two methods are used in the shippingindustry to account for voyage charter revenue: (1) recognition of revenueratably over the estimated length of each voyage, and (2) recognition ofrevenue following completion of a voyage. Recognition of voyage revenuesratably over the estimated length of each voyage is the most prevalent methodof accounting for voyage revenues. Under each method, voyages may be calculatedon either a load-to-load or discharge-to-discharge basis. In applying theratable revenue recognition method, management believes that thedischarge-to-discharge basis of calculating voyages more accurately estimatesvoyage results than the load-to-load basis. Since, at the time of discharge,management generally knows the next load port and the expected discharge port,the discharge-to-discharge calculation of voyage revenues can be estimated witha greater degree of accuracy. We do not begin recognizing voyage revenue untila charter has been agreed to by us and the customer, even if the vessel hasdischarged its cargo and is sailing to the anticipated load port on its nextvoyage.

 

Revenues from time charters are accounted for as operatingleases and are thus recognized ratably over the rental periods of suchcharters. We do not recognize time charter revenues for vessels during periodsthat those vessels are off hire.

 

***Vessel Lives and Impairment***

 

The carrying value of each of our vessels representsits original cost at the time it was delivered or purchased, less depreciationcalculated using an estimated useful life of 25 years from the date thatsuch vessel was originally delivered from the shipyard, or, in the case of ourdouble-hulled ATBs, 20 years from the date the ATBs were double-hulled.Use of a 25-year life has become standard in the shipping industry. The actuallife of a vessel may be different. If the economic lives assigned to thevessels prove to be too long because of new regulations or other future events,higher depreciation expense and impairment losses could result in futureperiods related to a reduction in the useful lives of any affected vessels.

 

The carrying values of our vessels may not representtheir fair market value at any point in time, since the market prices ofsecond-hand vessels tend to fluctuate with changes in charter rates and thecost of new buildings. Historically, both charter rates and vessel values tendto be cyclical. We record impairment losses only when events occur that causeus to believe that future cash flows for any individual vessel will be lessthan its carrying value. The carrying amounts of vessels held and used arereviewed for potential impairment whenever events or changes in circumstancesindicate that the carrying amount of a particular vessel may not be fullyrecoverable. In such instances, an impairment charge would be recognized if theestimate of the undiscounted future cash flows expected to result from the useof the vessel and its eventual disposition is less than the vessel’s carryingamount. This assessment is made at the individual vessel level, sinceseparately identifiable cash flow information for each vessel is available.

 

In developing estimates of future cash flows, we mustmake assumptions about future charter rates, ship operating expenses and theestimated remaining useful lives of the vessels. These assumptions are based onhistorical trends, as well as future expectations. Although management believesthat the assumptions used to evaluate potential impairment are reasonable andappropriate, such assumptions are highly subjective.

 

There have been no impairment indicators during theperiods presented.

 

***Drydocking***

 

Within the shipping industry, there are two methodsthat are used to account for drydockings: (1) capitalize drydocking costsas incurred (deferral method) and amortize such costs over the period to thenext scheduled drydocking, and (2) expense 

 

50

----

 

drydocking costs as incurred. Since drydocking cycles typically extendover two and a half years or longer, we believe that the deferral method bettermatches revenues and expenses than the expense-as-incurred method.

 

***Goodwill and Intangibles***

 

We allocate the cost of acquired companies to theidentifiable tangible and intangible assets and liabilities acquired. Theremaining amount is classified as goodwill. Our future operating performancewill be affected by the amortization of intangible assets and potentialimpairment charges related to goodwill. Accordingly, the allocation of purchaseprice to intangible assets and goodwill may significantly affect our futureoperating results. Goodwill and indefinite lived assets are not amortized, butare reviewed for impairment annually or more frequently if impairmentindicators arise.

 

The allocation of the purchase price of acquiredcompanies to intangible assets and goodwill requires us to make significantestimates and assumptions, including estimates of future cash flows expected tobe generated by the acquired assets and the appropriate discount rate to valuethese cash flows. In addition, the process of evaluating the potentialimpairment of goodwill and intangible assets is highly subjective and requiressignificant judgment at many points during the analysis. The estimates andassumptions regarding expected cash flows and the discount rate also requireconsiderable judgment and are based upon existing contracts, historicalexperience, financial forecasts and industry trends and conditions. In thefourth quarter of 2007, we completed our annual impairment testing of goodwillwith no goodwill impairment charge.

 

Amortization expense of intangible assets for theperiod November 15, 2007 through December 31, 2007 was $0.6 million,for the period January 1, 2007 through November 14, 2007 was $4.0million and for the year ended December 31, 2006 was $0.4 million.

 

***NewlyIssued Accounting Standards***

 

In September 2006,the Financial Accounting Standards Board issued Statement of FinancialAccounting Standards No. 157 (“FAS 157”), “Fair Value Measurements.” Thestandard provides guidance for using fair value to measure assets andliabilities in accordance with generally accepted accounting principles, andexpands disclosures about the extent to which companies measure assets andliabilities at fair value, the information used to measure fair value, and theeffect of fair value measurements on earnings. FAS 157 applies whenever otherstandards require or permit assets or liabilities to be measured at fair valuebut does not expand the use of fair value in any new circumstances. FAS 157 iseffective for financial statements issued for fiscal years beginning after November 15,2007, and interim periods within those fiscal years. Early adoption ispermitted. The adoption of FAS 157 will not have a material effect on ourearnings or financial position.

 

In February 2007,the Financial Accounting Standards Board issued Statement of FinancialAccounting Standards No. 159 (“FAS 159”), “The Fair Value Option forFinancial Assets and Financial Liabilities – including an amendment of FAS 115.”  FAS 159 provides entities with theopportunity to choose to measure eligible financial instruments and certainother items at fair value at specified election dates to mitigate volatility inreported earnings caused by measuring related assets and liabilitiesdifferently without having to apply complex hedge accounting provisions.  FAS 159 is effective for financial statementsissued for fiscal years beginning after November 15, 2007 and interimperiods within those fiscal years.  Earlyadoption is permitted provided a company also elects to apply the provisions ofFAS 157.  The adoption of FAS 159 willnot have a material effect on our earnings or financial position.

 

In December 2007,the Financial Accounting Standards Board issued Statement of Financial AccountingStandards No. 141(revised 2007), “Business Combinations” (“FAS 141R”). FAS 141Restablishes principles and requirements for how an acquirer recognizes andmeasures in its financial statements the identifiable assets acquired, theliabilities assumed, any noncontrolling interest in the acquiree and thegoodwill acquired. FAS 141R also establishes disclosure requirements toenable the evaluation of the nature and financial effects of the businesscombination. FAS 141R applies prospectively to business combinations forwhich the acquisition date is on or after the beginning of the first annualreporting period beginning on or after December 15, 2008.  An entity may not apply it before that date.

 

In December 2007,the Financial Accounting Standards Board issued Statement of Financial AccountingStandards No. 160,“Noncontrolling Interests in Consolidated Financial Statements—an amendment of AccountingResearch Bulletin No. 51” (“FAS 160”). FAS 160 establishes accounting andreporting standards for ownership interests in subsidiaries held by partiesother than the parent, the amount of consolidated net income attributable tothe parent and to the noncontrolling interest, changes in a parent’s ownershipinterest and the valuation of retained noncontrolling equity investments when asubsidiary is deconsolidated. FAS 160 also establishes disclosurerequirements that clearly identify and distinguish between the interests of theparent and the interests of the noncontrolling owners. FAS 160 iseffective for fiscal years, and interim periods within those fiscal years,beginning on or after December 15, 2008 (that is, January 1, 2009,for entities with calendar 

 

51

----

 

year-ends). Earlier adoption is prohibited. This statement is required to be appliedprospectively as of the beginning of the fiscal year in which it initiallyapplied, except for the presentation and disclosure requirements, which must beapplied retrospectively for all periods presented.

 

As required by EmergingIssues Task Force Issue No. 03-06, “Participating Securities and the Two-Class Methodunder FASB Statement No. 128, Earnings per Share” (“EITF 03-6”), thegeneral partner’s interest in net income is calculated as if all net income forthe period was distributed according to the terms of the partnership agreement,regardless of whether those earnings would or could be distributed.  The partnership agreement does not providefor the distribution of net income; rather, it provides for the distribution ofavailable cash, which is a contractually defined term that generally means allcash on hand at the end of each quarter after provision for certain cashrequirements.  Unlike available cash, netincome is affected by non-cash items, such as depreciation and amortization.

 

***Industry Overview***

* *

The table below shows the daily TCE rates thatprevailed in markets in which the Partnership’s vessels operated for theperiods indicated. It is important to note that the spot market is quoted in ARrates. The conversion of AR rates to the following TCE rates required thePartnership to make certain assumptions as to brokerage commissions, port time,port costs, speed and fuel consumption, all of which will vary in actual usage.In each case, the rates may differ from the actual TCE rates achieved by thePartnership in the period indicated because of the timing and length of voyagesand the portion of revenue generated from long-term charters.

 

**U.S. Flag Jones Act Product Carriers**

** **

**Average SpotMarket TCE Rates**

**Jones Act ProductCarriers and Articulated Tug Barges (ATBs)**

 
| ** **         | ** ** | **Q1-2007** | ** ** | **Q2-2007** | ** ** | **Q3-2007** | ** ** | **Q4-2007** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|----------|------------|----------|------------|----------|------------|
| 45,000 dwt Tankers |       | $           | 64,800     |        | $          | 56,700      |       | $           | 51,100     |     | $          | 51,800   |       | $        | 56,100     |   | $ | 54,800 |   | $ | 48,700 |   |
| 30,000 dwt ATBs    |       | $           | 41,900     |        | $          | 37,000      |       | $           | 33,200     |     | $          | 33,600   |       | $        | 36,400     |   | $ | 35,300 |   | $ | 30,600 |   |

 

Rates for Jones Act Product Carriers and handysizeATBs averaged $56,100 per day and $36,400 per day, respectively in 2007.Product carrier rates in 2007 were 2% higher than the 2006 average and average2007 ATB rates were 3% higher than the 2006 average. Higher refineryutilization rates at Gulf Coast refineries helped increase rates in the firsthalf of 2007 for both product carriers and handysize ATBs compared with thefirst half of 2006 rates. Higher fuel costs, not recoverable through contracts,caused average TCE rates in the second half of 2007 to be lower than the secondhalf of 2006 rates.

 

In the first quarter of 2007, average spot TCE ratesfor handymax tankers and handysize ATBs increased 29% compared with the firstquarter of 2006.  Although refinerymaintenance in the first quarter of 2007 was extensive, the increase in freightrates reflected significantly higher refinery utilization rates of 87.4% atGulf Coast refineries compared with the first quarter of 2006 rate of 83.2%.

 

Rates for Jones Act product carriers and handysize ATBs during the second quarter of 2007 were 12% higher than average ratesin the comparable quarter of 2006. The higher average rates realized in 2007reflected an increase in both tanker and barge movements of petroleum productsfrom Gulf Coast refineries to the lower Atlantic states as well as to the West Coast.

 

Average rates in the third quarter of 2007 for handymax tankers and handysize ATBs were 12% below the average rates in the third quarter of 2006. 2007rates were negatively impacted by increases in fuel costs not recoverable through contracts and increases in available tonnage resulting from additional tankers inthe spot market.

 

Average spot TCE rates in the fourth quarter of 2007for handymax tankers and handysize ATBs declined 14% from the fourth quarter of2006, driven by the higher fuel prices not recoverable through contracts.

 

The Delaware Bay lightering business transported anaverage of 259,000 barrels per day during 2007, a 6% increase over 2006. Thelarger volumes transported reflected an increase in draft restrictions at oneof the refineries compared with the prior year and an increase in refinery throughput levels.

 

52

----

 

As of December 31, 2007, the total Jones Act product carrier fleet oftankers, ATBs and ITBs (Integrated Tug Barges) consisted of 61 vessels, or 2.4million deadweight tons, which was a four vessel decrease from December 31,2006. There were seven deliveries in 2007 consisting of five newbuilds and twoconverted vessels. Also in 2007, there were eight vessels scrapped and threetankers removed from service to undergo conversion to double hulls.  The Jones Act product carrierorderbook consists of 33 tankers and barges in the 160,000 to 420,000 barrelsize range, of which 31 are scheduled for delivery through 2011, and two doublehull conversions, resulting in a total orderbook of 35 vessels. These additionswill be offset by the phasing out of 22 vessels during the next nine years inaccordance with OPA 90 regulations. An additional seven double hull tankerswill also likely be retired upon reaching 35 years of service resulting in apotential of 29 vessels being removed from the Jones Act fleet. The Jones Act product carrier fleet isexpected to increase by three vessels during 2008 with five vessels being addedand two being sold for scrap.

 

According to the latest International Energy Agencyreport, 2008 demand in the U.S. is forecasted to be approximately 20.7 millionbarrels per day, which is a reduction of approximately 100,000 barrels per dayfrom 2007 demand. This projected decrease is primarily the result of increasingevidence of an economic slowdown in the U.S. combined with significantly higherprices for transportation fuels.

 

Refinery utilization levels in the U.S. are forecastto increase during 2008 from 88.7% during 2007 as a result of increasedthroughput at BP’s Texas City refinery and lower planned maintenance activitieselsewhere. Higher refining utilization, especially in the Gulf Coastrefineries, will result in an increase in the production of gasoline, dieseland aviation gasoline. The incremental production of clean products in the GulfCoast will likely be moved on Jones Act product carriers as pipelines movingproducts from the Gulf Coast to the East Coast are currently operating at fullcapacity. This should increase demand for Jones Act product carriers in 2008.

 

Freight rates remain highly sensitive to severeweather, geopolitical and economic events. Hurricanes in the Gulf of Mexicocould have a pronounced effect on freight rates for both crude oil and productmovements depending on the extent to which upstream and downstream facilitiesare affected.

 

***Year Ended December 31, 2007 Compared with Year Ended December 31,2006***

* *

*TimeCharter Equivalent Revenues*

 

The followingtable reconciles TCE revenues to shipping revenues, as reported in theconsolidated statements of operations:

 
| ** **            | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------|------------|--------------------------------------------|------------|
| **In thousands** | ** ** | **2007**                                   | ** ** | **2006** | ** ** |
| TCE revenues          |       | $                                          | 182,671    |   | $ | 78,260 |   |
| Voyage expenses       |       | 31,336                                     |       | 10,592 |   |
| Shipping  revenues    |       | $                                          | 214,007    |   | $ | 88,852 |   |

 

Consistent withgeneral practice in the shipping industry, we use TCE revenues, which representshipping revenues less voyage expenses, as a measure to compare revenuesgenerated from voyage charters to revenues generated from time charters. TCErevenues, a non-U.S. GAAP measure, provides additional meaningful informationin conjunction with shipping revenues, the most directly comparable U.S. GAAPmeasure, because it assists management in making decisions regarding thedeployment and use of our vessels and in evaluating their financialperformance.

 

The followingtable provides information with respect to average daily TCE rates earned andrevenue days for the years ended December 31, 2007 and 2006:

 
| ** **                      | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------|------------|--------------------------------------------|------------|
| ** **                      | ** ** | **2007**                                   | ** ** | **2006** | ** ** |
| Revenue Days:                   |       |                                       |       |   |   |
| Jones Act ATBs                  |       | 2,273                                      |       | 216 |   |
| Jones Act  Product Carriers     |       | 2,528                                      |       | 1,432 |   |
| Non-Jones Act  Product Carriers |       | 718                                        |       | 720 |   |
|                            |       | 5,519                                      |       | 2,368 |   |

 

53

----

 
| Average Daily TCE Rates: | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------|------------|------------|------------|------------|------------|
| Jones Act ATBs                          |       | $          | 28,787     |       | $          | 25,139 |   |
| Jones Act  Product Carriers             |       | $          | 36,292     |       | $          | 33,431 |   |
| Non-Jones Act  Product Carriers         |       | $          | 35,504     |       | $          | 34,661 |   |

 

TCE revenuesincreased $104.4 million, or 133%, from $78.3 million for the year ended December 31,2006 to $182.7 million for the year ended December 31, 2007. The increasein TCE revenues resulted primarily from an increase in revenue days of 3,151 inthe year ended December 31, 2007, compared with the same 2006 period.These additional days were attributable to the acquisition of Maritrans, whichaccounted for 2,655 of the additional revenue days in 2007.  In addition, we took delivery of the *Overseas Houston, Overseas Long Beach* andthe *Overseas Los Angeles* in February, June andNovember 2007, respectively. At the time of the Maritrans acquisition, theATB *OSG 242* was in a shipyardbeing double-hulled and later completed on April 5, 2007. On February 20,2007, a second ATB, the *M211*, was takenout of service and entered the shipyard to be doubled hulled, which is nowexpected to be completed in the second quarter of 2008.

 

*VesselExpenses*

 

The followingtable provides information with respect to average daily vessel expenses andoperating days for the years ended December 31, 2007 and 2006:

 
| ** **                      | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------|------------|--------------------------------------------|------------|
| ** **                      | ** ** | **2007**                                   | ** ** | **2006** | ** ** |
| Operating Days:                 |       |                                       |       |   |   |
| Jones Act ATBs                  |       | 2,920                                      |       | 249 |   |
| Jones Act  Product Carriers     |       | 2,750                                      |       | 1,522 |   |
| Non-Jones Act  Product Carriers |       | 730                                        |       | 730 |   |
|                            |       | 6,400                                      |       | 2,501 |   |

 
| Average Daily Vessel Expenses: | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------------|------------|------------|------------|------------|------------|
| Jones Act ATBs                                |       | $          | 8,604      |       | $          | 6,355 |   |
| Jones Act  Product Carriers                   |       | $          | 17,132     |       | $          | 14,589 |   |
| Non-Jones Act  Product Carriers               |       | $          | 14,475     |       | $          | 14,586 |   |

 

Vessel expensesincreased $48.4 million, or 141%, from $34.4 million for the year ended December 31,2006 to $82.8 million for the year ended December 31, 2007.  The increase in expenses and operating dayswas principally the result of the inclusion of the Maritrans fleet, which added$34.7 million to vessel expenses and 3,339 operating days in the 2007 period,and to the delivery of three bareboat chartered-in vessels in 2007. Inaddition, the charter on the *Overseas GalenaBay* was converted from a bareboat charter to a bareboat charter withoperating expense reimbursement in July 2006, which increased vesselexpenses and TCE revenues by comparable amounts.

 

*Bareboat Charter Expenses*

 

Bareboat charterexpenses were $13.7 million for the year ended December 31, 2007. The *Overseas Houston,**OverseasLong Beach* and *Overseas Los Angeles*were delivered from the shipyard in February, June and November 2007,respectively and operated for 325 days, 189 days and 46 days in 2007.

 

*Depreciationand Amortization*

 

Depreciation andamortization expense increased $26.2 million, or 121%, from $21.6 million forthe year ended December 31, 2006 to $47.8 million for the year ended December 31,2007. These increases were primarily due to an increase in the operating fleetas a result of the acquisition of Maritrans, which added $20.8 of depreciationexpense. Depreciation and amortization for the years ended December 31,2007 and 2006 includes $4.6 million and $0.4 million, respectively, related tothe amortization of intangibles resulting from the acquisition of Maritrans.

 

54

----

 

*Generaland Administrative Expenses*

 

General and administrative expenses increased $13.5 million, or 170%,from $7.9 million for the year ended December 31, 2006 to $21.5 millionfor the year ended December 31, 2007. Prior to November 14, 2007,general and administrative expenses were allocated based on our fleet’sproportionate share of OSG’s total ship-operating (calendar) days. For theyears ended December 31, 2007 and 2006, ship-operating days were6,400 days and 2,501 days, respectively. Management believes these allocations reasonably present the financialposition, results of operations and cash flows of OSG America Predecessor forthe periods presented. General and administrative expenses for the period November 15,2007 to December 31, 2007 reflects actual expenses incurred.

 

*Equity in Income of Affiliated Companies*

* *

On a quarterlybasis, we recognize our share of the estimated incentive charter hire that hasbeen deemed earned through the reporting date that is not reversible subsequentthereto.  ATC fully distributes its netincome for each year by making a distribution in the first quarter of thefollowing year.  Equity in income ofaffiliated companies decreased by $1.1 million, or 16%, from $6.8 million forthe year ended December 31, 2006 to $5.7 million for the year ended December 31,2007. These decreases were attributable to a reduction in the number of vesselsoperated by ATC and a decrease in the incentive hire rate earned by ATC in 2007compared with 2006.

 

*Interest Expense, other*

* *

Interest expenseon third party obligations increased $1.0 million, or 25%, from $4.1 millionfor the year ended December 31, 2006 to $5.1 million for the year ended December 31,2007. As a result of the acquisition of Maritrans, we assumed $55.6 million ofsecured term loans. The net interest expense incurred with respect to theseterm loans amounted to $3.1 million for the year ended December 31, 2007.Interest expense for year ended December 31, 2007 is net of $1.5 millioncapitalized in connection with vessel construction.

 

*Provision for Federal Income Taxes*

* *

The income taxprovisions for the period January 1, 2007 through November 14, 2007and the year ended December 31, 2006 were based on the pre-tax resultsdetermined on a separate-return basis. The changes in the tax provisions for the period ended November 14,2007 compared with the 2006 period were primarily attributable to theacquisition of the Maritrans fleet.

 

In 2006, OSG madean election under the American Jobs Creation Act of 2004, effective for yearscommencing with 2005, to have its qualifying U.S. flag operations taxed under anew tonnage tax regime rather than under the usual U.S. corporate income taxregime. As a result of that election, our taxable income for U.S. income taxpurposes with respect to the eligible U.S. flag vessels did not include incomefrom qualifying shipping activities in U.S. foreign trade (i.e., transportationbetween the U.S. and foreign ports or between foreign ports).

 

As a result of ourinitial public offering, as a partnership, we are not a taxable entity and willincur no federal income tax liability. Instead, each unitholder will be required to take into account his orher share of items of income, gain, loss, and deduction of the partnership incompleting his federal income tax liability without regard to whethercorresponding cash distributions are received from the partnership by him.

 

***Year Ended December 31, 2006 Compared with Year Ended December 31,2005***

* *

*TimeCharter Equivalent Revenues*

 

The followingtable reconciles TCE revenues to shipping revenues, as reported in theconsolidated statements of operations:

 
| ** **            | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------|------------|--------------------------------------------|------------|
| **In thousands** | ** ** | **2006**                                   | ** ** | **2005** | ** ** |
| TCE revenues          |       | $                                          | 78,260     |   | $ | 46,785 |   |
| Voyage expenses       |       | 10,592                                     |       | 3,055 |   |
| Shipping  revenues    |       | $                                          | 88,852     |   | $ | 49,840 |   |

 

55

----

 

During the year ended December 31, 2006, TCErevenues increased $31.5 million, or 67%, to $78.3 million from $46.8 millionfrom the year ended December 31, 2005. This increase in TCE revenuesresulted principally from an increase in the average rate earned of $4,500 perday and an increase of 729 revenue days. The increase in the average daily rateearned was principally attributable to the conversion of the bareboat charterin respect of the *Overseas Galena Bay*to a bareboat charter with operating expense reimbursement in June 2006and the impact of the redelivery of the *OverseasPuget Sound* under a then-existing long-term time charter and therate earned on its new time charter that commenced in 2006. The additionalrevenue days were attributable to the inclusion of the *Overseas Maremar* and *Overseas Luxmar* for the full year in 2006,compared with only 202 days during 2005 (see below). Additionally, theacquisition of Maritrans contributed an additional 278 revenue days in 2006.The above increases were, however, offset by an increase number of drydock andrepair days, which increased to 101 days in 2006 from 23 days in2005.

 

*Vessel Expenses*

 

Vessel expenses increased by $14.8 million to $34.4million for the year ended December 31, 2006 from $19.6 million for the yearended December 31, 2005. The increase in expenses was principally a resultof the inclusion of the *Overseas Maremar*and the *Overseas Luxmar* for thefull year, compared with only 202 days in 2005, together with theconversion of the bareboat charter in respect of the *Overseas Galena Bay* to a bareboat charter with operatingexpense reimbursement in July 2006. In addition, the inclusion of theMaritrans fleet from November 29, 2006 added $2.4 million to vesselexpenses in 2006.

 

*Depreciation and Amortization*

 

Depreciation and amortization increased by $7.0million to $21.6 million for the year ended December 31, 2006 from $14.6million for the year ended December 31, 2005. This increase was primarilydue to an increase in the operating fleet as a result of the acquisition ofMaritrans and the inclusion of the *OverseasMaremar* and the *Overseas Luxmar*for the full year.

 

*General and AdministrativeExpenses*

 

General and administrative expenses were allocatedbased on OSG America Predecessor’s proportionate share of OSG’s totalship-operating days for each period. Our ship-operating days were2,501 days for the year ended December 31, 2006 compared with1,662 days for the year ended December 31, 2005.

 

*Equity in Income of AffiliatedCompanies*

 

Equity in income of affiliated companies decreased by$1.3 million to $6.8 million for the year ended December 31, 2006, from$8.1 million for the year ended December 31, 2005. This decrease wasattributable to a reduction in the number of vessels operated by ATC.

 

*Interest Expense, other*

 

Interest expense on third party obligations decreasedby $0.4 million to $4.1 million for the year ended December 31, 2006 from$4.5 million for the year ended December 31, 2005. This decrease wasprincipally a result of a decrease in the principal amount outstanding underthe two capital leases as a result of the regular monthly payments made.Interest expense for the year ended December 31, 2006 is net of $0.2million that was capitalized in connection with vessel construction.

 

**EBITDA**

 

EBITDA representsnet income plus interest expense, provision for income taxes and depreciationand amortization expense. EBITDA is presented to provide investors withmeaningful additional information that management uses to monitor ongoingoperating results and evaluate trends over comparative periods.

 

EBITDA assists ourmanagement and investors by increasing the comparability of our fundamentalperformance from period to period and against the fundamental performance ofother companies in our industry that provide EBITDA information. This increasedcomparability is achieved by excluding the potentially disparate effectsbetween periods or companies of interest expense, taxes, depreciation oramortization, which items may significantly affect net income between periodsand are affected by various and possibly changing financing methods, capitalstructure and historical cost basis. We believe that including EBITDA as afinancial and operating measure benefits investors in (a) selectingbetween investing in us and other investment alternatives and (b) monitoringour ongoing financial and operational strength and health in assessing whetherto continue to hold common units.

 

56

----

 

EBITDA allows usto assess the ability of assets to generate cash sufficient to service debt,make distributions and undertake capital expenditures. By eliminating the cashflow effect resulting from our existing capitalization and other items such asdrydocking expenditures and working capital changes (which may varysignificantly from period to period), EBITDA provides a consistent measure ofour ability to generate cash over the long term. Management uses thisinformation as a significant factor in determining (a) our propercapitalization (including assessing how much debt to incur and whether changesto the capitalization should be made) and (b) whether to undertakematerial capital expenditures and how to finance them, all in light of existingcash distribution commitments to unitholders. Use of EBITDA as a liquiditymeasure also permits investors to assess our fundamental ability to generatecash sufficient to meet cash needs, including distributions on our commonunits.

 

EBITDA should notbe considered as a substitute for net income, cash flow from operatingactivities prepared in accordance with accounting principles generally acceptedin the United States or as a measure of profitability or liquidity.  While EBITDA is frequently used as a measure ofoperating results and performance, it is not necessarily comparable to othersimilarly titled captions of other companies due to differences in methods ofcalculation.

 

The followingtable reconciles net income, as reflected in our statements of operations, toEBITDA:

 
| ** **                          | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------|------------|--------------------------------------------|------------|
| **In thousands**               | ** ** | **2007**                                   | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net income                          |       | $                                          | 9,167      |   | $ | 7,736 |   | $ | 2,007 |   |
| Provision for  federal income taxes |       | 2,048                                      |       | 768 |   | 1,325 |   |
| Interest expense                    |       | 11,500                                     |       | 12,612 |   | 10,685 |   |
| Depreciation and  amortization      |       | 47,766                                     |       | 21,592 |   | 14,553 |   |
| EBITDA                              |       | $                                          | 70,481     |   | $ | 42,708 |   | $ | 28,570 |   |

 

The followingtable reconciles net cash provided by operating activities as reflected in ourstatements of cash flows, to EBITDA:

 
| ** **                                                      | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------------------------|------------|--------------------------------------------|------------|
| **In thousands**                                           | ** ** | **2007**                                   | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net cash  provided by operating activities                      |       | $                                          | 28,313     |   | $ | 13,299 |   | $ | 19,800 |   |
| Payments for  drydocking                                        |       | 17,407                                     |       | 5,835 |   | 115 |   |
| Interest expense                                                |       | 11,500                                     |       | 12,612 |   | 10,685 |   |
| Undistributed  earnings from affiliated companies               |       | (1,067                                     | )          | (1,021 | ) | 838 |   |
| Changes in  operating assets and liabilities (except for taxes) |       | 11,456                                     |       | 6,732 |   | (5,219 | ) |
| Federal income  taxes                                           |       | 3,325                                      |       | 4,924 |   | 2,040 |   |
| Other                                                           |       | (453                                       | )          | 327 |   | 311 |   |
| EBITDA                                                          |       | $                                          | 70,481     |   | $ | 42,708 |   | $ | 28,570 |   |

 

***Liquidity and Sources of Capital***

* *

Working capital atDecember 31, 2007 was $15.0 million compared with a working capitaldeficiency of $5.1 million at December 31, 2006. We operate in a capitalintensive industry. In addition to distributions on our partnership units, ourprimary liquidity requirements relate to our operating expenses, includingpayments under our management and administrative services agreements,drydocking expenditures, payments of interest and principal under our senior securedrevolving credit facility and lease obligations. Our long-term liquidity needsprimarily relate to capital expenditures for the purchase or construction ofvessels.

 

The amount ofavailable cash we need to pay the minimum quarterly distributions for fourquarters on our common units, subordinated units and general partner interestis $45.9 million. There is no guarantee that we will pay the minimum quarterlydistribution on our common and subordinated units in any quarter and we will beprohibited from making any distributions to unitholders if it would cause anevent of default, or an event of default exists, under our credit agreement.

 

We anticipate thatour primary sources of funds for our short-term liquidity needs will be cashflows from operations. We believe that cash flows from operations and bankborrowings from our senior secured revolving credit facility referred to belowwill be sufficient to meet our existing short-term liquidity needs for the next12 months.

 

57

----

 

Our secured termloan agreements impose certain operating restrictions and establish minimumfinancial covenants. We were in compliance with the financial covenantscontained in the secured loan agreements as of December 31, 2007. Ourfailure to comply with any of the covenants in the agreements could result in adefault, which would permit lenders to accelerate the maturity of the debt andto foreclose upon collateral securing the debt. Under those circumstances, wemight not have sufficient funds or other resources to satisfy our remainingobligations.

 

*Cash Flows*

 

*Operatingcash flows.*  Net cash flow from operating activities was$28.3 million, $13.3 million and $19.8 million for the years ended December 31, 2007,2006 and 2005, respectively.

 

The increase of $15.0 million from 2006 to 2007 wasprimarily attributable to the Maritrans acquisition which added 10 vesselsto our fleet. Income from vessel operations for the year ended December 31, 2007increased $2.7 million over 2006 and depreciation and amortizationincreased by $26.2 million primarily as a result of the Maritrans acquisition.These increases were partially offset by an increase of $11.6 million inpayments for drydocking.

 

Net cash flow from operating activities decreased to$13.3 million in 2006, from $19.8 million in 2005, primarilyreflecting an increase of $5.7 million in payments for drydocking and areduction of $17.3 million from the timing of our cash receipts andpayments, partially offset by increases of $8.3 million in income fromvessel operations and $7.0 million in depreciation and amortization.

 

Net cash flow from operating activities depends uponthe timing and amount of drydocking expenditures, repairs and maintenanceactivity, vessel additions and dispositions, changes in interest rates,fluctuations in working capital balances and spot market freight rates. Thenumber of vessel drydockings tends to vary from year to year.

 

*Investingcash flows.*  Net cash used in investing activities was$44.8 million, $345.5 million and $74.1 million for the years ended December 31, 2007,2006 and 2005, respectively.

 

Investing activities in 2007 related primarily tocosts that were incurred double-hulling two barges. During 2006, investingactivities related primarily to the acquisition by OSG of Maritrans on November 28,2006 for $340.9 million. During 2005, investing activities consisted of theacquisition of two Handysize product carriers for $74.1 million.

 

*Financingcash flows.* Netcash provided by financing activities was $19.5 million, $332.4 million and$54.3 million for the years ended December 31, 2007, 2006 and 2005,respectively.

 

Net financing cash outflow generally represents theamount of cash flow generated from operations less the amount used forinvesting activities. The investment in Maritrans and the two vessels acquiredduring 2005 were financed primarily through advances from OSG in the form ofnon-interest bearing advances. Loans and advances to OSG were contributed tocapital prior to the completion of our initial public offering on November 15,2007. Issuances of common stock during 2005 represents amounts received inconnection with the capitalization of new vessel-owning subsidiaries.Repayments of debt in 2005, 2006 and 2007 represent regularly scheduledinstallments under existing capital lease obligations and secured term loans.

 

*Ongoing Capital Expenditures*

 

Marinetransportation of crude oil and refined petroleum products is acapital-intensive business, which requires significant investment to maintainan efficient fleet and stay in regulatory compliance.

 

Over the nextthree years, we estimate that we will spend an average of approximately $18 to$20 million per year for drydocking and classification society surveys. Wedrydock our vessels twice in every five-year period and, as our fleet maturesand expands, our drydocking expenses will likely increase. Ongoing costs forcompliance with environmental regulations are primarily included as part of ourdrydocking and classification society survey costs or are a component of ouroperating expenses. In addition, vessels may have to be drydocked in the eventof accidents or other unforeseen damage. Periodically, we also incurexpenditures to acquire or construct additional product carriers and bargesand/or to upgrade or double hull vessels in order to comply with statutoryregulations. We are not aware of any regulatory changes or environmentalliabilities that will have a material impact on our current or futureoperations.

 

We believe thatour cash flow from charters-out will be sufficient to cover the interest andprincipal payments under our debt agreements, amounts due under theadministrative services and management agreements, other general andadministrative expenses and other working capital requirements for the shortand medium term. To the extent we pursue 

 

58

----

 

other vesselacquisitions; we expect to finance any such commitments from existing long-termcredit facilities and additional long-term debt as required. The amounts ofworking capital and cash generated from operations that may, in the future, beutilized to finance vessel commitments are dependent on the rates at which wecan charter our vessels. Such charter rates are volatile.

 

Because we distribute all of our available cash, wemay not grow as fast as companies that reinvest their available cash. We expectthat we will rely upon external financing sources, including bank borrowingsand the issuance of debt and equity securities, to fund acquisitions andexpansion capital expenditures. As a result, to the extent we are unable tofinance growth externally, our cash distribution policy will significantlyimpair our ability to grow. To the extent we issue additional units inconnection with any acquisitions or expansion capital expenditures, the paymentof distributions on those additional units may increase the risk that we willbe unable to maintain or increase our per unit distribution level, which inturn may affect the available cash that we have to distribute on each unit. Ourpartnership agreement does not limit our ability to issue additional units,including units ranking senior to the common units being offered under thisprospectus. The incurrence of additional debt by us or our operatingsubsidiaries would result in increased interest expense, which in turn may alsoaffect the available cash that we have to distribute to our unitholders.

 

*AggregateContractual Obligations*

 

A summary of ourlong-term contractual obligations as of December 31, 2007 follows:

 
| **In thousands**                                   | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **Beyond  2012** | ** ** | **Total** | ** ** |
|---------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|------------------|------------|-----------|------------|
| Long-term debt (1)                                      |       | $        | 5,716      |     | $          | 5,717    |       | $        | 5,717      |     | $          | 5,716            |       | $         | 5,716      |   | $ | 35,039 |   | $ | 63,621 |   |
| Obligations  under capital leases (1)                   |       | 8,884    |       | 9,692    |       | 9,691    |       | 8,103    |       | —   |       | —           |       | 36,370    |       |
| Operating lease  obligations (chartered-in vessels) (2) |       | 30,154   |       | 51,791   |       | 61,539   |       | 64,331   |       | 64,306   |       | 150,944          |       | 423,065   |       |
| Construction  installments (3)                          |       | 25,856   |       | 2,355    |       | —   |       | —   |       | —   |       | —           |       | 28,211    |       |
| Total                                                   |       | $        | 70,610     |     | $          | 69,555   |       | $        | 76,947     |     | $          | 78,150           |       | $         | 70,022     |   | $ | 185,983 |   | $ | 551,267 |   |

 

----

(1)          Amounts shown include contractualinterest obligations.

(2)          As of December 31, 2007 we hadcharter-in commitments for eight vessels on leases that are, or will be,accounted for as operating leases. These leases provide us with various renewaloptions.

(3)          Represents remaining shipyard commitmentsand excludes capitalized interest and other construction costs.

 

*SeniorSecured Revolving Credit Facility*

 

On November 15,2007, OSG America Operating Company LLC, a wholly owned subsidiary of us,entered into a $200 million senior secured revolving credit facility with INGBank N.V. and DnB NOR Bank ASA.  As of December 31,2007, there were no borrowings outstanding under the facility.

 

Borrowings underthe senior secured revolving credit facility are due and payable five yearsafter the date that the facility agreement was signed (the “closing date”),subject to a 24-month extension period which may be requested by thePartnership on or after the second anniversary of the closing date (up to90 days prior to the fifth anniversary of the closing date) and which may beapproved by the lenders. Drawings under the facility will be available on arevolving basis until the earlier of one month prior to the applicable maturitydate or the date on which the facility is permanently reduced to zero and thelenders are no longer required to make advances. The maximum number of advancespermitted to be outstanding under the senior secured revolving credit facilityat any one time will be ten.

 

Borrowings underthe senior secured revolving credit facility are secured by, among otherthings, first preferred mortgages on certain owned vessels, and are guaranteedby us and certain of our subsidiaries.

 

OSG AmericaOperating Company LLC will be able, at its option, to prepay all loans underour senior secured revolving credit facility at any time without penalty (otherthan customary LIBOR breakage costs). The outstanding loans under the senior secured revolving credit facilitywill bear interest at a rate equal to LIBOR plus the applicable margin (70basis points per year until the fifth anniversary of the closing date and, ifthe extension option is exercised, 75 basis points per year thereafter).

 

59

----

 

The senior secured revolving credit facility will prevent us fromdeclaring dividends or making distributions if any event of default, as definedin the senior secured revolving credit agreement, exists or would result fromsuch payments. In addition, the senior secured revolving credit facilitycontains covenants requiring us to adhere to certain financial covenants.

 

*InterestRate Risk*

 

We are exposed to the impact of interest rate changes primarily throughour unhedged floating-rate borrowings. Significant increases in interest ratescould adversely affect our operating margins, results of operations and ourability to service our debt. From time to time, we may use interest rate swapsto reduce our exposure to market risk from changes in interest rates. Theprincipal objective of these contracts would be to minimize the risks and costsassociated with our floating-rate debt. As at December 31, 2007, allof our long-term debt consisted of fixed-rate secured term loans.

 

We intend to invest our cash in financial instruments with maturitiesof less than three months within the parameters of our investment policy andguidelines.

 

We may use interest rate swaps to manage the impact of interest ratechanges on earnings and cash flows. Changes in the fair value of interest rateswaps are either offset against the fair value of assets or liabilities throughincome, or recognized in other comprehensive income until the hedged item isrecognized in income. The ineffective portion of an interest rate swap changein fair value is immediately recognized in income. Premiums and receipts, ifany, are recognized as adjustments to interest expense over the lives of theindividual contracts.

 

*ForeignCurrency Risk*

 

The shipping industry’s functional currency is the U.S. dollar. All ofour revenues and most of our operating costs are in U.S. dollars.

 

*Off Balance Sheet Arrangements*

 

We do not currently haveany liabilities, contingent or otherwise, that we consider to be off balancesheet arrangements.

 

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

 

See Item 7.

 

60

----

 

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

 

**TABLE OF CONTENTS**

 
| **OSG America L.P. Consolidated and Predecessor Combined Carve-Out Financial Statements**                                                                                                                                                                                                      | ** ** | **Page**   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                                  | ** ** | ** ** |
| Report of Independent  Registered Public Accounting Firm                                                                                                                                                                                                                                                                                    |       | 62         |
|                                                                                                                                                                                                                                                                                                                                        |       |       |
| Consolidated Balance Sheet at December 31, 2007  and Predecessor Combined Carve-Out Balance Sheet as of December 31, 2006                                                                                                                                                                                                         |       | 63         |
|                                                                                                                                                                                                                                                                                                                                        |       |       |
| Consolidated Statement of Operations for the period  November 15, 2007 to December 31, 2007 and Predecessor Combined  Carve-Out Statements of Operations for the period January 1, 2007 to November 14,  2007 and the years ended December 31, 2006 and 2005                                                       |       | 64         |
|                                                                                                                                                                                                                                                                                                                                        |       |       |
| Consolidated Statement of Cash Flows for the period  November 15, 2007 to December 31, 2007 and Predecessor Combined  Carve-Out Statements of Cash Flows for the period January 1, 2007 to  November 14, 2007 and the years ended December 31, 2006 and 2005                                                       |       | 65         |
|                                                                                                                                                                                                                                                                                                                                        |       |       |
| Consolidated  Statement of Changes in Partners’ Capital for the period November 15,  2007 to December 31, 2007 and Predecessor Combined Carve-Out Statements  of Changes in Stockholder’s Deficiency for the period January 1, 2007 to  November 14, 2007 and the years ended December 31, 2006 and 2005 |       | 66         |
|                                                                                                                                                                                                                                                                                                                                        |       |       |
| Notes  to Consolidated and Predecessor Combined Carve-Out Financial Statements                                                                                                                                                                                                                                                              |       | 67         |

 

61

----

 

REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM

 

TheBoard of Directors and Unitholders of OSG America L.P.

 

We haveaudited the accompanying consolidated balance sheet as of December 31,2007 of OSG America L.P. and the related consolidated statements of operations,changes in partners’ capital, and cash flows for the period from November 15,2007 to December 31, 2007,  and thepredecessor combined carve-out balance sheet of OSG America Predecessor as of December 31,2006, and the related predecessor combined carve-out statements of operations,changes in stockholder’s deficiency, and cash flows for the period from January 1,2007 to November 14, 2007 and for each of the two years in the periodended December 31, 2006.  OSG America L.P. and OSG AmericaPredecessor collectively are referred to hereinafter as “Partnership”. Thesefinancial statements are the responsibility of the Partnership’smanagement.  Our responsibility is to express an opinion on thesefinancial statements based on our audits. The financial statements of Alaska Tanker Company, LLC (a joint venturein which the Partnership has a 37.5% interest) as of December 31, 2006 and2007 and for the three years ended December 31, 2007 have been audited byother auditors whose report has been furnished to us, and our opinion on theconsolidated and predecessor combined carve-out financial statements, insofaras it relates to the amounts included for Alaska Tanker Company, LLC, is basedsolely on the report of the other auditors.  In the consolidated financialstatements and the predecessor combined carve-out financial statements, thePartnership’s investment in Alaska Tanker Company, LLC is stated at $5,782,000and $6,848,000 at December 31, 2007 and 2006, respectively, and thePartnership’s equity in the net income of Alaska Tanker Company, LLC is statedat $2,551,000 for the period from November 15, 2007 to December 31,2007 and $3,192,000,  for the predecessorcombined carve-out period from January 1, 2007 to November 14,2007  and $6,811,000 and $8,066,000 forthe two years in the period ended December 31, 2006, respectively.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. We were not engaged toperform an audit of the Partnership’s internal control over financialreporting. Our audits included consideration of internal control over financialreporting as a basis for designing audit procedures  that are appropriatein the circumstances, but not for the purpose of expressing an opinion on theeffectiveness of the Partnership’s internal control over financialreporting.  Accordingly, we express no such opinion. An audit alsoincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, and evaluating the overallfinancial statement presentation. We believe that our audits and the report ofother auditors provide a reasonable basis for our opinion.

 

In ouropinion, based on our audits and the report of the other auditors, theconsolidated and predecessor combined carve-out financial statements referredto above present fairly, in all material respects, the financial position ofOSG America L.P. as of December 31, 2007, and the  results of its operations and its cash flowsfor the period from November 15 to December 31, 2007 and thefinancial position of OSG America Predecessor as of December 31, 2006 andthe results of its operations and cash flows for the period from January 1,2007 to November 14, 2007 and for the two years in the period ended December 31,2006 in conformity with U.S. generally accepted accounting principles.

 

 

/s/ Ernst & Young LLP

 

CertifiedPublic Accountants

 

Tampa,Florida

 

March 6,2008

 

62

----

 

**OSG AMERICA LP**

**CONSOLIDATED AND PREDECESSORCOMBINED CARVE-OUT**

**BALANCE SHEETS**

**DOLLARS IN THOUSANDS**

 
| ** **                                                                 | ** ** | **Successor****As of  December 31,  2007** | ** ** | **Predecessor****As of  December 31,  2006** | ** ** |
|----------------------------------------------------------------------------|------------|------------------------------------------------------|------------|--------------------------------------------------------|------------|
| **Assets**                                                                 |       |                                                 |       |                                                   |       |
| **Current Assets:**                                                        |       |                                                 |       |                                                   |       |
| Cash and cash equivalents                                                  |       | $                                                    | 3,380      |                                                   | $          | 280 |   |
| Voyage receivables                                                         |       | 26,263                                               |       | 18,407                                                 |       |
| Other receivables                                                          |       | 7,146                                                |       | 2,083                                                  |       |
| Inventory                                                                  |       | 2,997                                                |       | 1,900                                                  |       |
| Prepaid expenses and other current assets                                  |       | 3,961                                                |       | 1,325                                                  |       |
| Total current assets                                                       |       | 43,747                                               |       | 23,995                                                 |       |
|                                                                       |       |                                                 |       |                                                   |       |
| Vessels, less accumulated depreciation                                     |       | 405,447                                              |       | 392,953                                                |       |
| Vessels under capital leases, less accumulated amortization                |       | 21,246                                               |       | 25,749                                                 |       |
| Deferred drydock expenditures, net                                         |       | 16,177                                               |       | 4,212                                                  |       |
| Investment in Alaska Tanker Company, LLC                                   |       | 5,782                                                |       | 6,848                                                  |       |
| Intangible assets, less accumulated amortization                           |       | 87,017                                               |       | 91,611                                                 |       |
| Goodwill                                                                   |       | 62,874                                               |       | 64,912                                                 |       |
| Other assets                                                               |       | 8,822                                                |       | 677                                                    |       |
| Total assets                                                               |       | $                                                    | 651,112    |                                                   | $          | 610,957 |   |
|                                                                       |       |                                                 |       |                                                   |       |
| **Liabilities and Partners’ Capital/Stockholder’s Deficiency**   |       |                                                 |       |                                                   |       |
| **Current Liabilities:**                                                   |       |                                                 |       |                                                   |       |
| Accounts payable and accrued expenses                                      |       | $                                                    | 19,522     |                                                   | $          | 15,756 |   |
| Accrued federal income taxes                                               |       | —                                               |       | 3,325                                                  |       |
| Current portion of debt                                                    |       | 2,834                                                |       | 4,202                                                  |       |
| Current obligations under capital leases                                   |       | 6,375                                                |       | 5,771                                                  |       |
| Total current liabilities                                                  |       | 28,731                                               |       | 29,054                                                 |       |
|                                                                       |       |                                                 |       |                                                   |       |
| Long-term debt, less current portion                                       |       | 46,753                                               |       | 51,198                                                 |       |
| Obligations under capital leases                                           |       | 23,846                                               |       | 30,772                                                 |       |
| Advances from affiliated companies                                         |       | 9,657                                                |       | 568,986                                                |       |
| Deferred federal income taxes                                              |       | —                                               |       | 75,237                                                 |       |
| Other non-current liabilities                                              |       | 1,428                                                |       | —                                                 |       |
| Total liabilities                                                          |       | 110,415                                              |       | 755,247                                                |       |
|                                                                       |       |                                                 |       |                                                   |       |
| **Partners’ Capital/Stockholder’s Deficiency:**                  |       |                                                 |       |                                                   |       |
| Partners’ capital                                                     |       | 540,697                                              |       | —                                                 |       |
| Common stock                                                               |       | —                                               |       | 201                                                    |       |
| Additional paid-in capital                                                 |       | —                                               |       | 1,299                                                  |       |
| Accumulated deficit                                                        |       | —                                               |       | (145,790                                               | )          |
| Total partners’ capital/stockholder’s deficiency                 |       | 540,697                                              |       | (144,290                                               | )          |
| Total liabilities and partners’ capital/stockholder’s deficiency |       | $                                                    | 651,112    |                                                   | $          | 610,957 |   |

 

Seenotes to financial statements.

 

63

----

 

**OSG AMERICA LP**

**CONSOLIDATEDAND PREDECESSOR COMBINED CARVE-OUT**

**STATEMENTS OF OPERATIONS**

**DOLLARS IN THOUSAND, EXCEPT PERSHARE AMOUNTS**

 
| ** **                                                                                                                                                                                                                                                                                                                                                                   | ** ** | **Successor****November 15 -  December 31,  2007** | ** ** | **Predecessor****January 1 -  November 14,  2007** | ** ** | **Predecessor  Year ended  December 31,  2006** | ** ** | **Predecessor****Year ended  December 31,  2005** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| **Shipping Revenues:**                                                                                                                                                                                                                                                                                                                                                       |       |                                                              |       |                                                              |       |                                                      |       |                                                        |       |
| Time and bareboat charter revenues                                                                                                                                                                                                                                                                                                                                           |       | $                                                                 | 17,094     |                                                              | $          | 91,517                                                    |       | $                                                           | 49,189     |   | $ | 40,770 |   |
| Voyage charter revenues                                                                                                                                                                                                                                                                                                                                                      |       | 14,042                                                            |       | 91,354                                                            |       | 39,663                                                    |       | 9,070                                                       |       |
|                                                                                                                                                                                                                                                                                                                                                                         |       | 31,136                                                            |       | 182,871                                                           |       | 88,852                                                    |       | 49,840                                                      |       |
| **Operating Expenses:**                                                                                                                                                                                                                                                                                                                                                      |       |                                                              |       |                                                              |       |                                                      |       |                                                        |       |
| Voyage expenses                                                                                                                                                                                                                                                                                                                                                              |       | 4,666                                                             |       | 26,670                                                            |       | 10,592                                                    |       | 3,055                                                       |       |
| Vessel expenses                                                                                                                                                                                                                                                                                                                                                              |       | 11,398                                                            |       | 71,407                                                            |       | 34,430                                                    |       | 19,550                                                      |       |
| Bareboat charter expenses                                                                                                                                                                                                                                                                                                                                                    |       | 3,469                                                             |       | 10,205                                                            |       | —                                                    |       | —                                                      |       |
| Depreciation and amortization                                                                                                                                                                                                                                                                                                                                                |       | 7,001                                                             |       | 40,765                                                            |       | 21,592                                                    |       | 14,553                                                      |       |
| General and administrative                                                                                                                                                                                                                                                                                                                                                   |       | 2,899                                                             |       | —                                                            |       | —                                                    |       | —                                                      |       |
| General and administrative allocated from Overseas Shipholding  Group, Inc.                                                                                                                                                                                                                                                                                             |       | —                                                            |       | 18,564                                                            |       | 7,942                                                     |       | 4,246                                                       |       |
| Loss on charter termination                                                                                                                                                                                                                                                                                                                                                  |       | —                                                            |       | —                                                            |       | —                                                    |       | 2,486                                                       |       |
| Total operating expenses                                                                                                                                                                                                                                                                                                                                                     |       | 29,433                                                            |       | 167,611                                                           |       | 74,556                                                    |       | 43,890                                                      |       |
| Income from vessel operations                                                                                                                                                                                                                                                                                                                                                |       | 1,703                                                             |       | 15,260                                                            |       | 14,296                                                    |       | 5,950                                                       |       |
| Equity in income of affiliated companies                                                                                                                                                                                                                                                                                                                                     |       | 2,551                                                             |       | 3,192                                                             |       | 6,811                                                     |       | 8,066                                                       |       |
| Operating income                                                                                                                                                                                                                                                                                                                                                             |       | 4,254                                                             |       | 18,452                                                            |       | 21,107                                                    |       | 14,016                                                      |       |
| Other income /(expense)                                                                                                                                                                                                                                                                                                                                                      |       | 17                                                                |       | (8                                                                | )          | 9                                                         |       | 1                                                           |       |
|                                                                                                                                                                                                                                                                                                                                                                         |       | 4,271                                                             |       | 18,444                                                            |       | 21,116                                                    |       | 14,017                                                      |       |
| Interest expense to a wholly-owned subsidiary of Overseas Shipholding  Group, Inc.                                                                                                                                                                                                                                                                                      |       | —                                                            |       | 6,426                                                             |       | 8,535                                                     |       | 6,173                                                       |       |
| Interest expense, other                                                                                                                                                                                                                                                                                                                                                      |       | 665                                                               |       | 4,409                                                             |       | 4,077                                                     |       | 4,512                                                       |       |
| Income before federal income taxes                                                                                                                                                                                                                                                                                                                                           |       | 3,606                                                             |       | 7,609                                                             |       | 8,504                                                     |       | 3,332                                                       |       |
| Provision for federal income taxes                                                                                                                                                                                                                                                                                                                                           |       | —                                                            |       | 2,048                                                             |       | 768                                                       |       | 1,325                                                       |       |
| Net income                                                                                                                                                                                                                                                                                                                                                                   |       | $                                                                 | 3,606      |                                                              | $          | 5,561                                                     |       | $                                                           | 7,736      |   | $ | 2,007 |   |
|                                                                                                                                                                                                                                                                                                                                                                         |       |                                                              |       |                                                              |       |                                                      |       |                                                        |       |
| General partner’s interest in net income                                                                                                                                                                                                                                                                                                                                |       | $                                                                 | 72         |                                                              |       |                                                      |       |                                                        |       |   |
|                                                                                                                                                                                                                                                                                                                                                                         |       |                                                              |       |                                                              |       |                                                      |       |                                                        |       |
| Limited partners’ interest:                                                                                                                                                                                                                                                                                                                                             |       |                                                              |       |                                                              |       |                                                      |       |                                                        |       |
| Net income                                                                                                                                                                                                                                                                                                                                                                   |       | $                                                                 | 3,534      |                                                              |       |                                                      |       |                                                        |       |   |
| Net income per unit – basic                                                                                                                                                                                                                                                                                                                                             |       | $                                                                 | 0.12       |                                                              |       |                                                      |       |                                                        |       |   |
|                                      -  diluted                                                                                                                                     |       | $                                                                 | 0.12       |                                                              |       |                                                      |       |                                                        |       |   |
| Weighted average units outstanding  - basic                                                                                                                                                                                                                                                                                                                             |       | 30,002,250                                                        |       |                                                              |       |                                                      |       |                                                        |       |
|                                                            -  diluted |       | 30,002,250                                                        |       |                                                              |       |                                                      |       |                                                        |       |
| ** **                                                                                                                                                                                                                                                                                                                                                                   |       |                                                              |       |                                                              |       |                                                      |       |                                                        |       |
| Basic and diluted net income per share                                                                                                                                                                                                                                                                                                                                       |       |                                                              |       | $                                                                 | 285.20     |                                                      | $          | 2,434.93                                                    |       | $ | 1,873.81 |   |
| Shares used in computing basic and diluted net income per share                                                                                                                                                                                                                                                                                                              |       |                                                              |       | 19,500                                                            |       | 3,177                                                     |       | 1,071                                                       |       |

 

See notes to financial statements.

 

64

----

 

**OSG AMERICA LP**

**CONSOLIDATED AND PREDECESSORCOMBINED CARVE-OUT**

**STATEMENTS OF CASH FLOW**

**DOLLARS IN THOUSANDS**

 

| ** **                                                                                    | ** ** | **Successor****November 15 –  December 31,  2007** | ** ** | **Predecessor****January 1 –  November 14,  2007** | ** ** | **Predecessor****Year Ended  December 31,  2006** | ** ** | **Predecessor****Year Ended  December 31,  2005** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| **Cash Flows from Operating Activities:**                                                     |       |                                                                   |       |                                                                   |       |                                                        |       |                                                        |       |
| Net income                                                                                    |       | $                                                                      | 3,606      |                                                                   | $          | 5,561                                                       |       | $                                                           | 7,736      |   | $ | 2,007 |   |
| Items included in net income not affecting cash flows:                                        |       |                                                                   |       |                                                                   |       |                                                        |       |                                                        |       |
| Depreciation and amortization                                                                 |       | 7,001                                                                  |       | 40,765                                                                 |       | 21,592                                                      |       | 14,553                                                      |       |
| Provision (credit) for deferred federal income taxes                                          |       | —                                                                 |       | 3,162                                                                  |       | (1,153                                                      | )          | (3,075                                                      | )          |
| (Increase) decrease in undistributed earnings of affiliated companies,  net of distributions  |       | (2,551                                                                 | )          | 3,618                                                                  |       | 1,021                                                       |       | (838                                                        | )          |
| Other – net                                                                              |       | 125                                                                    |       | 328                                                                    |       | (327                                                        | )          | (311                                                        | )          |
| Payments for drydocking                                                                       |       | (533                                                                   | )          | (16,874                                                                | )          | (5,835                                                      | )          | (115                                                        | )          |
| Changes in operating assets and liabilities:                                                  |       |                                                                   |       |                                                                   |       |                                                        |       |                                                        |       |
| Increase in receivables                                                                       |       | (2,684                                                                 | )          | (10,235                                                                | )          | (533                                                        | )          | (3,118                                                      | )          |
| (Increase) decrease in other current assets                                                   |       | (2,071                                                                 | )          | (1,662                                                                 | )          | (26                                                         | )          | 276                                                         |       |
| (Decrease) increase in accrued federal income taxes                                           |       | —                                                                 |       | (4,439                                                                 | )          | (3,003                                                      | )          | 2,360                                                       |       |
| (Decrease) increase in accounts payable, accrued expenses and other  liabilities              |       | (3,295                                                                 | )          | 8,491                                                                  |       | (6,173                                                      | )          | 8,061                                                       |       |
| Net cash (used in) provided by operating activities                                           |       | (402                                                                   | )          | 28,715                                                                 |       | 13,299                                                      |       | 19,800                                                      |       |
|                                                                                          |       |                                                                   |       |                                                                   |       |                                                        |       |                                                        |       |
| **Cash Flows from Investing Activities:**                                                     |       |                                                                   |       |                                                                   |       |                                                        |       |                                                        |       |
| Expenditures for vessels                                                                      |       | (3,643                                                                 | )          | (41,113                                                                | )          | (4,623                                                      | )          | (74,116                                                     | )          |
| Acquisition of Maritrans                                                                      |       | —                                                                 |       | —                                                                 |       | (340,860                                                    | )          | —                                                      |       |
| Net cash used in investing activities                                                         |       | (3,643                                                                 | )          | (41,113                                                                | )          | (345,483                                                    | )          | (74,116                                                     | )          |
|                                                                                          |       |                                                                   |       |                                                                   |       |                                                        |       |                                                        |       |
| **Cash Flows from Financing Activities:**                                                     |       |                                                                   |       |                                                                   |       |                                                        |       |                                                        |       |
| Capital contribution by OSG                                                                   |       | —                                                                 |       | 103                                                                    |       | —                                                      |       | 1,100                                                       |       |
| Payments on debt and obligations under capital leases                                         |       | (1,327                                                                 | )          | (10,808                                                                | )          | (5,938                                                      | )          | (5,180                                                      | )          |
| Proceeds from issuance of common units pursuant to initial public  offering                   |       | 129,256                                                                |       | —                                                                 |       | —                                                      |       | —                                                      |       |
| Payment of proceeds to affiliated companies for liabilities owed                              |       | (129,256                                                               | )          | —                                                                 |       | —                                                      |       | —                                                      |       |
| Payments for deferred financing costs                                                         |       | (1,203                                                                 | )          | —                                                                 |       | —                                                      |       | —                                                      |       |
| Changes in advances from affiliates                                                           |       | 9,657                                                                  |       | 23,121                                                                 |       | 338,337                                                     |       | 58,341                                                      |       |
| Net cash provided by financing activities                                                     |       | 7,127                                                                  |       | 12,416                                                                 |       | 332,399                                                     |       | 54,261                                                      |       |
| Net increase (decrease) in cash and cash equivalents                                          |       | 3,082                                                                  |       | 18                                                                     |       | 215                                                         |       | (55                                                         | )          |
| Cash and cash equivalents at beginning of period                                              |       | 298                                                                    |       | 280                                                                    |       | 65                                                          |       | 120                                                         |       |
| Cash and cash equivalents at end of period                                                    |       | $                                                                      | 3,380      |                                                                   | $          | 298                                                         |       | $                                                           | 280        |   | $ | 65 |   |
| **Supplemental schedule of noncash financing activities:**                                    |       |                                                                   |       |                                                                   |       |                                                        |       |                                                        |       |
| Issuance of  units to OSG pursuant to initial public offering                                 |       | $                                                                      | 397,029    |                                                                   | —     |                                                        | —     |                                                        | —     |   |
| Issuance of  general partner interest to OSG America LLC pursuant to initial public  offering |       | $                                                                      | 10,804     |                                                                   | —     |                                                        | —     |                                                        | —     |   |
| Loans and non-interest bearing advances contributed to capital by OSG                         |       |                                                                   |       | $                                                                      | 675,715    |                                                        |       |                                                        |       |   |

 

Seenotes to financial statements.

 

65

----

 

**OSG AMERICA LP**

**CONSOLIDATED AND PREDECESSORCOMBINED CARVE-OUT**

**STATEMENT OF CHANGES IN PARTNERS’ CAPITAL / STOCKHOLDER’S DEFICIENCY**

**DOLLARS AND UNITS IN THOUSANDS**

 
| ** **                                                  | ** ** | **Common Stock** | ** ** | **Additional  Paid-in** | ** ** | **Accumulated** | ** ** | ** **  | ** ** |
|-------------------------------------------------------------|------------|-----------------------|------------|-------------------------|------------|-----------------|------------|-------------|------------|
| ** **                                                  | ** ** | **Shares**            | ** ** | **Amount**              | ** ** | **Capital**     | ** ** | **Deficit** | ** ** | **Total** | ** ** |
| Balance at  December 31, 2004                          |       | 400                   |       | $                       | 200        |            | $          | 200         |       | $ | (155,533 | ) | $ | (155,133 | ) |
| Issuance of  stock                                          |       | 1,100                 |       | 1                       |       | 1,099           |       | —      |       | 1,100 |   |
| Net income                                                  |       | —                |       | —                  |       | —          |       | 2,007       |       | 2,007 |   |
| Balance at  December 31, 2005                          |       | 1,500                 |       | $                       | 201        |            | $          | 1,299       |       | $ | (153,526 | ) | $ | (152,026 | ) |
| Issuance of  stock                                          |       | 18,000                |       | —                  |       | —          |       | —      |       | — |   |
| Net income                                                  |       | —                |       | —                  |       | —          |       | 7,736       |       | 7,736 |   |
| Balance at  December 31, 2006                          |       | 19,500                |       | $                       | 201        |            | $          | 1,299       |       | $ | (145,790 | ) | $ | (144,290 | ) |
| Capital contribution by OSG                                 |       | —                |       | —                  |       | 103             |       | —      |       | 103 |   |
| Net income                                                  |       | —                |       | —                  |       | —          |       | 5,561       |       | 5,561 |   |
| Capital  contribution of advances from affiliated companies |       | —                |       | —                  |       | 675,715         |       | —      |       | 675,715 |   |
| Balance at  November 14, 2007                          |       | 19,500                |       | $                       | 201        |            | $          | 677,117     |       | $ | (140,229 | ) | $ | 537,089 |   |

 
| ** **                                                                                      | ** ** | **Limited Partners** | ** ** | ** **                  | ** ** | ** **  | ** ** |
|-------------------------------------------------------------------------------------------------|------------|---------------------------|------------|-----------------------------|------------|-------------|------------|
| ** **                                                                                      | ** ** | **Common Units**     | ** ** | **Subordinated Units** | ** ** | **General** | ** ** | ** ** | ** ** |
| ** **                                                                                      | ** ** | **Units**                 | ** ** | **Amount**                  | ** ** | **Unit**    | ** ** | **Amount** | ** ** | **Partner** | ** ** | **Total** | ** ** |
| Balance at  November 15, 2007                                                              |       | —                    |       | $                           | —     |        | —     |   | $ | — |   | $ | — |   | $ | — |   |
| Issuance of  common units pursuant to initial public offering                                   |       | 7,500                     |       | 129,256                     |       | —      |       | — |   | — |   | 129,256 |   |
| Issuance of units to Overseas Shipholding  Group, Inc. pursuant to initial public offering |       | 7,500                     |       | 132,343                     |       | 15,000      |       | 264,686 |   | — |   | 397,029 |   |
| Issuance of  general partner interest to OSG America LLC pursuant to initial public  offering   |       | —                    |       | —                      |       | —      |       | — |   | 10,804 |   | 10,804 |   |
| Issuance and  amortization of restricted units awards                                           |       | 2                         |       | 2                           |       | —      |       | — |   | — |   | 2 |   |
| Net income                                                                                      |       | —                    |       | 1,767                       |       | —      |       | 1,767 |   | 72 |   | 3,606 |   |
| Balance at  December 31, 2007                                                              |       | 15,002                    |       | $                           | 263,368    |        | 15,000     |   | $ | 266,453 |   | $ | 10,876 |   | $ | 540,697 |   |

 

Seenotes to financial statements.

 

66

----

 

**Notes to Consolidated andPredecessor Combined Carve-Out Financial Statements:**

 

**Note A—Organization:**

 

OSG America L.P., a Delaware limited partnership (the “Partnership”),was formed on May 14, 2007 to ultimately own a 100% interest in OSGAmerica Operating LLC (the “Operating Company”). The Partnership’s generalpartner, OSG America LLC (the “General Partner”), is a wholly owned subsidiaryof Overseas Shipholding Group, Inc. (“OSG”), a publicly traded companyincorporated in Delaware. The Partnership obtained the foregoing assets inconnection with the initial public offering of its common units, which wasconsummated on November 15, 2007.

 

At or prior to the completion of the offering, the followingtransactions occurred:

 

·                  The Partnership entered into a contributionagreement with OSG pursuant to which OSG transferred to the Partnership all ofthe outstanding membership interests of the 18 vessel subsidiaries,  represented by the 19,500 issued andoutstanding common registered shares as reflected in the accompanyingpredecessor combined carve-out statement of changes in stockholder’s deficiencyat November 14, 2007, that own the vessels in the Partnership’s initialfleet and a 37.5% membership interest in Alaska Tanker Company, LLC;

·                  OSG assigned to the Partnership theagreements to bareboat charter, from subsidiaries of Aker American Shipping, Inc.,  six newbuild product carriers upon deliveryof those vessels;

·                  The Partnership issued to OSG 7,500,000common units and 15,000,000 subordinated units, representing a 73.5% limitedpartner interest in the Partnership;

·                  The Partnership issued to the General Partnera 2% general partner interest in the Partnership and all of the Partnership’sincentive distribution rights, which will entitle the General Partner toincreasing percentages of the cash the Partnership distributes in excess of$0.43125 per unit per quarter;

·                  The Partnership issued 7,500,000 of itscommon units to the public representing a 24.5% limited partner interest in thePartnership; and

·                  The Partnership satisfied its obligation toreimburse OSG for approximately $129,256,000 of capital expenditures incurredprior to the initial public offering with the proceeds from the offering.

 

In addition, at orprior to the completion of the offering, the Partnership entered into thefollowing agreements:

 

·                  a management agreement with OSG ShipManagement, Inc. (“OSGM”), a wholly owned subsidiary of OSG, pursuant towhich OSGM agreed to provide the Partnership commercial and technicalmanagement services;

·                  an administrative services agreement withOSGM, pursuant to which OSGM agreed to provide the Partnership administrativeservices;

·                  an omnibus agreement withOSG, the General Partner and others, setting forth, among other things:

·                  when the Partnership andOSG may compete with each other;

·                  certain rights of firstoffer on Jones Act tank vessels;

·                  the grant to the Partnership of options to purchase the membership interests of one or moresubsidiaries of OSG that have entered into shipbuilding contracts with BenderShipbuilding & Repair Co., Inc. for six newbuild articulated tugbarges (“ATBs”);

·                  the grant to the Partnership of options to acquire the membership interests of one or moresubsidiaries of OSG that have entered into agreements to bareboat charter, fromsubsidiaries of Aker American Shipping, Inc., two newbuild productcarriers and two newbuild shuttle tankers, upon delivery of those vessels; and

·                  a $200,000,000 seniorsecured revolving credit facility.

 

**Note B — Summary of Significant AccountingPolicies:**

 

*Basis ofPresentation and Description of Business.** *OSG America L.P. is engaged in providing marinetransportation services through the ownership and operation of a fleet oftankers and ATBs.  Of the 18 vessels inthe operating fleet, 16 operate in the Jones Act trade and two operate in theinternational market under the U.S. flag while participating in the MaritimeSecurity Program.  These two tankers arenot eligible for Jones Act trading because they were not built in the UnitedStates.  The management of OSG AmericaL.P. has determined that it operates in one segment. In addition, OSG AmericaL.P. owns a 37.5% ownership interest in a joint venture, Alaska Tanker Company,LLC.

 

The accompanyingconsolidated and predecessor combined carve-out financial statements have beenprepared in accordance with U.S. generally accepted accounting principles.  The consolidated financial statements includethe assets and liabilities of the Partnership and its wholly-owned subsidiaries.  Allsignificant intercompany balances and transactions have 

 

67

----

 

beeneliminated in consolidation. Investments in 50% or less owned affiliatedcompanies, in which the Partnership exercises significant influence, but is notthe primary beneficiary, are accounted for by the equity method.

 

For the year ended December 31,2007, the predecessor combined carve-out financial statements are for theperiod January 1, 2007 through November 14, 2007, and the consolidatedfinancial statements of the Company and its wholly owned subsidiaries are forthe 47 day period from November 15, 2007 through December 31,2007 during which the Company operated as an independent company. For theperiod from January 1, 2007 through November 14, 2007 and for theyears ended December 31, 2006 and 2005, the predecessor combined carve-outfinancial statements presented herein have been carved out of the financialstatements of OSG using specific identification.  In the preparation of these predecessorcarve-out financial statements, general and administrative expenses were notidentifiable as relating to the vessels. General and administrative expenses,consisting primarily of salaries and other employee related costs, office rent,legal and professional fees, and travel and entertainment were allocated basedon the Company’s proportionate share of OSG’s total ship-operating days foreach of the periods presented. Management believes these allocations reasonablypresent the financial position, results of operations and cash flows of OSGAmerica Predecessor (the “Predecessor”). However, the predecessor combinedcarve-out statements of financial position, operations and cash flow may not beindicative of those that would have been realized had OSG America Predecessoroperated as an independent stand-alone entity for the periods presented. HadOSG America Predecessor operated as an independent stand-alone entity, itsresults could have differed significantly from those presented herein.

 

*Cash and Cash Equivalents. *Interest-bearingdeposits that are highly liquid investments and have a maturity of three monthsor less when purchased are included in cash and cash equivalents. The treasuryfunctions of OSG are managed centrally. Accordingly, cash received by OSGAmerica Predecessor (principally charter hire) was transferred to OSG forinvestment purposes, with a corresponding reduction in the advances fromaffiliates. Cash required by OSG America Predecessor (principally operatingexpenses and debt amortization) was transferred from OSG with a correspondingincrease in the advances from affiliates.

 

*Inventory. *Inventory consists of fuel and is stated at costdetermined on a first-in, first-out basis.

 

*Vessels. *Vesselsare recorded at cost and are depreciated to their estimated salvage value onthe straight-line basis, using a vessel life ranging from 20 to 25 years.Each vessel’s salvage value is equal to the product of its lightweight tonnageand an estimated scrap rate per ton. Accumulated depreciation was $59,568,000 and $27,264,000 at December 31,2007 and 2006, respectively.

 

Interest costs arecapitalized to vessels during the period that vessels are under construction.Interest capitalized aggregated $204,000 for the period November 15 throughDecember 31, 2007, $1,320,000 for the period January 1 through November 14,2007 and $167,000 for the year ended December 31, 2006.

 

*Deferred Drydock Expenditures.*Expenditures incurredduring a drydocking are deferred and amortized on the straight-line basis overthe period until the next scheduled drydocking, generally two and a half years.Expenditures for maintenance and repairs are expensed when incurred.Amortization of capitalized drydock expenditures, which is included indepreciation and amortization in the consolidated and combined statements ofoperations, amounted to $1,302,000 for the period November 15 through December 31,2007, $4,140,000 for the period January 1 through November 14, 2007and $3,384,000 and $1,666,000 for the years ended December 31, 2006 and2005, respectively.

 

*Vessels under Capital Leases.* The Partnership charters in two vessels thatit accounts for as capital leases. Amortization of capital leases is computedby the straight-line method over 22 years, which is the duration of theleases.  Accumulated amortization was$80,414,000 and $74,994,000 at December 31, 2007 and 2006, respectively.

 

*Impairment of Long-Lived Assets.***** Thecarrying amounts of long-lived assets held and used by the Partnership arereviewed for potential impairment whenever events or changes in circumstancesindicate that the carrying amount of a particular asset may not be fullyrecoverable. In such instances, an impairment charge would be recognized if theestimate of the undiscounted future cash flows expected to result from the useof the asset and its eventual disposition is less than the asset’s carryingamount. This assessment is made at the individual vessel level since separatelyidentifiable cash flow information for each vessel is available. The amount ofan impairment charge, if any, would be determined using discounted cash flows.

 

*Deferred Financing Costs.*** **Direct costsassociated with obtaining long-term financing are deferred and amortized tointerest expense over the terms of the related debt.  Deferred financing costs of $1,172,000 at December 31,2007 are stated net of accumulated amortization and are included in otherassets.  Amortization for the period November 15through December 31, 2007 amounted to $31,000.

 

68

----

 

*Goodwill and Intangible Assets.*Goodwill andindefinite lived intangible assets acquired in a business combination are notamortized but are reviewed for impairment annually or more frequently ifimpairment indicators arise. Intangible assets with estimable useful lives areamortized over their estimated useful lives. The Partnership’s intangibleassets, which consist of long-term customer relationships acquired as part ofthe purchase of Maritrans Inc. (“Maritrans”) by OSG in November 2006, arebeing amortized on a straight line basis over 20 years.  Accumulated amortization at December 31,2007 and 2006 was $4,983,000 and $383,000, respectively.  Amortization expense amounted to $594,000 forthe period November 15 through December 31, 2007, $4,006,000 for theperiod January 1 through November 14, 2007 and $383,000 for the yearended December 31, 2006. Amortization of intangible assets for each of thefive years subsequent to December 31, 2007 is expected to approximate$4,600,000 per year.

 

*Revenue and Expense Recognition. *Revenues from time charters are recognized ratablyover the rental periods of such charters, as service is performed. Voyagerevenues and expenses are recognized ratably over the estimated length of eachvoyage and, therefore, are allocated between reporting periods based on therelative transit time in each period. A voyage charter agreement with acustomer consists of sailing to the load port (the positioning leg), loadingthe cargo, sailing to the discharge port and discharging the cargo. The charteragreement requires the relevant vessel to proceed to the port or place asordered by the charterer in accordance with the contract. The vessel is,therefore, employed from the time it receives a contract until the lastdischarge point and a contract is not cancellable in the positioning leg,provided the Partnership fulfills its contractual commitment. Accordingly, thevoyage period commences upon departure from the discharge port of the vessel’sprevious cargo and ends upon the departure from the discharge port of thecurrent cargo. The Partnership generally enters into a charter agreement with acustomer for the vessel’s next voyage prior to the time of discharge for itsprevious voyage. The impact of recognizing voyage expenses ratably over thelength of each voyage is not materially different on a quarterly and annualbasis from a method of recognizing such costs as incurred. The Partnership doesnot begin recognizing voyage revenue until a charter has been agreed to by boththe Partnership and the customer, even if the vessel has discharged its cargoand is sailing to the anticipated load port on its next voyage.

 

Under voyage charters,expenses such as commissions, fuel, port charges, pilot fees, tank cleaning costs,canal tolls and cargo handling operations are paid by the Partnership whereas,under time and bareboat charters, such voyage costs generally are paid by thePartnership’s customers.

 

*Significant Customers.*During the three years ended December 312007, the Partnership derived revenues from certain major customers, each onerepresenting more than 10% of revenues. In 2007, revenues from four customersaggregated 46% of total revenues. In 2006 and 2005, revenues from fourcustomers aggregated 62% and 85%, respectively, of total revenues. ThePartnership does not necessarily derive 10% or more of its total revenues fromthe same group of customers each year.

 

*Income Taxes.*All of the companies included in thePredecessor combined carve-out financial statements were included in the OSGconsolidated group for U.S. income tax purposes for periods through November 14,2007. The Predecessor’s financial statements have been prepared on the basisthat OSG was responsible for all taxes for the periods prior to January 1,2002. The provisions for income taxes in the Predecessor combined carve-outfinancial statements have been determined on a separate-return basis for allperiods presented. Deferred tax assets and liabilities were recognized for theexpected tax consequences of temporary differences between the tax bases ofassets and liabilities and their reported amounts. Valuation allowances wererecorded, when appropriate, to reduce deferred tax assets when it was morelikely than not that a tax benefit would not be realized by OSG AmericaPredecessor. Current income taxes were provided on income reported forfinancial statement purposes adjusted for transactions that do not enter intothe computations of income tax payable.

 

In June 2006, theFASB issued Interpretation No. 48, “Accounting for Uncertainty in IncomeTaxes”. This interpretation clarifies the accounting for uncertainty in incometaxes recognized in an enterprise’s financial statements by prescribing arecognition threshold and measurement attribute for the financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return. This interpretation also provides guidance on derecognition,classification, interest and penalties, accounting in interim periods, disclosureand transition. This interpretation was effective for fiscal years beginningafter December 15, 2006. The Predecessor adopted this standard effective January 1,2007. The adoption of this standard did not have a material impact on thefinancial condition, results of operations and cash flows.

 

The Partnership is not ataxable entity and does not incur a federal income tax liability.  Instead, each partner of a partnership isrequired to take into account his share of items of income, gain, loss and deductionof the partnership in computing his federal income tax liability, regardless ofwhether cash distributions are made to him by the partnership.  Distributions by a partnership to a partnerare generally not taxable to the partner unless the amount of cash distributedexceeds the partner’s adjusted basis in his partnership interest.

 

The Internal Revenue Codeprovides that publicly traded partnerships will, as a general rule, be taxed ascorporations.  However, an exception,referred to as the “Qualifying Income Exception,” exists with respect topublicly traded partnerships of which 90% or more of the gross income for everytaxable year consists of “qualifying income”. Qualifying income 

 

69

----

 

includes income and gainsderived from the transportation, storage and processing of crude oil, naturalgas and products thereof. For the period November 15 through December 31,2007, at least 90% of the Partnership’s current gross income constitutesqualifying income, and the Partnership will be classified as a partnership andthe operating company will be disregarded as an entity separate from thePartnership for federal income tax purposes.

 

*Partners’Capital.*On November 8,2007, OSG announced the pricing of the initial public offering of 7,500,000common units representing limited partner interests in the Partnership at$19.00****per unit. The common unitsissued to the public represent a 24.5% limited partner interest in thePartnership. OSG America LLC, a wholly owned subsidiary of OSG, is the solegeneral partner of the partnership and has a 2% general partner interest, andother subsidiaries of OSG hold a 73.5% limited partnership interest.

 

Netproceeds after deducting fees on the transaction were $129,256,000, which wereused to satisfy the obligation of the Partnership to reimburse OSG for capitalexpenditures incurred in the 24 months prior to the offering to improve theassets contributed to the Partnership by OSG, as partial consideration for thatcontribution.

 

*Stockholder’sEquity.*At December 31, 2006, the wholly ownedsubsidiaries included in the Predecessor combined carve-out financialstatements had authorized capital of 6,500 common registered shares (1,300shares were issued and outstanding) with $1.00 par value; 2,000 commonregistered shares (200 shares were issued and outstanding) with no par value;and, in connection with the November 28, 2006 acquisition of Maritrans,18,000 common shares with a par value of $.01 per share, all of which wereissued and outstanding at December 31, 2006.  The stockholder’s equity was exchanged forcommon and subordinated units of the Partnership in connection with the initialpublic offering.

 

*Unit-Based Compensation**.  *The Partnership has adopted a long-term incentive plan that permits thegranting of awards to directors and employees in the form of restricted unitsand unit options. The Partnership recognizes compensation cost for therestricted units on a straight-line basis over the vesting periods of theawards, which is three years. No unit options have been granted.

 

*NetIncome per Unit.*** **Basic net income per unit is determined by dividingnet income, after deducting the amount of net income allocated to the generalpartner interest, by the weighted average number of units outstanding duringthe period.  Diluted net income per unitis calculated in the same manner as basic net income per unit, except that theweighted average number of outstanding units is increased to include thedilutive effect of restricted units granted under the Partnership’s long-termincentive plan.  There was no change inthe weighted average units outstanding for diluted net income per unit for theperiod November 15 through December 31, 2007.

 

Asrequired by Emerging Issues Task Force Issue No. 03-06, “ParticipatingSecurities and the Two-Class Method under FASB Statement No. 128,Earnings per Share” (“EITF 03-6”), the general partner’s interest in net incomeis calculated as if all net income for the period was distributed according tothe terms of the partnership agreement, regardless of whether those earningswould or could be distributed.  Thepartnership agreement does not provide for the distribution of net income;rather, it provides for the distribution of available cash, which is acontractually defined term that generally means all cash on hand at the end ofeach quarter after provision for certain cash requirements.  Unlike available cash, net income is affectedby non-cash items, such as depreciation and amortization.

 

Asdescribed in Note A above, the general partner’s incentive distribution rightsentitle it to receive an increasing percentage of distributions when the quarterlycash distribution exceeds $0.43125 per unit. For purposes of EITF 03-6, the Partnership must calculate the generalpartner’s share of net income under the assumption that such net income wasdistributable.  Since net income did notexceed $0.43125 per unit for the period November 14 through December 31,2007, the Partnership did not use any increased percentages in calculating thegeneral partner’s interest in net income.

 

*Use of Estimates.***** The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesrequires management to make estimates and assumptions that affect the amountsreported in the financial statements and accompanying notes. Actual resultscould differ from those estimates.

 

*Newly Issued Accounting Standards***. **In September 2006,the Financial Accounting Standards Board issued Statement of FinancialAccounting Standards No. 157 (“FAS 157”), “Fair Value Measurements.” Thestandard provides guidance for using fair value to measure assets andliabilities in accordance with generally accepted accounting principles, andexpands disclosures about the extent to which companies measure assets andliabilities at fair value, the information used to measure fair value, and theeffect of fair value measurements on earnings. FAS 157 applies whenever otherstandards require or permit assets or liabilities to be measured at fair valuebut does not expand the use of fair value in any new circumstances. FAS 157 iseffective for financial statements issued for fiscal years beginning after November 15,2007, and interim periods within those fiscal years. Early adoption ispermitted. The adoption of FAS 157 will not have a material effect on thePartnership’s earnings or financial position.

 

70

----

 

In February 2007, the Financial Accounting Standards Board issuedStatement of Financial Accounting Standards No. 159 (“FAS 159”), “The FairValue Option for Financial Assets and Financial Liabilities — including anamendment of FAS 115.”  FAS 159 providesentities with the opportunity to choose to measure eligible financialinstruments and certain other items at fair value at specified election datesto mitigate volatility in reported earnings caused by measuring related assetsand liabilities differently without having to apply complex hedge accountingprovisions.  FAS 159 is effective forfinancial statements issued for fiscal years beginning after November 15,2007 and interim periods within those fiscal years.  Early adoption is permitted provided a companyalso elects to apply the provisions of FAS 157. The adoption of FAS 159 will not have a material effect on thePartnership’s earnings or financial position.

 

In December 2007,the Financial Accounting Standards Board issued Statement of Financial AccountingStandards No. 141(revised 2007), “Business Combinations” (“FAS 141R”). FAS 141Restablishes principles and requirements for how an acquirer recognizes andmeasures in its financial statements the identifiable assets acquired, theliabilities assumed, any noncontrolling interest in the acquiree and thegoodwill acquired. FAS 141R also establishes disclosure requirements toenable the evaluation of the nature and financial effects of the businesscombination. FAS 141R applies prospectively to business combinations forwhich the acquisition date is on or after the beginning of the first annualreporting period beginning on or after December 15, 2008.  An entity may not apply it before that date.

 

In December 2007,the Financial Accounting Standards Board issued Statement of Financial AccountingStandards No. 160,“Noncontrolling Interests in Consolidated Financial Statements—an amendment ofAccounting Research Bulletin No. 51” (“FAS 160”). FAS 160establishes accounting and reporting standards for ownership interests insubsidiaries held by parties other than the parent, the amount of consolidatednet income attributable to the parent and to the noncontrolling interest,changes in a parent’s ownership interest and the valuation of retainednoncontrolling equity investments when a subsidiary is deconsolidated.FAS 160 also establishes disclosure requirements that clearly identify anddistinguish between the interests of the parent and the interests of thenoncontrolling owners. FAS 160 is effective for fiscal years, and interimperiods within those fiscal years, beginning on or after December 15, 2008(that is, January 1, 2009, for entities with calendar year-ends).  Earlier adoption is prohibited. Thisstatement is required to be applied prospectively as of the beginning of thefiscal year in which it initially applied, except for the presentation anddisclosure requirements, which must be applied retrospectively for all periodspresented.

 

**Note C — Acquisition of Maritrans:**

** **

On November 28, 2006, OSG acquired Maritrans, a leading U.S. flagcrude oil and petroleum product shipping company that owned and operated one ofthe largest fleets of double hull vessels serving the U.S. East Coast and GulfCoast trades.  The operating results ofcertain wholly owned subsidiaries of Maritrans, which were carved out of theconsolidated financial statements of Maritrans, have been included in thePartnership’s combined financial statements commencing November 29,2006.  The Maritrans fleet consisted ofseven ATBs, one of which was in the process of being double hulled, oneconventional tug barge (“CTB”) and two tankers, all operating under the U.S.flag.

 

The following table summarizes the final allocation of the purchaseprice to the fair value of the Maritrans assets and liabilities. The finalallocation of the purchase price resulted in a decrease to goodwill of$2,038,000 in 2007:

 
| **In thousands**                                                       | ** ** | ** ** | ** ** |
|------------------------------------------------------------------------|------------|------------|------------|
|                                                                   |       |       |       |
| Assets:                                                                |       |       |       |
| Current assets,  including receivables                                 |       | $          | 16,227     |   |
| Vessels                                                                |       | 303,995    |       |
| Intangible  assets subject to amortization                             |       | 92,000     |       |
| Goodwill                                                               |       | 62,874     |       |
| Total assets                                                           |       | 475,096    |       |
|                                                                   |       |       |       |
| Liabilities:                                                           |       |       |       |
| Current  liabilities, including current installments of long-term debt |       | 14,976     |       |
| Long-term debt                                                         |       | 51,427     |       |
| Deferred federal  income taxes and other liabilities                   |       | 68,112     |       |
| Total  liabilities assumed                                             |       | 134,515    |       |
| Net assets  acquired (cash consideration)                              |       | $          | 340,581    |   |

 

71

----

 

The following unauditedpro forma financial information reflects the results of the Maritrans acquisitionas if it had occurred at the beginning of each of the periods presented during2006 and 2005, after giving effect to purchase accounting adjustments:

 
| ** **                                              | ** ** | **Year ended December 31,**                        | ** ** |
|---------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                              | ** ** | **2006**                                                          | ** ** | **2005** | ** ** |
| ** **                                              | ** ** | **(In thousands, except per  share amounts)** | ** ** |
| Pro forma shipping  revenues                            |       | $                                                                 | 190,654    |   | $ | 153,108 |   |
| Pro forma net  income                                   |       | 11,305                                                            |       | 5,432 |   |
| Pro forma per  share amounts:                           |       |                                                              |       |   |   |
| Basic and  diluted net income per share                 |       | $                                                                 | 579.73     |   | $ | 284.85 |   |
| Average shares  outstanding during the period presented |       | 19,500                                                            |       | 19,071 |   |

 

        The pro forma results have been prepared for comparativepurposes only and do not purport to be indicative of what operating resultswould have been had the acquisition actually taken place on the datesindicated. These results do not reflect any synergies that might be achievedfrom the combined operations.

 

**Note D —Alaska Tanker Company, LLC:**

** **

In the first quarter of1999, OSG, BP Oil Shipping Company USA, Inc. (“BP”) and Keystone Alaska,LLC formed Alaska Tanker Company, LLC (“ATC”) to manage the vessels carryingAlaskan crude oil for BP. ATC, 37.5% of which is now owned by the Partnership,provides marine transportation services in the environmentally sensitiveAlaskan crude oil trade.  Each member ofATC is entitled to receive its respective share of any incentive charter hirepayable by BP to ATC.  The Partnership isnot the primary beneficiary (as defined in FASB Interpretation 46(R) “Consolidationof Variable Interest Entities, an Interpretation of ARB No. 51”) with regard toATC and accounts for its 37.5% interest in ATC according to the equity method.

 

A condensed summary ofthe assets and liabilities of ATC follows:

 
| ** **                                  | ** ** | **As of December 31,** | ** ** |
|---------------------------------------------|------------|---------------------------------------|------------|
| **In thousands**                            | ** ** | **2007**                              | ** ** | **2006** |   |
| Current assets                              |       | $                                     | 31,726     |   | $ | 36,035 |   |
| Noncurrent  assets                          |       | 926                                   |       | 776 |   |
| Total assets                                |       | $                                     | 32,652     |   | $ | 36,811 |   |
|                                        |       |                                  |       |   |   |
| Current  liabilities                        |       | $                                     | 29,028     |   | $ | 33,936 |   |
| Noncurrent  liabilities                     |       | 6,611                                 |       | 2,775 |   |
| Members’ equity                        |       | 100                                   |       | 100 |   |
| Accumulated  other comprehensive loss       |       | (3,087                                | )          | — |   |
| Total  liabilities and members’ equity |       | $                                     | 32,652     |   | $ | 36,811 |   |

 

The balance inaccumulated other comprehensive loss relates to the adoption of Statement ofFinancial Accounting Standards No. 158, “Employers’ Accounting for DefinedBenefit Pension and other Postretirement Plans — an amendment to FASB StatementNos. 87, 88, 106 and 132(R)”.  Thisamount is amortized and recorded on ATC’s statement of operations and will bereimbursed by BP as set forth in the time charter agreements.

 

A condensed summary ofthe results of operations of ATC follows:

 
| ** **                                       | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------|------------|--------------------------------------------|------------|
| **In thousands**                            | ** ** | **2007**                                   | ** ** | **2006** | ** ** | **2005** | ** ** |
| Time charter  equivalent revenues                |       | $                                          | 144,628    |   | $ | 139,160 |   | $ | 164,719 |   |
| Ship operating  and other expenses               |       | (129,312                                   | )          | (121,000 | ) | (143,835 | ) |
| Income from  vessel operations – net income |       | $                                          | 15,316     |   | $ | 18,160 |   | $ | 20,884 |   |

 

72

----

 

**Note E—Accounts Payable and Accrued Expenses:**

** **

Accounts payable andaccrued expenses consist of the following:

 
| ** **                            | ** ** | **As of December 31,** | ** ** |
|---------------------------------------|------------|---------------------------------------|------------|
| **In thousands**                 | ** ** | **2007**                              | ** ** | **2006** | ** ** |
| Trade payables                        |       | $                                     | 4,533      |   | $ | 4,067 |   |
| Fuel accruals                         |       | 3,544                                 |       | 807 |   |
| Charter revenues  received in advance |       | 3,074                                 |       | 5,220 |   |
| Drydock accrual                       |       | 2,523                                 |       | 148 |   |
| Insurance  premiums                   |       | 2,253                                 |       | 208 |   |
| Payroll and  benefits                 |       | 1,003                                 |       | 1,345 |   |
| Interest expense                      |       | 311                                   |       | 302 |   |
| Brokers  commissions                  |       | 444                                   |       | 162 |   |
| Other                                 |       | 1,837                                 |       | 3,497 |   |
|                                  |       | $                                     | 19,522     |   | $ | 15,756 |   |

 

**Note F—Advances from Affiliates:**

 
| ** **                                                      | ** ** | **As of December 31,** | ** ** |
|-----------------------------------------------------------------|------------|---------------------------------------|------------|
| **In thousands**                                           | ** ** | **2007**                              | ** ** | **2006** | ** ** |
| Interest bearing  loans                                         |       | $                                     | —     |   | $ | 167,093 |   |
| Non-interest  bearing advances with no fixed terms of repayment |       | 9,657                                 |       | 401,893 |   |
|                                                            |       | $                                     | 9,657      |   | $ | 568,986 |   |

 

Loans and non-interestbearing advances aggregating $596,044,000 were contributed to capital by OSG in2007 prior to the completion of the initial public offering.  The interest bearing loans that wereoutstanding at December 31, 2006, were payable to a wholly-ownedsubsidiary of OSG according to a floating rate revolving credit facility.  The effective interest rate on the interestbearing loans outstanding at December 31, 2006 was 4.89%. The Partnershiprepaid the non-interest bearing advances outstanding at December 31, 2007in February 2008 by borrowing under the senior secured revolving creditfacility.

 

**Note G — Long-term Debt:**

** **

Long-term debt consistsof the following:

 
| ** **                                                    | ** ** | **As of December 31,** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------------|------------|
| **In thousands**                                         | ** ** | **2007**                              | ** ** | **2006** | ** ** |
| 5.1% to 6.3%  fixed rate secured term loans, due through 2014 |       | $                                     | 49,587     |   | $ | 55,400 |   |
| Less current  portion                                         |       | (2,834                                | )          | (4,202 | ) |
| Long-term  portion                                            |       | $                                     | 46,753     |   | $ | 51,198 |   |

 

As of December 31,2007, approximately 18.4% of the net book value of the Partnership’s vessels ispledged as collateral under secured term loans. The term loans require the Partnership to maintain the vessels in goodcondition, maintain specified insurance, and abide by other covenants, whichare customary with respect to such borrowings.

 

73

----

 

The aggregate annual principal payments required to be made on debt areas follows:

 
| **In thousands** | ** ** | **As of December 31, 2007** | ** ** |
|-----------------------|------------|-------------------------------------------------|------------|
| 2008                  |       | $                                               | 2,834      |   |
| 2009                  |       | 3,007                                           |       |
| 2010                  |       | 3,191                                           |       |
| 2011                  |       | 3,385                                           |       |
| 2012                  |       | 3,591                                           |       |
| Thereafter            |       | 33,579                                          |       |
| Total                 |       | $                                               | 49,587     |   |

* *

Interest paid, excludingloans to affiliates and capitalized interest, amounted to $439,000 for theperiod from November 15 through December 31, 2007, $4,595,000 for theperiod from January 1 through November 14, 2007, and $3,877,000 and$4,512,000, for the years ended December 31, 2006 and 2005, respectively.

 

*SeniorSecured Revolving Credit Facility*

 

On November 15, 2007, OSG America Operating Company LLC, a whollyowned subsidiary of the Partnership, entered into a $200,000,000 senior securedrevolving credit facility with ING Bank N.V. and DnB NOR Bank ASA.  As of December 31, 2007, there were noborrowings outstanding under the facility.

 

Borrowings under the senior secured revolving credit facility are dueand payable five years after the date that the facility agreement was signed(the “closing date”), subject to a 24-month extension period which may berequested by the Partnership on or after the second anniversary of the closingdate (up to 90 days prior to the fifth anniversary of the closing date)and which may be approved by the lenders. Drawings under the facility will beavailable on a revolving basis until the earlier of one month prior to theapplicable maturity date or the date on which the facility is permanentlyreduced to zero and the lenders are no longer required to make advances. Themaximum number of advances permitted to be outstanding under the senior securedrevolving credit facility at any one time will be ten.

 

Borrowings under the senior secured revolving credit facility aresecured by, among other things, first preferred mortgages on certain ownedvessels, and are guaranteed by the Partnership and certain of its subsidiaries.

 

OSG America Operating Company LLC will be able, at its option, toprepay all loans under the Partnership’s senior secured revolving creditfacility at any time without penalty (other than customary LIBOR breakagecosts).  The outstanding loans under thesenior secured revolving credit facility will bear interest at a rate equal toLIBOR plus the applicable margin (70 basis points per year until the fifthanniversary of the closing date and, if the extension option is exercised, 75basis points per year thereafter).

 

The new senior secured revolving credit facility will prevent thePartnership from declaring dividends or making distributions if any event ofdefault, as defined in the senior secured revolving credit agreement, exists orwould result from such payments. In addition, the senior secured revolvingcredit facility contains covenants requiring the Partnership to adhere tocertain financial covenants.

 

**Note H—Taxes:**

 

        All current and deferred tax liabilities were contributed tocapital by OSG immediately prior to the Partnership’s initial public offering.

 

In 2006, OSG made anelection under the American Jobs Creation Act of 2004, effective for yearscommencing with 2005, to have its qualifying U.S. flag operations taxed under anew tonnage tax regime rather than under the usual U.S. corporate income taxregime. As a result of that election, the Predecessor’s taxable income for U.S.income tax purposes with respect to the eligible U.S. flag vessels did notinclude income from qualifying shipping activities in U.S. foreign trade (i.e.,transportation between the U.S. and foreign ports or between foreign ports).

 

74

----

 

The significantcomponents of deferred tax liabilities at December 31, 2006 follow:

 
| **In thousands**                                                               |   |   |   |
|--------------------------------------------------------------------------------|--------|--------|--------|
| Excess of book  over tax basis of depreciable or amortizable assets – net |   | $      | 72,204 |   |
| Costs  capitalized and amortized for book, expensed for tax                    |   | 1,474  |   |
| Other – net                                                               |   | 1,559  |   |
| Total deferred  tax liabilities (long-term)                                    |   | $      | 75,237 |   |

 

Thecomponents of the Predecessor’s provisions for federal income taxes follow:

 
| ** **            | ** ** | **January 1 –  November 14,** | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------|------------|---------------------------------------------------|------------|--------------------------------------------|------------|
| **In thousands** | ** ** | **2007**                                          | ** ** | **2006**                                   | ** ** | **2005** | ** ** |
| Current               |       | $                                                 | (1,114     | )                                          | $          | 1,921 |   | $ | 4,400 |   |
| Deferred              |       | 3,162                                             |       | (1,153                                     | )          | (3,075 | ) |
|                  |       | $                                                 | 2,048      |                                       | $          | 768 |   | $ | 1,325 |   |

 

        Reconciliations of the Predecessor’s actual federal incometax rate attributable to pretax income and the U.S. statutory income tax ratefollow:

 
| ** **                                | ** ** | **January 1 –  November 14,** | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------|------------|---------------------------------------------------|------------|--------------------------------------------|------------|
| **In thousands**                     | ** ** | **2007**                                          | ** ** | **2006**                                   | ** ** | **2005** | ** ** |
| Actual federal  income tax provision rate |       | 26.9                                              | %          | 9.0                                        | %          | 39.8 | % |
| Adjustments:                              |       |                                              |       |                                       |       |   |   |
| Tonnage tax  exclusion                    |       | 26.5                                              | %          | 27.6                                       | %          | (4.8 | )% |
| Amortization of  intangibles              |       | (18.4                                             | )%         | (1.6                                       | )%         | — |   |
| U.S. statutory  income tax provision rate |       | 35.0                                              | %          | 35.0                                       | %          | 35.0 | % |

 

**Note I — Leases:**

** **

*Charters-in:*

 

As of December 31, 2007, the Partnership had commitments tobareboat charter-in ten vessels.  Eightof such charter-ins are, or will be, accounted for as operating leases.  The future minimum commitments and relatednumber of operating days under these operating leases are as follows:

 
| ** **            | ** ** | **As of December 31, 2007** | ** ** |
|-----------------------|------------|-------------------------------------------------|------------|
| **In thousands** | ** ** | **Amount**                                      | ** ** | **Operating Days** | ** ** |
| 2008                  |       | $                                               | 30,154     |   | 1,439 |   |
| 2009                  |       | 51,791                                          |       | 2,378 |   |
| 2010                  |       | 61,539                                          |       | 2,787 |   |
| 2011                  |       | 64,331                                          |       | 2,920 |   |
| 2012                  |       | 64,306                                          |       | 2,928 |   |
| Thereafter            |       | 150,944                                         |       | 5,256 |   |
| Total                 |       | $                                               | 423,065    |   | 17,708 |   |

 

75

----

 

The future minimum commitments under two bareboat charters-in that areclassified as capital leases are as follows:

 
| **In thousands**              | ** ** | **As of December 31, 2007** | ** ** |
|------------------------------------|------------|-------------------------------------------------|------------|
| 2008                               |       | $                                               | 8,884      |   |
| 2009                               |       | 9,692                                           |       |
| 2010                               |       | 9,691                                           |       |
| 2011                               |       | 8,103                                           |       |
| Net minimum  lease payments        |       | 36,370                                          |       |
| Less amount  representing interest |       | (6,149                                          | )          |
| Total                              |       | $                                               | 30,221     |   |

 

In June 2005, OSGsigned agreements to bareboat charter ten Jones Act Product Tankers to beconstructed by Aker Philadelphia Shipyard, Inc. (“APSI”), which order wasincreased to 12 ships in October 2007. Agreements for eight of suchvessels are included in the Partnership. Following construction, APSI will sellthe vessels to leasing subsidiaries of American Shipping Corporation (“ASC”),an affiliate of APSI, which will bareboat charter the eight vessels to thePartnership for initial terms of five or seven years. The Partnership hasextension options for the lives of the vessels. The charters provide for profitsharing with the owners of the vessels when revenues earned by such vesselsexceed amounts defined in the charters. Three of these vessels, the *Overseas Houston,**Overseas Long Beach*and *OverseasLos Angeles*, have already been delivered from the shipyard,in February, June and November 2007, respectively. The remaining fivevessels are scheduled to be delivered from the shipyard between 2008 and early2010. The bareboat charters will commence upon delivery of the vessels.

 

*Charters-out:*

 

The future minimumrevenues, before reduction for brokerage commissions, expected to be receivedon noncancelable time charters and the related revenue days (revenue daysrepresent calendar days, less days that vessels are not available foremployment due to repairs, drydock or lay-up) are as follows:

 
| ** **            | ** ** | **As of December 31, 2007** | ** ** |
|-----------------------|------------|-------------------------------------------------|------------|
| **In thousands** | ** ** | **Amount**                                      | ** ** | **Revenue Days** | ** ** |
| 2008                  |       | $                                               | 99,091     |   | 2,620 |   |
| 2009                  |       | 119,833                                         |       | 2,712 |   |
| 2010                  |       | 125,440                                         |       | 2,595 |   |
| 2011                  |       | 106,750                                         |       | 2,173 |   |
| 2012                  |       | 60,839                                          |       | 1,249 |   |
| Thereafter            |       | 56,213                                          |       | 1,199 |   |
| Total                 |       | $                                               | 568,166    |   | 12,548 |   |

 

Revenues from a timecharter are not generally received when a vessel is off-hire, including timerequired for normal periodic maintenance of the vessel. In arriving at theminimum future charter revenues, an estimated time off-hire to perform periodicmaintenance on each vessel has been deducted, although there is no assurancethat such estimate will be reflective of the actual off-hire in the future.

 

The scheduled futureminimum revenues should not be construed to reflect total shipping revenues forany of the periods.

 

**Note J—Long-termIncentive Plan**

 

In 2007, the Board of Directors of the general partnerof the Partnership adopted the OSG America L.P. 2007 Omnibus IncentiveCompensation Plan (the “Plan”) for directors and employees of the Partnershipand its affiliates. The Plan currently permits the grant of awards covering anaggregate of 250,000 common units in the form of unit options, unitappreciation rights, restricted units, unsecured and unfunded restricted unitawards, performance units, cash incentive awards and other equity-based orequity-related awards. The Plan is administered by the Board of Directors ofthe general partner of the 

 

76

----

 

Partnership. The Board of Directors, in itsdiscretion, may terminate the Plan at any time and also reserves the right toalter or amend the Plan from time to time, including increasing the number ofcommon units with respect to which awards may be granted subject to unitholderapproval as required by the New York Stock Exchange. No change in anyoutstanding grant may be made, however, which would materially impair therights of any participant without the consent of such participant.

 

Unit compensation expense for the period of November 15through December 31, 2007 was not material to the Partnership’s Statementof Operations. As of December 31, 2007, there was $41,000 of unamortizedcompensation cost related to non-vested restricted units, which is expected tobe recognized over a remaining weighted-average vesting period of 2.9 years. Asummary of the status of the Partnership’s restricted unit awards as of December 31,2007 and of changes in restricted units outstanding under the Partnership’slong-term incentive plan for the period of November 15 through December 31,2007 follows:

 
| ** **                                                    | ** ** | **Number of units** | ** ** | **Weighted-  Average Grant  Date Fair Value  per Unit** | ** ** |
|---------------------------------------------------------------|------------|-------------------------------|------------|-----------------------------------------------------------------------------|------------|
| Restricted unit  awards outstanding at November 15, 2007 |       | —                        |       | $                                                                           | —     |   |
| Units granted                                                 |       | 2,250                         |       | $                                                                           | 19.00      |   |
| Units vested                                                  |       | —                        |       | $                                                                           | —     |   |
| Restricted unit  awards outstanding at December 31, 2007 |       | 2,250                         |       | $                                                                           | 19.00      |   |

 

**Note K—PensionPlans:**

 

        The Partnership makes contributions to jointly managed(company and union) multi-employer pension plans covering seagoing personnel.The Employee Retirement Income Security Act of 1974 requires employers who arecontributors to U.S. multi-employer plans to continue funding their allocableshare of each plan’s unfunded vested benefits in the event of withdrawal fromor termination of such plans. Certain other seagoing personnel are coveredunder a defined contribution plan, the cost of which is funded as incurred. Thecosts of these plans were not material for the period November 15 through December 31,2007, for the period January 1 through November 14, 2007, or for theyears ended December 31, 2006 and 2005.

 

**Note L—FairValue Of Financial Instruments:**

 

        *Cashand cash equivalents*.  The carrying amounts reported in the consolidated and Predecessorcombined carve-out balance sheets for interest-bearing deposits approximatetheir fair value.

 

*Debt,including capital leases.* The fair values of the Company’sfixed rate debt are estimated using discounted cash flow analyses, based on therates currently available for debt with similar terms and remaining maturities.

 
| ** **                                 | ** ** | **As of December 31,** | ** ** |
|--------------------------------------------|------------|---------------------------------------|------------|
| ** **                                 | ** ** | **2007**                              | ** ** | **2006** | ** ** |
| **In Thousands**                      | ** ** | **Carrying  Amount**                  | ** ** | **Fair  Value** | ** ** | **Carrying  Amount** | ** ** | **Fair  Value** | ** ** |
| ** **                                 | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash and cash  equivalents                 |       | $                                     | 3,380      |   | $ | 3,380 |   | $ | 280 |   | $ | 280 |   |
| Debt, including  capital lease obligations |       | 79,808                                |       | 78,471 |   | 91,943 |   | 92,348 |   |
|                                            |            |                                       |            |  |  |  |  |  |  |  |  |  |  |

 

**Note M — Commitments:**

 

As of December 31, 2007, the Partnership had remaining commitmentsof $28,211,000 on non-cancelable contracts for the construction of two tugs (tobe delivered in 2008 and 2009) and the double hulling of one existing barge (tobe completed in 2008). We expect these commitments to be funded from existingcash on hand, borrowings under our revolving credit facility or additionallong-term debt as required.

 

77

----

 

**Note N — Quarterly Results ofOperations (Unaudited):**

 
| ** **                                                                                                                                 | ** ** | ** **                         | ** ** | ** **                        | ** ** | ** **                         | ** ** | **Quarter ended Dec. 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|-----------------------------------|------------|------------------------------------|------------|-------------------------------------------|------------|
| **Results of Operations   (in thousands, except per share and per   unit amounts)** | ** ** | **Quarter  ended  March 31,** | ** ** | **Quarter  ended  June 30,** | ** ** | **Quarter  ended  Sept. 30,** | ** ** | **Oct. 1  through  Nov. 14,**   | ** ** | **Nov. 15  through  Dec. 31,** | ** ** | **Combined** | ** ** |
| **2007**                                                                                                                                   |       |                               |       |                              |       |                               |       |                                      |       |   |   |   |   |
| Shipping  revenues                                                                                                                         |       | $                                  | 49,734     |                              | $          | 49,366                             |       | $                                         | 55,784     |   | $ | 27,987 |   | $ | 31,136 |   | $ | 59,123 |   |
| Income from  vessel operations                                                                                                             |       | 7,980                              |       | 4,579                             |       | 1,446                              |       | 1,255                                     |       | 1,703 |   | 2,958 |   |
| Net income  (loss)                                                                                                                         |       | 4,203                              |       | 2,674                             |       | (1,577                             | )          | 261                                       |       | 3,606 |   | 3,867 |   |
| Basic net income  (loss) per share                                                                                                         |       | $                                  | 215.52     |                              | $          | 137.12                             |       | $                                         | (80.83     | ) | $ | 13.38 |   | — |   | — |   |
| Diluted net  income (loss) per share                                                                                                       |       | $                                  | 215.52     |                              | $          | 137.12                             |       | $                                         | (80.83     | ) | $ | 13.38 |   | — |   | — |   |
| Basic net income per unit                                                                                                                  |       | —                             |       | —                            |       | —                             |       | —                                    |       | $ | 0.12 |   | — |   |
| Diluted net income per unit                                                                                                                |       | —                             |       | —                            |       | —                             |       | —                                    |       | $ | 0.12 |   | — |   |
| **2006**                                                                                                                                   |       | —                             |       |                              |       |                               |       |                                      |       |   |   |   |   |
| Shipping  revenues                                                                                                                         |       | $                                  | 17,259     |                              | $          | 20,578                             |       | $                                         | 21,623     |   | — |   | — |   | $ | 29,392 |   |
| Income from  vessel operations                                                                                                             |       | 3,074                              |       | 4,332                             |       | 3,998                              |       | —                                    |       | — |   | 2,892 |   |
| Net income                                                                                                                                 |       | 2,158                              |       | 2,519                             |       | 2,286                              |       | —                                    |       | — |   | 773 |   |
| Basic net income  per share                                                                                                                |       | $                                  | 1,438.93   |                              | $          | 1,679.33                           |       | $                                         | 1,524.53   |   | — |   | — |   | $ | 94.75 |   |
| Income per share                                                                                                                           |       | $                                  | 1,438.93   |                              | $          | 1,679.33                           |       | $                                         | 1,524.53   |   | — |   | — |   | $ | 94.75 |   |

 

78

----

 

**INDEPENDENT AUDITORS’ REPORT**

 

The MembersAlaska Tanker Company, LLC:

 

Wehave audited the accompanying balance sheets of Alaska Tanker Company, LLC (aDelaware limited liability company) as of December 31, 2007 and 2006, andthe related statements of operations, members’ equity (deficit) and cash flowsfor each of the years in the three-year period ended December 31, 2007.These financial statements are the responsibility of the Company’s management.Our responsibility is to express an opinion on these financial statements basedon our audits.

 

Weconducted our audits in accordance with auditing standards generally acceptedin the United States of America. Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes considerationof internal control over financial reporting as a basis for designing auditprocedures that are appropriate in the circumstances, but not for the purposeof expressing an opinion on the effectiveness of the Company’s internal controlover financial reporting. Accordingly, we express no such opinion. An auditalso includes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, as well as evaluating theoverall financial statement presentation. We believe that our audits provide areasonable basis for our opinion.

 

Asdiscussed in note 8 to the financial statements, the Company adopted therecognition and disclosure provisions of Statement of Financial AccountingStandards No. 158, *Employers’ Accounting forDefined Benefit Pension and Other Postretirement Plans*, as of December 31,2007.

 

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the financial position of Alaska Tanker Company, LLC as of December 31,2007 and 2006 and the results of its operations and its cash flows for each ofthe years in the three-year period ended December 31, 2007 in conformitywith U.S. generally accepted accounting principles.

 

 

/s/ KPMG LLP

 

February 18, 2008

 

79

----

 

**ALASKA TANKERS COMPANY, LLC**

**BALANCE SHEETS**

** **
| ** **                                           | ** ** | **As of December 31,** | ** ** |
|------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                           | ** ** | **2007**                              | ** ** | **2006** | ** ** |
| **Assets**                                           |       |                                  |       |   |   |
| **Current Assets:**                                  |       |                                  |       |   |   |
| Cash                                                 |       | $                                     | 4,590,735  |   | 6,130,228 |   |
| Due from members:                                    |       |                                  |       |   |   |
| BP Oil                                               |       | 26,560,187                            |       | 29,165,226 |   |
| OSG                                                  |       | —                                |       | 5,158 |   |
| Other receivables                                    |       | 21,097                                |       | 73,768 |   |
| Prepaid expenses                                     |       | 553,646                               |       | 660,424 |   |
| Total current assets                                 |       | 31,725,665                            |       | 36,034,804 |   |
|                                                 |       |                                  |       |   |   |
| Long term assets:                                    |       |                                  |       |   |   |
| Other assets                                         |       | 926,218                               |       | 775,813 |   |
| Total assets                                         |       | $                                     | 32,651,883 |   | 36,810,617 |   |
|                                                 |       |                                  |       |   |   |
| **Liabilities and Members’ Equity  (Deficit)**  |       |                                  |       |   |   |
| **Current Liabilities:**                             |       |                                  |       |   |   |
| Accounts payable                                     |       | $                                     | 3,499,882  |   | 6,259,944 |   |
| Accrued expenses (note 4)                            |       | 10,212,011                            |       | 9,516,407 |   |
| Accrued dividend to members                          |       | 15,316,393                            |       | 18,159,823 |   |
| Total current liabilities                            |       | 29,028,286                            |       | 33,936,174 |   |
|                                                 |       |                                  |       |   |   |
| Long term liabilities:                               |       |                                  |       |   |   |
| Other liabilities                                    |       | 6,610,981                             |       | 2,774,443 |   |
| Total long term liabilities                          |       | 6,610,981                             |       | 2,774,443 |   |
| Total liabilities                                    |       | 35,639,267                            |       | 36,710,617 |   |
|                                                 |       |                                  |       |   |   |
| Commitments and contingencies (notes 3 and 6)        |       |                                  |       |   |   |
|                                                 |       |                                  |       |   |   |
| **Members’ equity (Deficit):**                  |       |                                  |       |   |   |
| Members’ equity                                 |       | 100,000                               |       | 100,000 |   |
| Accumulated other comprehensive loss                 |       | (3,087,384                            | )          | — |   |
| Members’ equity (deficit)                       |       | (2,987,384                            | )          | 100,000 |   |
| Total liabilities and members’ equity (deficit) |       | $                                     | 32,651,883 |   | 36,810,617 |   |

 

See accompanying notes to financial statements.

 

80

----

 

**ALASKATANKER COMPANY, LLC**

**STATEMENTSOF OPERATIONS**

 
| ** **                                      | ** ** | **Years ended December 31,** | ** **  |
|-------------------------------------------------|------------|---------------------------------------------|-------------|
| ** **                                      | ** ** | **2007**                                    | ** **  | **2006** | ** ** | **2005** | ** ** |
| Revenues                                        |       | $                                           | 143,565,531 |   | 136,287,792 |   | 160,767,828 |   |
| Predelivery revenues (outside of time charters) |       | 1,062,497                                   |        | 2,871,765 |   | 3,951,222 |   |
| Total revenues                                  |       | 144,628,028                                 |        | 139,159,557 |   | 164,719,050 |   |
| ** **                                      |       |                                        |        |   |   |   |   |
| Cost of operations:                             |       |                                        |        |   |   |   |   |
| Payroll                                         |       | 31,634,274                                  |        | 30,899,151 |   | 38,389,245 |   |
| Consumables                                     |       | 3,639,972                                   |        | 3,218,657 |   | 3,136,940 |   |
| Insurance, net                                  |       | 1,298,750                                   |        | 1,699,149 |   | 1,874,574 |   |
| Vessel repair                                   |       | 13,159,701                                  |        | 6,247,026 |   | 6,668,430 |   |
| Drydock and customs                             |       | —                                      |        | 7,083,307 |   | 1,862,630 |   |
| Fuel                                            |       | 41,465,437                                  |        | 39,427,153 |   | 53,528,517 |   |
| Port charges                                    |       | 18,017,692                                  |        | 15,190,016 |   | 18,824,079 |   |
| Other                                           |       | 4,303,433                                   |        | 3,774,272 |   | 3,208,847 |   |
| New build expenses (projects outside warranty)  |       | 4,003,536                                   |        | 1,180,093 |   | — |   |
| Total cost of operations                        |       | 117,522,795                                 |        | 108,718,824 |   | 127,493,262 |   |
| ** **                                      |       |                                        |        |   |   |   |   |
| Administrative costs                            |       | 10,726,343                                  |        | 8,988,573 |   | 10,108,147 |   |
| Predelivery expenses (outside of time charters) |       | 1,062,497                                   |        | 2,871,765 |   | 3,951,222 |   |
| Severance costs                                 |       | —                                      |        | 420,572 |   | 2,282,053 |   |
| Net income                                      |       | $                                           | 15,316,393  |   | 18,159,823 |   | 20,884,366 |   |
|                                            |       |                                        |        |   |   |   |   |
| Dividend declared to members                    |       | $                                           | 15,316,393  |   | 18,159,823 |   | 20,884,366 |   |

 

Seeaccompanying notes to financial statements.

 

81

----

 

**ALASKATANKER COMPANY, LLC**

**STATEMENTSOF MEMBERS’ EQUITY (DEFICIT)**

**Yearsended December 31, 2007, 2006, and 2005**

 
| ** **                                             | ** ** | **OSG**    | ** ** | **Keystone** | ** ** | **BP Oil** | ** ** | **Members’  Equity** | ** ** | **Accumulated  other  comprehensive  loss** | ** ** | **Members’  equity  (deficit)** | ** ** |
|--------------------------------------------------------|------------|------------|------------|--------------|------------|-----------------|------------|---------------------------|------------|---------------------------------------------|------------|--------------------------------------|------------|
| Balance,  December 31, 2004                       |       | $          | 37,500     |         | 37,500     |            | 25,000     |                      | 100,000    |                                        | —     |                                 | 100,000    |   |
| Net Income                                             |       | 7,831,637  |       | 7,831,637    |       | 5,221,092       |       | 20,884,366                |       | —                                      |       | 20,884,366                           |       |
| Dividend to  members                                   |       | (7,831,637 | )          | (7,831,637   | )          | (5,221,092      | )          | (20,884,366               | )          | —                                      |       | (20,884,366                          | )          |
| Balance,  December 31, 2005                       |       | 37,500     |       | 37,500       |       | 25,000          |       | 100,000                   |       | —                                      |       | 100,000                              |       |
| Net Income                                             |       | 6,809,934  |       | 6,809,934    |       | 4,539,955       |       | 18,159,823                |       | —                                      |       | 18,159,823                           |       |
| Dividend to  members                                   |       | (6,809,934 | )          | (6,809,934   | )          | (4,539,955      | )          | (18,159,823               | )          | —                                      |       | (18,159,823                          | )          |
| Balance,  December 31, 2006                       |       | 37,500     |       | 37,500       |       | 25,000          |       | 100,000                   |       | —                                      |       | 100,000                              |       |
| Net Income                                             |       | 5,743,647  |       | 5,743,647    |       | 3,829,099       |       | 15,316,393                |       | —                                      |       | 15,316,393                           |       |
| Dividend to  members                                   |       | (5,743,647 | )          | (5,743,647   | )          | (3,829,099      | )          | (15,316,393               | )          | —                                      |       | (15,316,393                          | )          |
| Effect of  adoption of provisions of SFAS No. 158 |       | —     |       | —       |       | —          |       | —                    |       | (3,087,384                                  | )          | (3,087,384                           | )          |
| Balance, at  December 31, 2007                    |       | $          | 37,500     |         | 37,500     |            | 25,000     |                      | 100,000    |                                        | (3,087,384 | )(A)                                 | (2,987,384 | ) |

 

----

(A)                  The balance in accumulatedother comprehensive loss relates to the adoption of SFAS No. 158 andresulted in an increase in defined benefit pension and post retirement benefitobligations on the balance sheet.  Asthis amount is amortized and recorded on the statement of operations, it willbe reimbursed by BP Oil as set forth in the time charter agreements.

 

See accompanying notes tofinancial statements.

 

82

----

 

**ALASKATANKER COMPANY, LLC**

**STATEMENTSOF CASH FLOWS**

** **
| ** **                                                                         | ** ** | **Years ended December 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                         | ** ** | **2007**                                    | ** ** | **2006** | ** ** | **2005** | ** ** |
| Cash flows from operating activities:                                              |       |                                        |       |   |   |   |   |
| Net income                                                                         |       | $                                           | 15,316,393 |   | 18,159,823 |   | 20,884,366 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities: |       |                                        |       |   |   |   |   |
| Change in:                                                                         |       |                                        |       |   |   |   |   |
| Due from members and other receivables                                             |       | 2,662,868                                   |       | 4,413,239 |   | 2,151,040 |   |
| Prepaid expenses                                                                   |       | 106,778                                     |       | (224,141 | ) | 481,608 |   |
| Other assets                                                                       |       | (160,011                                    | )          | (184,326 | ) | (194,350 | ) |
| Accounts payable                                                                   |       | (2,760,062                                  | )          | 4,594,766 |   | (2,633,031 | ) |
| Accrued expenses                                                                   |       | 695,604                                     |       | (1,406,385 | ) | (9,124,077 | ) |
| Other liabilities                                                                  |       | 758,760                                     |       | 789,585 |   | 582,643 |   |
| Net cash provided by operating activities                                          |       | 16,620,330                                  |       | 26,142,561 |   | 12,148,199 |   |
| Cash flows from financing activities:                                              |       |                                        |       |   |   |   |   |
| Increase (decrease) in checks outstanding in excess of cash deposits               |       | —                                      |       | (2,356,361 | ) | 1,674,256 |   |
| Payment of dividend to members                                                     |       | (18,159,823                                 | )          | (20,884,366 | ) | (19,274,386 | ) |
| Net cash used in financing activities                                              |       | (18,159,823                                 | )          | (23,240,727 | ) | (17,600,130 | ) |
| Net change in cash                                                                 |       | (1,539,493                                  | )          | 2,901,834 |   | (5,451,931 | ) |
| Cash, beginning of year                                                            |       | 6,130,228                                   |       | 3,228,394 |   | 8,680,325 |   |
| Cash, end of year                                                                  |       | $                                           | 4,590,735  |   | 6,130,228 |   | 3,228,394 |   |
|                                                                               |       |                                        |       |   |   |   |   |
| Supplemental disclosure of  cash flow information:                                 |       |                                        |       |   |   |   |   |
| Noncash financing activity:                                                        |       |                                        |       |   |   |   |   |
| Dividends declared                                                                 |       | $                                           | 15,316,393 |   | 18,159,823 |   | 20,884,366 |   |
| Adoption of SFAS No. 158                                                      |       | 3,087,384                                   |       | — |   | — |   |

 

Seeaccompanying notes to financial statements.

 

83

----

 

ALASKA TANKERCOMPANY, LLC

Notes to FinancialStatements

December 31,2007 and 2006

 

**(1)**                     Organization and Purpose

** **

Alaska Tanker Company, LLC (ATC or the Company) wasorganized effective March 30, 1999 as a limited liability company in thestate of Delaware for the purpose of chartering and operating vessels for thetransportation of Alaskan produced crude oil to destinations designated byvessel charterers, and to provide tonnage planning and ship scheduling servicesto such vessel charterers.

 

The members of the Company and their respectiveownership interests are BP Oil Shipping Company USA, Inc. (BP Oil), whichowns 25%, Keystone Alaska, LLC (Keystone), which owns 37.5% and OSG America, LP(OSG), which owns 37.5%. The ownership interest held by OSG was previously heldby Overseas Shipholding Group, Inc. until November 15, 2007, when themembership interest was transferred to OSG as part of its initial publicoffering. Total capital contributions of $100,000 were made upon formation ofATC and each Member contributed its percentage of initial contribution based ontheir proportionate ownership.

 

The term of the Company shall be perpetual unlessdissolved or terminated by the members pursuant to the limited liabilitycompany agreement (Agreement). Disposition of a member’s interest can be madeonly in accordance with the Agreement which provides, among other things, thatany member who wants to dispose of its membership interest (other than to anaffiliate of the member) must (i) obtain approval of all of the othermembers; (ii) receive a bona fide offer to purchase its membership interestfrom a third party, (iii) offer to the other members to sell itsmembership interest on the same terms as the offer from the third party.

 

Pursuant to the Agreement, each member has agreed itwill not resign, retire, or withdraw from the Company, except that BP Oil maywithdraw as a member from the Company without cause, upon at least 120 daysprior notice to the other members. The withdrawal of BP Oil will not affect thetime charters (note 3) with BP Oil and the associated guarantees or othercontractual relationships then in place.

 

Income, loss, and distributions are allocated amongthe members in accordance with their sharing ratios in effect at the time(currently BP Oil 25%, Keystone 37.5%, OSG 37.5%).

 

The management of the Company is vested in the membercommittee, which is composed of three representatives, one from each of themembers of the Company. The representatives of Keystone and OSG have one andone half (11⁄2) votes each and the representative of BP Oil has one (1) vote.The member committee may delegate and has delegated certain operatingresponsibilities and authority to employees of the Company.

 

**(2)**                     Summary of Significant Accounting Policies

** **

***(a)***                      Use of Estimates

*** ***

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the reporting period. Significant items subject tosuch estimates and assumptions include valuation allowances for receivables andassets and liabilities related to employee benefits. Actual results coulddiffer from those estimates.

 

***(b)***                      Revenue Recognition

*** ***

Revenue is recorded pursuant to time charters(note 3) as expenses are incurred and incentive hire is earned. Asdiscussed in note 3, payments under bareboat charters are not recorded bythe Company in the accompanying financial statements as an expense nor is thecorresponding revenue recorded. Revenue earned prior to the signing of the timecharters is classified as preoperating revenue.

 

***(c)***                       Predelivery Expenses

*** ***

Predelivery expenses represent amounts paid by ATC onbehalf of BP Oil to prepare new vessels for operation. These amounts includethe procurement of spare parts, stocking the ship with consumables, certainpayroll expenses, and other costs incurred prior to the ship being ready tocarry crude oil and crew members. These amounts are reimbursed by BP Oil andare classified as predelivery expenses.

 

84

----

 

ALASKA TANKERCOMPANY, LLC

Notes to FinancialStatements

December 31,2007 and 2006

 

***(d)***                      Income Taxes

*** ***

The Company is taxed as a partnership, accordingly,all income taxes are the responsibility of the members.

 

***(e)***                       Cash

*** ***

Cash includes cash in banks and cash held onboardvessels in Master Cash Accounts.

 

***(f)***                         Prepaid Expenses

*** ***

Prepaid expenses include primarily prepaid payroll andinsurance costs at December 31, 2007 and 2006.

 

***(g)***                      Furniture, Fixtures and Equipment

*** ***

All expenditures for furniture, fixtures and equipmentare reimbursed by BP Oil. Accordingly, the net carrying value of furniture,fixtures and equipment is zero as of December 31, 2007 and 2006,respectively. As part of the formation of ATC, BP Oil provided approximately$853,000 of furniture, fixtures and equipment to the Company for use in theadministration of its operations. The Company has been provided the furniture,fixtures and equipment from BP Oil for no charge. Additionally, certainequipment is being leased by the Company under operating leases (note 6).

 

***(h)***                      New Build Expenses

*** ***

The Company incurs certain expenses upon receipt ofnew vessels to ensure they meet all safety criteria established by the Company.These expenses are subject to approval by BP prior to being incurred and areseparately recorded for financial reporting purposes.

 

***(i)***                         Reclassifications

*** ***

Certain prior year amounts have been reclassified toconform to the current year presentation.

 

**(3)**                     Charter Operations

** **

ATC was formed to operate vessels that were charteredto BP Oil in the Alaskan crude oil trade. During 2006, ATC had bareboatcharters for seven vessels. As of December 31, 2007, there were fiveremaining bareboat charters. A bareboat charter is a charter in which the ownerleases an unmanned ship for a long period at a rate which covers anydepreciation and a nominal return. The charterer mans, procures all suppliesand provisions, insures, maintains, and repairs the vessel, and pays for alloperating expenses.

 

The Company in turn charters the vessels under timecharters to BP Oil. A time charter is a form of charter where the bareboatcharterer leases the vessel and crew to the time charterer for a stipulatedperiod of time. The charterer pays for the vessels’ fuel and port charges inaddition to the time charter hire.

 

Each of the Company’s bareboat charters has acorresponding time charter with BP Oil covering identical periods. The timecharters contain a basic charter hire payment which is the same as the charterhire payment required by the corresponding bareboat charter. ATC, as allowed bythe time charters, has assigned the bareboat charter hire payments to be madedirectly by BP Oil to the shipowners or other person as designated by theshipowner. In addition, if a bareboat charter is terminated by the Company, thetermination payment required under the bareboat charter will be paid by BP Oilpursuant to the corresponding time charter. The time charters also includesupplemental charter hire payments which consist primarily of reimbursement ofthe Company’s operating expenses. In addition, as discussed below, the timecharters contain a provision for an incentive hire payment. The maximumincentive hire payment available per vessel for the year ended December 31,2007 is $2,243,333 (adjusted annually by the consumer price index).

 

As ATC is merely an operator of the vessels under thetime charters, the accompanying financial statements reflect only the operatingexpenses for the vessels and administration costs as well as the revenues fromBP Oil to fund those operations plus the incentive hire. BP Oil is responsiblefor paying all operating costs incurred by ATC. Total bareboat charter paymentsmade directly by BP Oil to the shipowners, or others as designated, and notreflected in the accompanying financial statements for the years ended December 31,2007, 2006 and 2005 were approximately

 

85

----

 

ALASKA TANKERCOMPANY, LLC

Notes to FinancialStatements

December 31,2007 and 2006

 

$90,162,000,$96,510,000 and $86,980,000, respectively. Included in the 2007 amount isapproximately $2,043,000 related to final payments for one ship that was takenout of service.

 

The bareboat andtime charter periods are the same for each individual vessel and expire onvarying dates from 2007 through 2023.

 

As noted above,the time charters between ATC and BP Oil make provisions for the payment ofincentive hire payments. These payments are made upon meeting certainperformance measure parameters as contractually defined in the time charter.The performance targets and assessment of achievement is agreed upon annuallyby the member committee. For the years ended December 31, 2007, 2006 and2005, the Company achieved incentive hire payments totaling $15,316,393,$18,159,823 and $20,884,366, respectively. The amount is shared by the membersof the Company based upon their sharing ratios and is shown as dividends tomembers in the accompanying financial statements. Included in the 2007incentive hire is $4,186,060, related to vessels that were taken out of servicein 2005 and 2006.

 

ATC does not ownany vessels nor does it have any options to acquire vessels under the bareboatcharter.

 

**(4)**                     Accrued Expenses

** **

Accrued expenses consist of the following at December 31,2007 and 2006:

 
| ** **                    | ** ** | **2007**  | ** ** | **2006**  | ** ** |
|-------------------------------|------------|-----------|------------|-----------|------------|
| Salaries and  wages           |       | $         | 3,476,367  |      | 1,835,387  |   |
| Drydock and  vessel repairs   |       | 2,200,230 |       | 1,850,465 |       |
| Voyage expenses               |       | 878,061   |       | 924,641   |       |
| Administrative  expenses      |       | 1,303,038 |       | 1,343,747 |       |
| Retirement and  medical plans |       | 481,894   |       | 828,187   |       |
| Other                         |       | 1,872,421 |       | 2,733,980 |       |
| Total                         |       | $         | 10,212,011 |      | 9,516,407  |   |

 

Included indrydock and vessel repairs are customs charges totaling approximately$1,500,000 at December 31, 2007 and 2006.

 

**(5)**                     Severance Costs

** **

The Companyreduced its fleet size in 2005 and as a result, 16 employees were givenseverance packages. Termination benefits were communicated to the affectedemployees prior to year-end. This reduction primarily impacted certain shorestaff, masters and chief mates. Employee severance costs primarily includedseverance benefits and notice pay. Severance costs of approximately $0,$421,000 and $2,282,000 were expensed in 2007, 2006, and 2005, respectively, ofwhich approximately $0 is included in other accrued expenses at December 31,2007.

 

The following table displays a rollforward of accrualsestablished for restructuring:

 
| Severance and  related costs:      |   |       |      |
|------------------------------------|--------|------------|-----------|
| Accrual at  December 31, 2005 |   | $          | 1,226,786 |   |
| 2006 charges                       |   | 327,670    |      |
| 2006 amounts  paid                 |   | (1,452,456 | )         |
| Accrual at  December 31, 2006 |   | 102,000    |      |
| 2007 amounts  paid                 |   | (102,000   | )         |
| Accrual at  December 31, 2007 |   | $          | —    |   |

 

86

----

 

ALASKA TANKERCOMPANY, LLC

Notes to FinancialStatements

December 31,2007 and 2006

 

**(6)**                     Commitments and Contingencies

** **

***(a)***                      Operating Leases

*** ***

The Company leasescertain office space, equipment and vehicles under noncancelable operatinglease agreements. The lease terms vary as do the Company’s renewal options.Expenses related to the leases totaled approximately $353,000, $456,000 and$526,000 for the years ended December 31, 2007, 2006 and 2005,respectively. Future annual lease payments are summarized as follows:

 
| **Year ending December 31:** | ** ** | ** ** | ** ** |
|-----------------------------------|------------|------------|------------|
| 2008                              |       | $          | 324,887    |   |
| 2009                              |       | 288,026    |       |
| 2010                              |       | 296,355    |       |
| 2011                              |       | 301,948    |       |
| 2012                              |       | 311,008    |       |
| Thereafter                        |       | 509,265    |       |
|                              |       | $          | 2,031,489  |   |

 

***(b)***                      Contingencies

*** ***

We are currently a party to various claims and legalproceedings in addition to those noted above. If management believes that aloss arising from these matters is probable and can reasonably be estimated, werecord the amount of the loss, or the minimum estimated liability when the lossis estimated using a range, and no point within the range is more probable thananother. As additional information becomes available, any potential liabilityrelated to these matters is assessed and the estimates are revised, ifnecessary. Based on currently available information, management believes thatthe ultimate outcome of these matters, individually and in the aggregate, willnot have a material adverse effect on our financial position or overall trendsin results of operations. However, litigation is subject to inherentuncertainties, and unfavorable rulings could occur. If an unfavorable rulingwere to occur, there exists the possibility of a material adverse impact on thefinancial position and results of operations of the period in which the rulingoccurs, or future periods.

 

**(7)**                     401(k) Plan

** **

The Company has a defined contribution plan with 401(k) provisionscovering all full-time employees other than those subject to collectivebargaining with a union and independent contractors. Employees become eligibleupon completion of one year of employment, 1,000 hours of service and age 21.Eligible employees may contribute in increments of 1% of eligible compensation,depending on their eligibility, subject to certain Internal Revenue Service(IRS) imposed limitations. The Company will match each dollar of employeesavings with $0.75 up to a maximum of 6% of eligible compensation. The Companymay, in its sole discretion, change the percentage of its contribution on aprospective basis. The employee contributions are always 100% vested. In 2005,the Company’s contributions were vested upon completion of five years ofservice. Effective January 1, 2006, Company contributions to the 401(k) planare vested upon the completion of three years of service. For the years ended December 31,2007, 2006 and 2005, the Company contributed approximately $168,000, $158,000and $173,000, respectively.

 

**(8)**                     Retirement Plans

** **

The Company offers adefined benefit plan and a postretirement benefit plan for its employees.

 

***(a)***                      Adoption of SFAS No. 158

*** ***

In September 2006, the FASB issued FASB StatementNo. 158, *Employers’ Accounting for Defined BenefitPension and Other Postretirement Plans – an amendment of FASB Statements No. 87,88, 106 and 132(R)*, (SFAS No. 158), which requires employers tofully recognize the funded status of single-employer defined benefit pension,retiree healthcare and other postretirement plans in their financialstatements, recognize as a component of other comprehensive income, net of tax,the gains or losses and prior service costs or credits that arise during theperiod but are not recognized as components of net periodic costs, measuredefined benefit plan

 

87

----

 

ALASKA TANKERCOMPANY, LLC

Notes to FinancialStatements

December 31,2007 and 2006

 

assets and obligations as of the date of the Company’sfiscal year-end statement of financial position, and disclose in the notes tofinancial statements additional information about certain effects on netperiodic benefit cost for the next fiscal year that arise from delayedrecognition of the gains or losses, prior service costs or credits, andtransition asset or obligation. The requirement of SFAS No. 158 torecognize the funded status of a benefit plan and the disclosure requirementswas effective as of December 31, 2007. The Company has historically used aDecember 31 measurement date.

 

The Company adopted SFAS No. 158 in the fiscalyear ended December 31, 2007 and the adoption of this accountingpronouncement resulted in $3,087,384 in accumulated other comprehensive loss inmembers’ equity (deficit), a $9,606 decrease in total assets and a $3,077,778increase in total liabilities to record unamortized losses related to thepostretirement benefit plan. These losses occurred due to the reduction in thediscount rate in prior years and the increase in benefits that arise whenparticipants meet the eligibility requirements. These unamortized losses willbe reclassified to the statement of operations over the estimated remainingyears to retirement of the participants.

 

This accounting changedoes not allow retroactive application.

 

The following is theincremental effect of applying SFAS No. 158 on individual line items inthe balance sheet at December 31, 2007.

 
| ** **                            | ** ** | **Before**                  | ** ** | ** **      | ** ** | **After**                   | ** ** |
|---------------------------------------|------------|-----------------------------|------------|-----------------|------------|-----------------------------|------------|
| ** **                            | ** ** | **application of**     | ** ** | ** **      | ** ** | **application of**     | ** ** |
| ** **                            | ** ** | **SFAS. No. 158** | ** ** | **Adjustments** | ** ** | **SFAS. No. 158** | ** ** |
| Other assets,  net                    |       | $                           | 935,824    |            | (9,606     | )                           | 926,218    |   |
| Total assets                          |       | 32,906,206                  |       | (9,606          | )          | 32,896,600                  |       |
| Other  liabilities, net               |       | 3,533,203                   |       | 3,077,778       |       | 6,610,981                   |       |
| Total  liabilities                    |       | 32,806,206                  |       | 3,077,778       |       | 35,883,984                  |       |
| Accumulated  other                    |       |                        |       |            |       |                        |       |
| comprehensive  loss                   |       | —                      |       | (3,087,384      | )          | (3,087,384                  | )          |
| Total members’  equity (deficit) |       | 100,000                     |       | (3,087,384      | )          | (2,987,384                  | )          |
|                                       |            |                             |            |                 |            |                             |            |  |

 

***(b)***                      Defined Benefit Pension Plan

*** ***

The Company maintains a noncontributory definedbenefit pension plan (the Plan) for substantially all of its employees.Employees become eligible upon completion of one year of employment. TheCompany’s current funding policy is to contribute the net periodic pension costaccrued each year, to the extent it falls between the minimum required andmaximum tax deductible contribution for the year. The Company’s annual pensioncontribution is based on independent actuarial computations.

 

The Company terminated the Plan effective December 31,2005 subject to IRS approval. As a result any benefit credits that otherwisewould have been earned after 2005 were eliminated. This resulted in a plancurtailment and the unrecognized prior service cost being fully amortized at December 31,2005.

 

Additionally, the Company maintained a supplementalnoncontributory defined benefit pension plan (Supplemental Plan). Together withthe Plan, the Supplemental Plan provided benefits for certain employees whoexceed allowable amounts under the Plan. This Plan was terminated as of December 31,2005 and a curtailment and settlement resulted. Any remaining benefits weretransferred to a supplemental capital appreciation plan.

 

88

----

 

ALASKA TANKERCOMPANY, LLC

Notes to FinancialStatements

December 31,2007 and 2006

 

The following are theamounts in accumulated other comprehensive loss that have not yet beenrecognized as components of net periodic benefit cost.

 
| ** ** | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------|------------|----------|------------|----------|------------|
| Net loss   |       | $        | 9,606      |     | —     |   |
|       |       | $        | 9,606      |     | —     |   |

 

Amounts recognized inaccumulated other comprehensive loss are as follows:

 
| ** **                                  | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------------------------|------------|----------|------------|----------|------------|
| Adjustment to  initially apply SFAS No.158: |       |     |       |     |       |
| Net loss                                    |       | $        | 9,606      |     | —     |   |
|                                        |       | $        | 9,606      |     | —     |   |
|                                        |       |     |       |     |       |

 

The estimated net loss that will be amortized fromaccumulated other comprehensive loss into net periodic benefit cost over thenext fiscal year is $0.

 

The following is abreakdown of certain aggregate components of the Plan at December 31, 2007and 2006 (measurement date of the Plan is December 31):

 
| ** **                      | ** ** | **2007**  | ** ** | **2006**  | ** ** |
|---------------------------------|------------|-----------|------------|-----------|------------|
| Projected  benefit obligation   |       | $         | (4,938,802 | )         | (4,858,453 | ) |
| Fair value of  plan assets      |       | 5,865,020 |       | 5,757,532 |       |
| Funded status                   |       | $         | 926,218    |      | 899,079    |   |
| Accumulated  benefit obligation |       | $         | (4,938,802 | )         | (4,858,453 | ) |

 

Amounts recognized in thebalance sheets at December 31:

 
| ** **                       | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|
| Noncurrent assets                |       | $        | 926,218    |     | 775,813    |   |
| Accumulated  other comprehensive |       | 9,606    |       | —   |       |
| Net amount  recognized           |       | $        | 935,824    |     | 775,813    |   |
|                             |       |     |       |     |       |

 

The weighted averageassumptions used to determine the benefit obligation at December 31, 2007and 2006 are as follows:

 
| ** **                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|
| Discount rate                                   |       | 6.00     | %          | 6.00     | %          |
| Expected  long-term rate of return on           |       | 8.00     | %          | 8.00     | %          |
| Rate of increase  in future compensation levels |       | —   |       | —   |       |

 

89

----

 

ALASKA TANKERCOMPANY, LLC

Notes to FinancialStatements

December 31,2007 and 2006

 

The following is abreakdown of aggregate pension benefits for the years ended December 31,2007, 2006 and 2005:

 
| ** **              | ** ** | **2007** | ** ** | **2006**   | ** ** | **2005**  | ** ** |
|-------------------------|------------|----------|------------|------------|------------|-----------|------------|
| Pension benefit  (cost) |       | $        | 160,011    |       | 184,326    |      | (1,304,905 | ) |
| Employer  contribution  |       | —   |       | —     |       | 1,200,000 |       |
| Benefits paid           |       | (243,944 | )          | (2,014,292 | )          | (422,189  | )          |
|                         |            |          |            |            |            |           |            |  |

 

The weighted averageassumptions used to determine the net benefit (cost) for the years ended December 31,2007, 2006 and 2005 are as follows:

 
| ** **                                        | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Discount rate                                     |       | 6.00     | %          | 5.75     | %          | 6.00     | %          |
| Expected  long-term rate of return on plan assets |       | 8.00     |       | 8.00     |       | 8.00     |       |
| Rate of increase  in future compensation levels   |       | —   |       | —   |       | 5.50     |       |

 

The Company’s overall expected long-term rate ofreturn on assets is 8%. The expected long-term rate of return is based on theportfolio as a whole and not on the sum of the returns on individual assetcategories. The return is based exclusively on historical returns withoutadjustments.

 

**Plan Assets**

** **

The Plan’s assets are invested to maximize returns andminimize risk to the participants in the Plan. This strategy also involvesmonitoring investment allocations to ensure appropriate diversification ofassets and performance. The Company has established targeted asset allocationsfor the Plan. These targets do not represent strict requirements, but areintended as general guidelines. The targeted allocation percentages are: fixedincome 60% and equities 40%.

 

The Plan’s assetallocation at December 31, 2007 and 2006, by asset category are asfollows:

 
| ** **                        | ** ** | **Plan assets at December 31** | ** ** |
|-----------------------------------|------------|----------------------------------------------------|------------|
| ** **                        | ** ** | **2007**                                           | ** ** | **2006** | ** ** |
| Mutual funds –  equities     |       | 51                                                 | %          | 40 | % |
| Mutual funds –  fixed income |       | 15                                                 |       | 48 |   |
| Corporate debt  instruments       |       | —                                             |       | 2 |   |
| U.S. government  securities       |       | 9                                                  |       | 2 |   |
| Interest-bearing  cash            |       | 25                                                 |       | 8 |   |
| Total                             |       | 100                                                | %          | 100 | % |
|                                   |            |                                                    |            |  |  |  |  |

 

**Cash Flows**

** **

The Company expects to contribute $0 to the Plans in2008.

 

The Plan’s assets will be distributed to participantsupon IRS and Pension Benefit Guarantee Corporation approval of the Plan’stermination. The Company expects such approvals to occur during 2007. Benefitpayments will be made as terminated employees request payouts prior to thefinal distribution. The distribution will be approximately $4,950,000 when thetermination occurs.

 

90

----

 

ALASKA TANKER COMPANY, LLC

Notes to Financial Statements

December 31, 2007 and 2006

 

***(c)***                       Postretirement Plan

*** ***

The Company has apostretirement medical and life insurance plan (the Postretirement Plan)that provides benefits to shore-based employees and nonunion licensed deckofficers at least 55 years of age with 10 years or more of service as defined.

 

Thefollowing are the amounts in accumulated other comprehensive loss that have notyet been recognized as components of net periodic benefit cost.

 

 
|                   | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------|------------|----------|------------|----------|------------|
| Net loss               |       | $        | 2,848,846  |     | —     |   |
| Net prior service cost |       | 228,932  |       | —   |       |
|                   |       | $        | 3,077,778  |     | —     |   |

 

Amountsrecognized in accumulated other comprehensive loss are as follows

 
| ** **                                 | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|
| Adjustment to initially apply SFAS No.158: |       |     |       |     |       |
| Net loss                                   |       | $        | 2,848,846  |     | —     |   |
| Net prior  service cost                    |       | 228,932  |       | —   |       |
|                                       |       | $        | 3,077,778  |     | —     |   |

 

The estimated net lossthat will be amortized from accumulated other comprehensive loss into netperiodic benefit cost over the next fiscal year is $320,000.

 

Thefollowing is a breakdown of certain aggregate components of the PostretirementPlan at December 31, 2007 and 2006 (measurement date of the PostretirementPlan is December 31):

 
| ** **                             | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|
| Projected benefit obligation |       | $        | (6,803,364 | )        | (6,369,658 | ) |
| Fair  value of plan assets             |       | —   |       | —   |       |
| Funded status                          |       | $        | (6,803,364 | )        | (6,369,658 | ) |
| Accumulated  benefit obligation        |       | $        | (6,803,364 | )        | (6,369,658 | ) |

 

Amountsrecognized in the balance sheets at December 31:

 
| ** **                              | ** ** | **2007**   | ** **       | **2006**   | ** ** |
|-----------------------------------------|------------|------------|------------------|------------|------------|
| Current  liabilities                    |       | $          |  (192,383   | )          | (151,564   | ) |
| Noncurrent  liabilities                 |       | (6,610,981 | )                | (2,774,443 | )          |
| Accumulated  other comprehensive income |       | 3,077,778  |             | —     |       |
| Net amount recognized                   |       | $          |  (3,725,586 | )          | (2,926,007 | ) |

 

Unrecognized priorservice costs are attributed to participants qualified to be participants inprior plans sponsored by the members of the Company.

 

91

----

 

ALASKA TANKER COMPANY, LLC

Notes to Financial Statements

December 31, 2007 and 2006

 

Thefollowing is a breakdown of postretirement benefits for the years ended December 31,2007, 2006 and 2005:

 
| ** **                           | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Benefit  cost                        |       | $        | 1,005,842  |     | 1,044,059  |     | 691,088    |   |
| Employer  and employee contributions |       | 237,065  |       | 212,469  |       | 121,889  |       |
| Benefits  paid                       |       | 206,263  |       | 185,910  |       | 105,997  |       |
|                                      |            |          |            |          |            |          |            |  |

 

Theweighted average assumptions used to determine the benefit obligation as of December 31,2007 and 2006 are as follows:

 
| ** **     | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------|------------|----------|------------|----------|------------|
| Discount  rate |       | 6.00     | %          | 6.00     | %          |

 

Theweighted average assumptions used to determine the net benefit cost for theyears ended December 31, 2007, 2006 and 2005 are as follows:

 
| ** **     | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------|------------|----------|------------|----------|------------|----------|------------|
| Discount  rate |       | 6.00     | %          | 5.75     | %          | 6.00     | %          |

 

The Company determinesthe discount rate based on Moody’s Aa bonds.

 

Healthcare cost trendrates for 2007 were increased to 9%, decreasing yearly by 1% to 5% in 2012. A1% increase in the assumed healthcare cost trend would increase the benefitcost by $123,841 and the benefit obligation by $1,152,458. A 1% decrease in theassumed healthcare cost trend would reduce the benefit cost by $98,575 and thebenefit obligation by $935,602.

 

**Cash Flows**

** **

The Company expects tomake benefit payments of approximately $192,000 to the Postretirement Plan in2008.

 

Thefollowing benefit payments, which reflect expected future services, asappropriate, are expected to be paid by the Postretirement Plan:

 

 

| 2008             |   | $         | 192,383 |   |
|------------------|--------|-----------|---------|--------|
| 2009             |   | 220,230   |    |
| 2010             |   | 245,992   |    |
| 2011             |   | 273,675   |    |
| 2012             |   | 310,227   |    |
| 2013 – 2017 |   | 1,968,620 |    |

 

**(9)**                     Related-Party Transactions

** **

The Company’s revenuesare derived primarily from time charter hire revenues received from BP Oil. Forthe years ended December 31, 2007, 2006 and 2005, BP Oil billed theCompany approximately $10,981,000, $461,000 and $6,496,000, respectively, forbunker fuel and $1,091,000, $236,000 and $558,000, respectively, for technicaland engineering services, consumable lube products, vetting inspections, andlay-up services.

 

The Company receivedaccounting and administrative support from Keystone Shipping (KS), an affiliateof Keystone through September 30, 2006. KS charged the Company, on amonthly basis, for the services provided at agreed-upon

 

92

----

 

ALASKA TANKER COMPANY, LLC

Notes to Financial Statements

December 31, 2007 and 2006

 

billing rates. For theyears ended December 31, 2007, 2006 and 2005, KS billed the Companyapproximately $14,000, $387,000 and $448,000, respectively, for servicesprovided.

 

93

----

 

**ITEM 9. CHANGES IN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

None

 

**ITEM 9A(T).         CONTROLSAND PROCEDURES**

 

(a)          Evaluation of disclosure controls and procedures

 

As ofthe end of the period covered by this Annual Report on Form 10-K, an evaluationwas performed under the supervision and with the participation of the Partnership’smanagement, including the Chief Executive Officer (“CEO”) and Chief FinancialOfficer  (“CFO”), of the effectiveness ofthe design and operation of the Partnership’s disclosure controls andprocedures pursuant to Rules 13a-15(e) and 15d-15(e) under the SecuritiesExchange Act of 1934 (the “Exchange Act”). Based on that evaluation, the Partnership’s management, including theCEO and CFO, concluded that the Partnership’s current disclosure controls andprocedures are effective to ensure that information required to be disclosed bythe Partnership in the reports the Partnership’s files or submits under theExchange Act is (i) recorded, processed, summarized and reported, within thetime periods specified in the Securities and Exchange Commission’s rules andforms and (ii) accumulated and communicated to the Partnership’s management,including the CEO and CFO, as appropriate to allow timely decisions regardingrequired disclosure. This Annual Report does not include a report of management’sassessment regarding internal control over financial reporting or anattestation report of the Partnership’s registered public accounting firm dueto a transition period established by rules of the Securities and ExchangeCommission for newly public companies. 

 

(b)         Changes in internal control over financial reporting

 

There have been nomaterial changes in the Partnership’s internal controls or in other factorsthat could materially affect these controls during the period covered by thisAnnual Report.

 

**ITEM 9B. OTHER INFORMATION**

 

None

 

**PART III**

 

**ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE**

 

OSG America LLC, as the general partner of OSG AmericaL.P., manages our operations andactivities.Unitholders are not entitled to elect the directors ofour general partner or directly or indirectly participate in our management oroperation.

 

Because we are a limited partnership, the listingstandards of the New York Stock Exchange do not require our general partner tohave a majority of independent directors or a nominating/corporate governanceor compensation committee.

 

We are managed and operated by the directors andofficers of our general partner. All of our operating personnel are employeesof an affiliate of our general partner. The President of our general partner,Jonathan P. Whitworth, allocates his time between managing our business andaffairs and the business and affairs of OSG. Mr. Whitworth is a SeniorVice President of OSG. The amount of time Mr. Whitworth allocates betweenour business and the businesses of OSG varies from time to time depending onvarious circumstances and needs of the businesses, such as the relative levelsof strategic activities of the businesses.

 

Officersof our general partner and those individuals providing services to us or oursubsidiaries may face a conflict regarding the allocation of their time betweenour business and the other business interests of OSG. Our general partnerintends to seek to cause its officers to devote as much time to the managementof our business and affairs as is necessary for the proper conduct of ourbusiness and affairs.

 

94

----

 

Thefollowing table provides information regarding the directors and executiveofficers of our general partner. Directors are elected for one-year terms.

 
| **Name**                 | ** ** | **Age** | ** ** | **Position**                                     |
|--------------------------|------------|---------|------------|--------------------------------------------------|
| Morten Arntzen           |       | 52      |       | Chairman of the  Board                           |
| Jonathan P.  Whitworth   |       | 41      |       | President, Chief  Executive Officer and Director |
| Myles R. Itkin           |       | 60      |       | Chief Financial  Officer and Director            |
| Robert E.  Johnston      |       | 60      |       | Director                                         |
| Kathleen C.  Haines |       | 53      |       | Director                                         |
| James G. Dolphin         |       | 40      |       | Director                                         |
| Steven T. Benz           |       | 56      |       | Director                                         |

 

***Morten Arntzen*** is Chairman of the Board of Directors of our generalpartner and has served as such since the inception of our general partner in May 2007.Mr. Arntzen has also served as President, Chief Executive Officer and aDirector of OSG since January 2004. Prior to joining OSG, Mr. Arntzenwas employed in various capacities by American Marine Advisors, Inc.(AMA), a U.S. based merchant banking firm specializing in the maritimeindustry, from 1997 to 2004, most recently serving as Chief Executive Officer.

 

***Jonathan P. Whitworth*** is President, Chief Executive Officer and a Directorof our general partner and has served as such since the inception of ourgeneral partner in May 2007. Mr. Whitworth has also served as SeniorVice President and Head of U.S. Flag Strategic Business Unit of OSG since November 2006,which he joined in connection with OSG’s acquisition of Maritrans Inc.Prior to joining OSG, Mr. Whitworth served as President and Chief ExecutiveOfficer of Maritrans Inc. from May 2004. Prior to joiningMaritrans Inc., Mr. Whitworth served from 2000 to May 2004 asManaging Director of Teekay Shipping (USA), Inc., with responsibility forbusiness development, customer relations and sales for North and South America.Mr. Whitworth holds a Chief Officer’s license from the U.S. Coast Guardand sailed on U.S. flag tankers in the international trade before starting hisshoreside career.

 

***Myles R. Itkin*** is Chief Financial Officer and a Director of ourgeneral partner and has served as such since the inception of our generalpartner in May 2007. Mr. Itkin has also served since 2006 asExecutive Vice President of OSG (Senior Vice President from 1995 through 2006)and since 1995 as Chief Financial Officer and Treasurer of OSG.

 

***Robert E. Johnston*** is a Director of our general partner and has servedas such since the inception of our general partner in May 2007. Mr. Johnstonhas also served since September 2005 as Senior Vice President and Head ofShipping Operations of OSG, with responsibility for all technical management ofOSG’s international flag and U.S. flag fleets. Prior to that, Capt. Johnstonserved as Senior Vice President and Chief Commercial Officer of OSG since October 1998.

 

***Kathleen C. Haines*** is a Director and chairs our audit committee andserves on our conflicts committee and our corporate governance committees. Ms. Hainescurrently serves as Chief Executive Officer of the transition company createdfollowing the sale of OMI Corporation (OMI), a $2.2 billion (assets)U.S.-based international shipping company. During her 18 year tenure atOMI, Ms. Haines served as Senior Vice President, Chief Financial Officerand Treasurer since August 2000.

 

***James G. Dolphin*** is a Director and chairs our conflicts committee andserves on our corporate governance committee and audit committee. Mr. Dolphinis Managing Director and President of AMA Capital Partners LLC (AMA), a NewYork based boutique merchant bank focused on the transportation industry. Mr. Dolphinconcentrates on mergers and acquisitions and strategic advisory work at AMA andalso serves on the investment committees of the firm’s private equity funds. Hewas involved in the creation of Oceania Cruises and served on its board, auditcommittee and executive committee for four years until its sale to the privateequity firm Apollo. Prior to joining AMA, Mr. Dolphin was a Principal inthe management consulting firm Booz Allen Hamilton, leading the global maritimepractice.

 

***Steven T. Benz*** is a Director and chairs our corporate governancecommittee and serves on our conflicts committee and audit committee. Mr. Benzis Chief Executive Officer and President of Marine Spill Response Corporation(MSRC) a $450 million (assets) not-for-profit environmental companydedicated to the cleanup of petroleum and chemical spills by marinetransportation companies and has served in that capacity for more than fiveyears.

 

95

----

 

**Meetings and Committees of the Boardof Directors**

 

***Meetings***

 

OSGAmerica LLC’s board of directors (“BOD”) did not meet during fiscal 2007.During fiscal 2007, one Audit Committee meeting was held and attended by allCommittee members.

 

***Audit Committee***

 

OSGAmerica LLC has a standing Audit Committee consisting of Ms. Haines(Chairman) and Messrs. Benz and Dolphin. The Audit Committee met once in2007. During a full year of operations, the Audit Committee is required to meetfour times annually. The members of the Audit Committee must be independent. Theboard of directors of OSG America LLC has determined that all members of theAudit Committee are independent within the meaning of the listing standards ofthe New York Stock Exchange and the applicable rules of the Securities andExchange Commission. In addition, the board of directors of OSG America LLC hasdetermined that all members of the Audit Committee are financially literate andthat Ms. Haines is an audit committee financial expert within the meaningof the rules of the Securities and Exchange Commission. The members of theAudit Committee are appointed annually by the BOD.

 

TheBOD has adopted a formal charter under which the Audit Committee operates. Thecharter governs the duties, responsibilities and conduct of the AuditCommittee.

 

Theprimary responsibilities of the Audit Committee are to assist the BOD inoverseeing (1) the quality and integrity of our financial statements andthe financial reporting process, (2) compliance with legal and regulatoryrequirements, (3) the qualifications, independence and performance of ourindependent registered public accounting firm, and (4) the effectivenessof our internal audit function and adequacy of our internal controls. The AuditCommittee has the sole authority to appoint, retain and terminate ourindependent registered public accounting firm, which reports directly to theAudit Committee.

 

The Audit Committee has established procedures for thereceipt, retention and treatment of complaints we receive regarding accounting,internal accounting controls or auditing matters and the confidential,anonymous submission by our employees of concerns regarding questionableaccounting or auditing matters.

 

***CorporateGovernance Committee***

 

OSGAmerica LLC has a standing Corporate Governance Committee consisting of Messrs. Benz(Chairman) and Dolphin and Ms. Haines. The Corporate Governance Committeedid not meet in 2007 and is not required to meet annually.

 

TheBOD has adopted a formal charter under which the Corporate Governance Committeeoperates. The charter governs the duties, responsibilities and conduct of theCorporate Governance Committee.

 

TheCorporate Governance Committee, among other tasks, (1) makesrecommendations to the BOD as to the size of the BOD and the composition of itscommittees, (2) oversees the evaluation of the BOD and its committees, (3) develops,recommends to the BOD, reviews and updates the corporate governance principles,policies and practices and independence standards and monitors compliance, (4) overseesdirector compensation and administers the OSG America L.P. 2007 OmnibusIncentive Compensation Plan, and (5) shapes the corporate governance ofthe Partnership.

 

***Conflicts Committee***

 

OSGAmerica LLC has a standing Conflicts Committee consisting of Messrs. Dolphin(Chairman) and Benz and Ms. Haines. The Conflicts Committee did not meetin 2007 and is not required to meet annually.

 

TheBOD has adopted a formal charter under which the Conflicts Committee operates.The charter governs the duties, responsibilities and conduct of the ConflictsCommittee.

 

TheConflicts Committee reviews specific matters that the BOD believes may involveconflicts of interest and takes such other action as may be required under theterms of our partnership agreement.

 

**Director Independence**

 

Forinformation on director independence, please read “Item 13. CertainRelationships and Related Transactions, and Director Independence.”

 

**Policies and Procedures for Approvalof Related Person Transactions**

 

TheConflicts Committee is responsible for reviewing and approving any relatedperson transaction.

 

96

----

 

**Code of Business Conduct and Ethics**

 

TheBOD has adopted a code of business conduct and ethics which is an extension ofthe Code of Business Conduct and Ethics of our affiliate, Overseas ShipholdingGroup Inc. (“OSG”) for all employees, officers and directors of OSP and allemployees of OSG and its affiliates who provide services to OSP. If anyamendments are made to the code or if OSG America LLC grants any waiver,including any implicit waiver, from a provision of the code that the SEC or theNew York Stock Exchange (“NYSE”) requires us to disclose, we will disclose thenature of such amendment or waiver on our website or in a current report on Form 8-K.

 

**Corporate Governance Guidelines**

 

TheBOD has adopted corporate governance guidelines in accordance with the rules ofthe New York Stock Exchange.

 

**Availability of Corporate GovernanceDocuments**

 

Copiesof the board committee charters, code of business conduct and ethics andcorporate governance guidelines are available, without charge, on our websiteat www.osgamerica.com and in print, free of charge, upon written request to theInvestor Relations, OSG America L.P., Two Harbour Place, 302 Knights RunAvenue, Suite 1200, Tampa, FL 33602.

 

**Executive Sessions of the Board ofDirectors**

 

Messrs. Benzand Dolphin and Ms. Haines, who are non-management directors of OSGAmerica LLC, meet at regularly scheduled executive sessions without management.These meetings are chaired by a lead director.

 

**Communications with IndependentDirectors**

 

Personswishing to communicate with our non-management directors may do so by writingto them at OSG America L.P., c/o Board of Directors, Two Harbour Place, 302Knights Run Avenue, Suite 1200, Tampa, FL 33602.

 

### **Reimbursementof Expenses of Our General Partner**

###  

Ourgeneral partner does not receive any management fee or other compensation formanaging us. Our general partner and its other affiliates are reimbursed forexpenses incurred on our behalf. These expenses include all expenses necessaryor appropriate for the conduct of our business and allocable to us, asdetermined by our general partner.

 

**Section 16(a) BeneficialOwnership Reporting Compliance**

 

Section 16(a) ofthe Securities Exchange Act of 1934 requires our officers and directors, andpersons who own more than 10% of a registered class of our equity securities,to file reports of beneficial ownership and changes in beneficial ownershipwith the SEC. Officers, directors and greater than 10% unitholders are requiredby SEC regulations to furnish us with copies of all Section 16(a) forms.

 

Basedsolely on our review of the copies of such forms we received, orrepresentations from certain reporting persons that no Form 4s wererequired for those persons, we believe that during the fiscal year ended December 31,2007, all of our officers, directors, and greater than 10% beneficial ownerscomplied on a timely basis with all applicable filing requirements under Section 16(a) ofthe Securities Exchange Act of 1934.

 

97

----

 

REPORT OF THE AUDIT COMMITTEE FOR FISCAL YEAR 2007

 

Managementhas primary responsibility for maintaining effective internal control overfinancial reporting, for assessing the effectiveness of internal control overfinancial reporting and for preparation of the consolidated financialstatements of the Partnership. The Partnership’s independent registered publicaccounting firm is responsible for performing an independent audit of thePartnership’s consolidated financial statements in accordance with auditingstandards generally accepted in the United States. The Audit Committee’sresponsibility is to monitor and oversee this process on behalf of the Board ofDirectors. The Board has adopted a written Audit Committee Charter which isposted on the Partnership’s website at www.osgamerica.com.

 

Infulfilling its oversight responsibilities, the Audit Committee has met and helddiscussions with management and the Partnership’s independent registered publicaccounting firm concerning the quality of the accounting principles, thereasonableness of significant judgments and the adequacy of disclosures in thefinancial statements. Management represented to the Audit Committee that thePartnership’s consolidated financial statements were prepared in accordancewith accounting principles generally accepted in the United States. The AuditCommittee reviewed and discussed the consolidated financial statements withmanagement and the Partnership’s independent registered public accounting firm.The Audit Committee further discussed with the Partnership’s independentregistered public accounting firm the matters required to be discussed byStatement on Auditing Standards No. 61 (Communications with AuditCommittees), as amended. The Audit Committee met once during 2007. The membersof the Audit Committee are considered to be independent because they satisfythe independent requirements for Board of Directors members prescribed by theNYSE listing standards and Rule 10A-3 under the 1934 Act.

 

ThePartnership’s independent registered public accounting firm also provided tothe Audit Committee the written disclosures and letter required by IndependenceStandards Board Standard No. 1 (Independence Discussions with AuditCommittees), as amended, and the Audit Committee discussed with the independentregistered public accounting firm their independence and considered thecompatibility of nonaudit services with the registered public accounting firm’sindependence.

 

Basedupon the Audit Committee’s discussions with management and the Partnership’sindependent registered public accounting firm, the Audit Committee’s review ofthe representations of management, the certifications of the Partnership’schief executive officer and chief financial officer which are required by theSecurities and Exchange Commission and the Sarbanes-Oxley Act of 2002, and thereport and letter of the independent registered public accounting firm providedto the Audit Committee, the Audit Committee recommended to the Board ofDirectors (and the Board of Directors approved) that the audited consolidatedfinancial statements referred to above be included in the Partnership’s AnnualReport on Form 10-K for the year ended December 31, 2007 for filingwith the SEC. The Audit Committee has also approved the selection of Ernst &Young LLP as the Partnership’s independent registered public accounting firmfor 2008.

 
|   |   | Audit Committee:              |
|--------|--------|-------------------------------|
|   |   |                          |
|   |   | Kathleen C.  Haines, Chairman |
|   |   | Steven T. Benz                |
|   |   | James G. Dolphin              |

 

**ITEM 11.EXECUTIVE COMPENSATION**

 

### **ExecutiveCompensation**

###  

We andour general partner were formed in May 2007. Because our Chairman, Mr. Arntzen,our President and Chief Executive Officer, Mr. Whitworth and our ChiefFinancial Officer, Mr. Itkin, are employees of OSG their compensation isset and paid by OSG and we reimburse OSG for time they spend on partnershipmatters. Officers and employees of our general partner or its affiliatesparticipate in employee benefit plans and arrangements sponsored by OSG, ourgeneral partner, or their affiliates, including plans that may be establishedin the future.

 

### **Compensationof Directors**

###  

Officersof our general partner or OSG who also serve as directors of our generalpartner do not receive additional compensation for their service as directors.Each non-management director receives compensation for attending meetings ofthe board of directors, as well as committee meetings. Non-management directorsreceive a director fee of $30,000 per year as well as a grant of 750 commonunits, which vest ratably over three years. Members of the audit, conflicts andcorporate governance committees each receive a committee fee of $5,000 per yearper committee, and the chair of each of these 

 

98

----

 

committees receives anadditional fee of $5,000 per year for serving in that role. In addition, eachdirector is reimbursed for out-of-pocket expenses in connection with attendingmeetings of the board of directors or committees. Each director is fullyindemnified by us for actions associated with being a director.

 

Thefollowing table sets forth a summary of the compensation paid to non-employeedirectors in 2007:

 

| **Name**           | ** ** | **Fees Earned or  Paid in Cash  ($)(1)** | ** ** | **Unit  Awards  ($)(2)** | ** ** | **Total  ($)** | ** ** |
|--------------------|------------|------------------------------------------|------------|--------------------------|------------|----------------|------------|
| Steven T. Benz     |       | $                                        | 7,065      |                     | $          | 607            |       | $ | 7,672 |   |
| James G. Dolphin   |       | $                                        | 7,065      |                     | $          | 607            |       | $ | 7,672 |   |
| Kathleen C. Haines |       | $                                        | 7,065      |                     | $          | 607            |       | $ | 7,672 |   |

 

----

(1)                             Consistsof annual Board fees, Board Chairman and committee fees and meeting fees.

(2)                             Unitawards represent the dollar amount recognized for financial statement reportingpurposes with respect to 2007 for the fair value of restricted units granted in2007 in accordance with SFAS 123R. Fair value of unit awards is calculated asthe Partnership’s initial public offering price.

 

**Long TermIncentive Plan**

 

In2007, the board of directors of our general partner adopted the OSG AmericaL.P. 2007 Omnibus Incentive Compensation Plan (the “Plan”), pursuant to whichdirectors, officers, employees and consultants of ours and our affiliates,including OSG and our general partner, who perform services for us are eligibleto receive awards based on, or related to, our common units (“units”).

 

ThePlan is administered by the board of directors of our general partner (the “Board”),who also interprets the Plan and establishes rules and regulations for itsadministration. The Board may designate a committee thereof to administer thePlan and to establish rules and regulations for its administration. ThePlan limits the aggregate number of units that may be delivered pursuant toawards to 250,000 units.

 

ThePlan permits the grant of various types of awards as determined by the Board inits sole discretion, including options, unit appreciation rights, restrictedunits, restricted unit awards, performance units, cash incentive awards and anyother equity-based or equity-related awards. The Board has full power andauthority to determine when and to whom awards will be granted and the amount,form of payment and other terms and conditions of each award, consistent withthe terms of the Plan. Awards may vary between individuals, between classes ofindividuals, by year or on any other basis the Board determines to beappropriate. Awards may be granted in tandem with other awards, and will be evidencedby specific award agreements. The Board may amend or waive the terms andconditions, or accelerate exercisability, of any outstanding award, except thatany amendment or waiver that would materially and adversely impair the rightsof any holder of an outstanding award will require the consent of the holder.

 

Underthe Plan, the Board is permitted and authorized to make awards that aredenominated or payable in, valued by reference to, or otherwise based on orrelated to our units, including the following:

 

***Unit Options.***Theholders of an option are entitled to purchase a number of units in the futureat a specified exercise price per unit (which will not be less than the fairmarket value of a unit on the date of grant of the option, unless otherwise provided)in such a manner and subject to such terms and conditions as shall bedetermined by the Board. The units subject to each option generally vest in oneor more installments over a specified period of service measured from the grantdate of the option. Except as otherwise provided by the award agreement,options vest with respect to one-third of the units on each of the first threeanniversaries of the date of grant. Options will not be exercisable after thetenth anniversary of the date of grant.

 

***Unit Appreciation Rights.***Aunit appreciation right is an award that, upon exercise, entitles the holder toreceive all or part of the excess of the fair market value of a unit on theexercise date over the exercise price established for the unit appreciationright. The exercise price per unit of unit appreciation right will not be lessthan the fair market value of a unit on the date of grant of the unitappreciation right, unless otherwise provided. Such excess may be paid inunits, cash, other property or a combination thereof, as determined by theBoard in its discretion. Unit appreciation rights vest and become exercisablein accordance with a vesting schedule established by the Board.

 

***Restricted Units and RUAs.***Arestricted unit is a unit that vests over a period of time and that during suchtime is subject to forfeiture. An RUA represents an unfunded and unsecuredpromise to deliver units, cash, other property or a 

 

99

----

 

combination thereof inaccordance with the terms of the applicable award agreement. In general,restricted units and RUAs may not be sold, assigned, transferred, pledged orotherwise encumbered. The Board determines the period over which restrictedunits (and distributions related to such restricted units) and RUAs granted toeligible persons will vest and may, for example, base its determination uponthe achievement of specified financial objectives.

 

***Performance Units.***Performanceunits give participants the right to receive payments in units, cash, otherproperty or a combination thereof based solely upon the achievement of certainperformance goals during a specified performance period. Subject to the termsof the Plan, the performance goals to be achieved during any performance period,the length of any performance period, the amount of any performance awardgranted, the amount of any payment or transfer to be made pursuant to anyperformance award and any other terms and conditions of any performance awardis determined by the Board.

 

***Unit Grants.***Unitsmay be granted that vest in the grantee immediately upon issuance, subject toany terms and conditions as may be determined by the Board and any limitationsunder the Plan.

 

***Cash Incentive Awards.***Acash incentive award is an award payable to a participant in cash upon theattainment of performance goals established by the Board.

 

Subjectto any applicable law, government regulation and the rules of the New YorkStock Exchange, the Board has the right at any time to amend, modify or terminatethe Plan, or any part of the Plan, from time to time, without unitholderapproval; provided, however, that unitholder approval shall be required for anyamendment that would, subject to certain exceptions:

 

·                  increase the maximum number of units for whichawards may be granted under the Plan;

 

·                  decrease the exercise price of any option or unitappreciation right that, at the time of such decrease, has an exercise pricethat is greater than the then current fair market value of a unit or cancel, inexchange for cash or any other award, any such award; or

 

·                  change the class of employees or other individualseligible to participate in the Plan.

 

Nomodification, amendment or termination of the Plan may be made that wouldmaterially and adversely affect the rights of any participant that has beengranted awards under the Plan, without the consent of such participant, unlessotherwise provided by the Board in the applicable award agreement.

 

Inaddition, the Board may at any time amend or terminate any outstanding awardwithout approval of a participant; provided, however, that no such amendment ortermination may be made that would materially and adversely impair the rightsof any participant or holder of any award, without the consent of theparticipant or holder.

 

Anyunits subject to any award that expires or is terminated, cancelled orforfeited without the delivery of units will be available for future awardsunder the Plan. The units issuable under the Plan may be units issued by us,acquired by us on the open market, acquired by us from any other person, or acombination of the foregoing.

 

TheBoard may make adjustments in the terms and conditions of, and the criteriaincluded in, awards in recognition of unusual or non-recurring events affectingus or our affiliates. In addition, unless otherwise provided for in theapplicable award agreement, in the event of a change of control (unlessprovision is made in connection with the change of control for the assumptionor substitution of outstanding awards), all outstanding awards shallimmediately vest and be deemed exercisable and all restrictions shall lapse asof immediately prior to such change of control. The acceleration of vesting inthe event of a change in control may be seen as an anti-takeover provision andmay have the effect of discouraging a merger proposal, a takeover attempt orother efforts to gain control of us.

 

Unlessearlier discontinued or terminated by the Board, the Plan will expire on thetenth anniversary of its date of adoption. No awards may be made after thatdate. However, unless otherwise expressly provided in an applicable awardagreement, any award granted under the Plan prior to expiration may extendbeyond the end of such period through the award’s normal expiration date.

 

Ourexecutive officers did not receive long-term incentive plan rewards in 2007.

 

100

----

** **

**ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATEDSECURITYHOLDER MATTERS**

 

The following table setsforth the beneficial ownership of units of OSG America Partners L.P. as of February 28,2008 held by beneficial owners of 5% or more of the units, by each of thedirectors and executive officers of our general partner, and by all directorsand executive officers of our general partner as a group. The address for allbeneficial owners is 666 Third Avenue, 5th Floor, New York, NewYork 10017, except for Mr. Whitworth, whose address is Two HarbourPlace, 302 Knights Run Avenue, Suite 1200, Tampa, Florida 33602.

 
| **Name of Beneficial Owner**                                             | ** ** | **Common  Units** | ** ** | **% of  Common  Units** | ** ** | **Subordinated  Units** | ** ** | **% of  Subordinated  Units** | ** ** | **% of  Total  Common and  Subordinated  Units** | ** ** |
|-----------------------------------------------------------------------------------------|------------|-------------------|------------|------------------------------|------------|-------------------------|------------|------------------------------------|------------|------------------------------------------------------------|------------|
| Overseas  Shipholding Group, Inc.(1)(2)                                            |       | 7,500,000         |       | 50.0                         |       | 15,000,000              |       | 100.0                              |       | 75.0                                                       | %          |
| Morten Arntzen                                                                          |       | 0                 |       |                         | *          | 0                       |       |                               | *          |                                                       | *          |
| Jonathan P.  Whitworth                                                                  |       | 13,000            |       |                         | *          | 0                       |       |                               | *          |                                                       | *          |
| Myles R. Itkin                                                                          |       | 0                 |       |                         | *          | 0                       |       |                               | *          |                                                       | *          |
| Robert E.  Johnston                                                                     |       | 10,000            |       |                         | *          | 0                       |       |                               | *          |                                                       | *          |
| Kathleen C.  Haines                                                                |       | 750               |       |                         | *          | 0                       |       |                               | *          |                                                       | *          |
| James G. Dolphin                                                                        |       | 750               |       |                         | *          | 0                       |       |                               | *          |                                                       | *          |
| Steven T. Benz                                                                          |       | 8,150             |       |                         | *          | 0                       |       |                               | *          |                                                       | *          |
| All executive  officers, directors and director nominees as a group (7 persons)(3) |       | 32,650            |       |                         | *          | 0                       |       |                               | *          |                                                       | *          |

 

----

*      Less than 1%

 

(1)           Overseas Shipholding Group, Inc., orOSG, is the ultimate parent company of OSG Bulk Ships, Inc., OSGAMLP OnePercent Interest Corporation and OSG Ship Management, Inc. and thereforemay be deemed to beneficially own the 7,500,000 common units and 15,000,000subordinated units, in aggregate, held by OSG Bulk Ships, Inc., OSGAMLPOne Percent Interest Corporation and OSG Ship Management, Inc.

 

(2)           Excludes the 2% general partner interestheld by our general partner, a wholly owned subsidiary of OSG.

 

(3)           Excludes units owned by OSG, on the boardof which serves a director of our general partner, Morten Arntzen. In additionJonathan P. Whitworth, our general partner’s Chief Executive Officer, Presidentand a Director, is OSG’s Senior Vice President and Head of U.S. Flag StrategicBusiness Unit, Myles R. Itkin, our general partner’s Chief FinancialOfficer and a Director, is OSG’s Executive Vice President, Chief FinancialOfficer and Treasurer and Robert E. Johnston, a Director of our generalpartner, is Senior Vice President and Head of Shipping Operations of OSG.

 

The following table setsforth, as of February 28, 2008, the number of shares of common stock ofOSG, the ultimate parent company of our general partner, owned by each of thedirectors and executive officers of our general partner and all directors andexecutive officers of our general partner as a group.

 
| **Name of Beneficial Owner**                                          | ** ** | **Shares of  Common Stock** | ** ** | **% of  Common Stock** | ** ** |
|--------------------------------------------------------------------------------------|------------|---------------------------------------|------------|----------------------------------|------------|
| Morten  Arntzen(1)                                                                   |       | 368,557                               |       | 1                                | %          |
| Jonathan P.  Whitworth(2)                                                            |       | 12,538                                |       |                             | *          |
| Myles R. Itkin(3)                                                                    |       | 47,286                                |       |                             | *          |
| Robert E.  Johnston(4)                                                               |       | 42,869                                |       |                             | *          |
| Kathleen C.  Haines                                                             |       | 0                                     |       |                             | *          |
| James G. Dolphin                                                                     |       | 0                                     |       |                             | *          |
| Steven T. Benz                                                                       |       | 0                                     |       |                             | *          |
| All executive  officers, directors and director nominees as a group (7 persons) |       | 471,250                               |       |                             | *          |

 

----

*      Less than 1%

 

(1)   Includes 244,833 shares of common stockissuable upon exercise of stock options.

 

101

----

 

(2)   Includes 4,823 shares of common stockissuable upon the exercise of stock options.

 

(3)   Includes 26,823 shares of common stockissuable upon the exercise of stock options.

 

(4)   Includes 21,723 shares of common stock issuableupon the exercise of stock options.

 

**ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE**

 

OSG, the owner of ourgeneral partner, owns 7,500,000 common units and 15,000,000 subordinated units,representing a 73.5% limited partner interest in us. In addition, our generalpartner, a wholly owned subsidiary of OSG, owns a 2% general partner interestin us and all of the incentive distribution rights.

 

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

 

We generally distribute98% to unitholders (including OSG, the owner of our general partner and theholder of 7,500,000 common units and 15,000,000 subordinated units) and makethe remaining 2% to our general partner. If distributions exceed the $0.375 perunit minimum quarterly distribution and other higher target levels, our generalpartner, as the holder of the incentive distribution rights, is entitled toincreasing percentages of the distributions, up to 50% of the distributionsabove the highest target level. We refer to the rights to the increasingdistribution as “incentive distribution rights”. Please read “Cash DistributionPolicy —Incentive Distribution Rights” in Item 5 of this report. Assuming wehave sufficient available cash to pay the full minimum quarterly distributionon all of our outstanding units for four quarters, but no distributions inexcess of the full minimum quarterly distribution, our general partner wouldreceive an annual distribution of approximately $0.9 million on its 2%general partner interest and OSG would receive an annual distribution ofapproximately $33.8 million on its common units and subordinated units.

 

Our general partner doesnot receive a management fee or other compensation for the management of ourpartnership. Our general partner and its other affiliates are entitled toreimbursement for all direct and indirect expenses they incur on our behalf. Inaddition, we and certain of our operating subsidiaries (and any of our futureoperating subsidiaries may) pay fees to certain subsidiaries of OSG forstrategic consulting, advisory, ship management, technical and administrativeservices. Our general partner will determine the amount of these reimbursableexpenses and will negotiate these fees. These reimbursed expenses totaledapproximately $2.9 million for the year ended December 31, 2007.

 

If our general partnerwithdraws or is removed, its general partner interest and its incentivedistribution rights will either be sold to the new general partner for cash orconverted into common units, in each case for an amount equal to the fairmarket value of those interests.

 

Upon our liquidation, thepartners, including our general partner, will be entitled to receiveliquidating distributions according to their respective capital accountbalances.

 

**OmnibusAgreement**

 

Upon the completion ofour initial public offering, we entered into an omnibus agreement with OSG andour general partner. The following discussion describes provisions of theomnibus agreement.

 

***Noncompetition***

 

Under the omnibusagreement, OSG agrees, and will cause its controlled affiliates (other than us,our general partner and our subsidiaries) to agree, not to engage in or acquireor invest in any business that provides marine transportation, distribution andlogistics services in connection with the transportation of crude oil andrefined petroleum products by water between points in the United States towhich the U.S. coastwise laws apply, to the extent such business generatesqualifying income for federal income tax purposes. This restriction will notprevent OSG or any of its controlled affiliates (other than us and oursubsidiaries) from:

 

·                  engaging in, or acquiring or investing in any business with the approvalof the conflicts committee of our general partner;

 

·                  continuing any business conducted by OSG or any of its subsidiaries at thetime of completion of our initial public offering;

 

102

----

 

·                  owning, operating or chartering any Jones Act product carriers and bargesacquired if OSG has first offered us the opportunity to acquire such Jones Actproduct carriers and barges and related charters, subject to negotiation of apurchase price, and our general partner, with the approval of the conflictscommittee, has elected not to acquire such Jones Act product carriers andbarges;

 

·                  entering into any arrangement for the construction of newbuild Jones Actproduct carriers and barges and chartering such newbuild Jones Act productcarriers and barges to a third party not affiliated with OSG and, upon deliveryof any such Jones Act tank vessel, owning, operating or chartering such JonesAct tank vessel. However, at least 180 days prior to the scheduled deliverydate of any such Jones Act tank vessel, OSG must offer to transfer such JonesAct tank vessel and related charters to us, subject to negotiation of apurchase price;

 

·                  owning, operating or chartering any Jones Act product carriers and bargesthat relate to a bid or award for a proposed Jones Act project that OSG or anyof its subsidiaries has submitted or hereafter submits or receives. However, atleast 180 days prior to the scheduled delivery date of any such Jones Actproduct carrier and/or barge, OSG must offer to transfer such Jones Act productcarrier and/or barge and related charters to us, subject to negotiation of apurchase price;

 

·                  owning, operating or chartering Jones Act product carriers and bargessubject to the offers to us described in the immediately preceding threeparagraphs pending our general partner’s determination whether to accept suchoffers and pending the closing of any offers we accept;

 

·                  acquiring, operating or chartering Jones Act product carriers and bargesand related charters if our general partner has previously advised OSG that theboard of directors of our general partner has elected, with the approval of itsconflicts committee, not to cause us or our subsidiaries to acquire or operatesuch Jones Act product carriers and barges and related charters;

 

·                  providing ship management services for Jones Act product carriers andbarges; or

 

·                  acquiring up to a 9.9% equity ownership, voting or profit participationinterest in any publicly-traded company that engages in, acquires or invests inany business that owns, operates or charters Jones Act product carriers andbarges.

 

If OSG or any of itscontrolled affiliates (other than us or our subsidiaries) owns, operates orcharters Jones Act product carriers and barges pursuant to any of theexceptions described above, it may not subsequently expand that portion of itsbusiness other than pursuant to those exceptions.

 

If OSG or its affiliatesno longer control our general partner or there is a change of control of OSG,our general partner or OSG, respectively, may terminate the noncompetitionprovisions of the omnibus agreement.

 

***Options to Acquire Additional Jones Act Vessels***

 

Under the omnibusagreement, OSG granted to us options to purchase up to six newbuild articulatedtug barges (“ATBs”) scheduled for delivery from Bender between late 2008 andlate 2010 and to acquire from OSG the right to bareboat charter up to twonewbuild product carriers and up to two newbuild shuttle tankers from Aker,scheduled for delivery between late 2009 and early 2011. The options withrespect to the purchase of ATBs and the rights to bareboat charter newbuildproduct carriers will be exercisable prior to the first anniversary of thedelivery of each vessel. The exercise of any of the options will be subject tothe negotiation of the terms and conditions of transfer and the purchase price.

 

The purchase price wouldbe determined according to a process in which, within 45 days after ournotification that we wish to exercise the option, OSG would propose to ourgeneral partner the terms on which it would be willing to transfer the relevantvessel(s) to us. Within 45 days after receiving OSG’s proposed terms, wewould propose a purchase price, which may be any combination of cash andoutstanding partnership units for the vessel(s). If we and OSG cannot agree ona purchase price after negotiating in good faith for 50 days, then we andOSG will negotiate in good faith for a further 10-day period to agree on acash-only purchase price for the vessel(s). If we and OSG cannot agree on a cashonly purchase price after negotiating in good faith for 10 days, OSG wouldhave the right to seek an alternative purchaser willing to pay at least 101% ofthe purchase price we proposed. If an alternative transaction on such terms hasnot been consummated within six months, we would have the right for 45 days topurchase the vessel(s) at the price we originally proposed.

 

103

----

 

To fund the exercise ofan option, we would be required to use cash from operations, incur borrowingsor raise capital through the sale of debt or additional equity securities. Ourability to obtain bank financing or to access the capital markets for futureofferings may be limited by our financial condition at the time of any suchfinancing or offering, as well as by adverse market conditions. Incurringadditional debt may significantly increase our interest expense and financialleverage and issuing additional equity securities may result in significantunitholder dilution and would increase the aggregate amount of cash required tomeet our minimum quarterly distribution to unitholders.

 

***Rights of First Offer on Jones Act Vessels***

 

Under the omnibusagreement, we granted to OSG a right of first offer on any proposed sale,transfer or other disposition of any of our Jones Act product carriers andbarges owned, operated or chartered by us or any of our subsidiaries, whetheror not such vessels were acquired pursuant to the terms of the omnibusagreement or otherwise. Likewise, OSG agreed to grant a similar right of firstoffer to us for any Jones Act product carriers and barges it or itssubsidiaries (other than us or our subsidiaries) might own from time to time.These rights of first offer will not apply to a sale, transfer or otherdisposition of vessels between any affiliated subsidiaries, or pursuant to theterms of any charter or other agreement with a charter party.

 

Prior to engaging in anynegotiation regarding any vessel disposition we or OSG, as the case may be,will deliver a written notice to the other party setting forth the materialterms and conditions of the proposed transaction. During the 60-day periodafter the delivery of such notice, we and OSG will negotiate in good faith toreach an agreement on the transaction. If we do not reach an agreement withinsuch 60-day period, we or OSG, as the case may be, will be able within the next180 days to sell, transfer or dispose of the vessel to a third party (orto agree in writing to undertake such transaction with a third party) on termsgenerally no less favorable to us or OSG, as the case may be, than thoseoffered pursuant to the written notice.

 

If OSG or its affiliatesno longer control our general partner or there is a change of control of OSG,our general partner or OSG, respectively, may terminate these rights of firstoffer provisions of the omnibus agreement.

 

***Indemnification***

 

Under the omnibusagreement, OSG indemnifies us for a period of five years after our initialpublic offering against certain environmental and toxic tort liabilities to theextent arising prior to the completion date of our initial public offering andrelating to our assets and liabilities as of the completion of our initialpublic offering. Liabilities resulting from a change in law after the completionof this offering are excluded from the environmental indemnity.

 

OSG will also indemnifyus for liabilities related to certain:

 

·                  defects in title to the assets contributed to us and any failure to obtaincertain consents and permits necessary to conduct our business, whichliabilities arise within three years after our initial public offering; and

 

·                  income tax liabilities attributable to the operation of the assetscontributed to us prior to the time that they were contributed.

 

There is an aggregate capof $10 million on the amount of indemnity coverage provided by OSG forenvironmental and toxic tort liabilities. With certain limited exceptions, noclaim may be made under the environmental indemnity unless the aggregate dollaramount of all claims exceeds $500,000, in which case OSG is liable for claimsonly to the extent such aggregate amount exceeds $500,000.

 

***Amendments***

 

The omnibus agreement maynot be amended without the prior approval of the conflicts committee of theboard of directors of our general partner if the proposed amendment will, inthe reasonable discretion of our general partner, adversely affect holders ofour common units.

 

**ManagementAgreement**

 

We entered into amanagement agreement with OSG Ship Management, Inc. (“OSGM”), pursuant towhich OSGM will provide certain commercial and technical management services tous in respect of the vessels in our fleet. In the event that we purchase orbareboat charter additional vessels, OSGM will also extend the commercial andtechnical management services provided pursuant to the management agreement tothose additional vessels. These services will be provided in a commerciallyreasonable manner in accordance with customary ship management practice andunder our direction. OSGM

 

104

----

 

will provide theseservices to us directly but may subcontract for certain of these services withother entities, including other OSG subsidiaries.

 

The management serviceswill include, among other things:

 

·                  *the commercial and technical management of the vessel:*managing day-to-day vessel operations including negotiating, executing andadministering charters and other contracts with respect to employment of thevessels, monitoring payments thereunder, ensuring regulatory compliance,arranging for the vetting of vessels, providing competent personnel tosupervise the maintenance and general efficiency of the vessels, arranging andsupervising drydockings, repairs, alterations and the upkeep of the vessels tothe required standards, arranging the supply of necessary stores, spares,water, lubricating oils and greases, procuring and arranging for port entrance,clearance and agency services, appointing counsel and handling and negotiatingthe settlement of all claims in connection with the operation of each vessel,appointing adjusters and surveyors and technical consultants as necessary,issuing voyage instructions and providing technical support,

 

·                  *vessel maintenance and crewing:*including supervising the maintenance and general efficiency of vessels,and ensuring the vessels are in seaworthy and good operating condition,selecting and engaging qualified officers and crew, ensuring compliance with thelaw of the vessels’ flag regarding crew manning levels, qualifications andcertifications arranging for all training, transportation, board and lodging ofthe crew and negotiating the settlement and payment of all wages,

 

·                  *purchasing and insurance:*purchasing stores, supplies and parts for vessels and arranging insurancefor vessels (including marine hull and machinery insurance, protection andindemnity insurance and war risk and oil pollution insurance).

 

We pay a fee to OSGM forsuch services that represent the reimbursement of the reasonable cost of anydirect and indirect expenses it incurs in providing such services, plus anamount equal to four percent of the payroll cost of all the crew who serve onthe vessels that are subject to the management agreement.

 

Under the managementagreement, neither we nor OSGM is liable for failure to perform any of our orits obligations, respectively, under the management agreement by reason of anycause beyond our or its reasonable control.

 

In addition, OSGM has noliability for any loss arising in the course of the performance of thecommercial and technical management services under the management agreementunless and to the extent that such loss is proved to have resulted solely fromthe gross negligence or willful default of OSGM or its employees, agents orsubcontractors, in which case (except where such loss resulted from OSGM’sintentional personal act or omission, or recklessly and with knowledge thatsuch loss would probably result) OSGM’s liability will be limited for eachincident or series of related incidents.

 

We have also agreed,under the management agreement, to indemnify OSGM and its employees, agents andsubcontractors against all actions which may be brought against them inconnection with their performance of the management agreement and against andin respect of all costs and expenses they may suffer or incur due to defendingor settling such action, provided however that such indemnity excludes any orall losses which may be caused by or due to the gross negligence or willfuldefault of OSGM or its employees, agents or subcontractors.

 

**AdministrativeServices Agreement**

 

We entered into anadministrative services agreement with OSGM, pursuant to which OSGM providescertain administrative management services to us, unless the provision of thoseservices by OSGM would materially interfere with OSG’s operations.

 

The administrativeservices include:

 

·                  *bookkeeping, audit and accounting services:*assistance with the maintenance of our corporate books and records,assistance with the preparation of our tax returns and arranging for theprovision of audit and accounting services;

 

·                  *legal and insurance services:*arranging for the provision of legal, insurance and other professionalservices and maintaining our existence and good standing in necessaryjurisdictions;

 

105

----

 

·                  *administrative and clerical services:*assistance with office space, arranging meetings for our commonunitholders pursuant to the partnership agreement, arranging the provision ofIT services, providing all administrative services required for subsequent debtand equity financings and attending to all other administrative mattersnecessary to ensure the professional management of our business;

 

·                  *banking and financial services:*providing cash management including assistance with preparation ofbudgets, overseeing banking services and bank accounts, arranging for thedeposit of funds, negotiating loan and credit terms with lenders and monitoringand maintaining compliance therewith;

 

·                  *advisory services:*assistancein complying with United States and other relevant securities laws;

 

·                  *client and investor relations:*arranging for the provision of, advisory, clerical and investor relationsservices to assist and support us in our communications with our commonunitholders; and

 

·                  *integration services:*integrationof any acquired businesses.

 

We reimburse OSGM forreasonable costs and expenses incurred in connection with the provision ofthese services within 15 days after OSGM submits to us an invoice for suchcosts and expenses, together with any supporting detail that may be reasonablyrequired.

 

Under the administrativeservices agreement, we have agreed to indemnify OSGM and its employees againstall actions which may be brought against them under the administrative servicesagreement including, without limitation, all actions brought under theenvironmental laws of any jurisdiction, and against and in respect of all costsand expenses they may suffer or incur due to defending or settling suchactions; provided, however, that such indemnity excludes any or all losseswhich may be caused by or due to the fraud, gross negligence or willfulmisconduct of OSGM or its employees or agents.

 

**IndemnificationAgreements**

 

We entered intoindemnification agreements with each officer and director of our generalpartner. Each of these agreements, subject to certain limitations, require usto indemnify each indemnitee to the fullest extent permitted by our partnershipagreement. This means, among other things, that we must indemnify theindemnitee against expenses (including attorneys’ fees and relateddisbursements) actually and reasonably incurred in connection with, andjudgments, penalties, fines and amounts paid in settlement of an action, suit,claim or proceeding arising out of the fact that such person is or was anofficer or director of our general partner, or is or was serving at our generalpartner’s request as a director, officer, employee or agent of another entityif such person meets the standard of conduct provided in our partnershipagreement. Also as permitted under our partnership agreement, theindemnification agreements require us to advance expenses in defending such anaction, provided that the indemnitee undertakes to repay any amounts soadvanced if it is ultimately determined that such person is not entitled to beindemnified by us. We will also make each indemnitee whole for taxes imposed onthe indemnification payments and for costs in any action to establish suchperson’s right to indemnification, whether or not wholly successful.

 

**AgreementsGoverning Bareboat Charters from Aker**

 

We, OSG and Aker haveentered into, or will enter into, various agreements governing the operation ofthe Jones Act product carriers and shuttle tankers, in respect of which OSG hasgranted us options to acquire the right to bareboat charter from Aker, in theevent we do not exercise those options. See “Business—Bareboat Charters fromAker of Our Newbuilds—Profit Sharing” and “Business—Bareboat Charters from Akerof Our Newbuilds—Pooling Agreement.”

 

**Director Independence**

 

Under our CorporateGovernance Guidelines, which incorporate the standards established by the NewYork Stock Exchange, the BOD must consist of at least three independentdirectors. As determined by the BOD, three of the seven members of the BOD havebeen determined to be independent under the Corporate Governance Guidelinesbecause no relationship was identified that would automatically bar them frombeing characterized as independent, and any relationships identified were notso material as to impair their independence. The BOD annually reviewsrelationships that directors may have with the Partnership to make adetermination of whether there are any material relationships that wouldpreclude a director from being independent.

 

106

----

 

**ITEM 14.PRINCIPAL ACCOUNTANT FEES AND SERVICES**

 

TheAudit Committee has appointed Ernst & Young LLP as independent registeredpublic accounting firm for the Partnership for the year 2008. Ernst &Young LLP is a well known and well qualified firm of public accountants. 

 

*Audit Fees.*   Audit fees incurred by the Partnership toErnst & Young LLP in 2007 for professional services rendered for theaudit of the Partnership’s annual financial statements for the year ended December 31,2007, the review of the financial statements included in the Partnership’s Form10-Q, as well as those services that only the independent registered publicaccounting firm reasonably could have provided and services associated withdocuments filed with the SEC and other documents issued in connection withsecurities offerings, were $286,000.

 

*Audit-Related Fees.*   Audit-related fees incurred by the Partnershipto Ernst & Young LLP in 2007 for accounting consultations related toaccounting, financial reporting or disclosure matters not classified as “Auditservices”, assistance with preparation of the registration statement andcarve-out financial statements relating to the Partnership’s initial publicoffering, and assistance with internal control reporting requirements, were $0.

 

*All Other Fees.*   During 2007, no services were performedby, or fees incurred to, Ernst & Young LLP other than as described above.

 

107

----

 

**PART IV**

 

**ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES**

 
| (a)(1)     | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | The following  consolidated financial statements of the Partnership are filed in response to  Item 8.                                                                                                                                                                                                                                                                                                                                                 |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|       |       | Report of Independent  Registered Public Accounting Firm.                                                                                                                                                                                                                                                                                                                                                                                                  |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|       |       | Consolidated Balance  Sheet at December 31, 2007 and Predecessor Combined Carve-Out Balance  Sheet as of December 31, 2006.                                                                                                                                                                                                                                                                                                                      |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|       |       | Consolidated Statement  of Operations for the period November 15, 2007 to December 31, 2007  and Predecessor Combined Carve-Out Statements of Operations for the period  January 1, 2007 to November 14, 2007 and the years ended  December 31, 2006 and 2005.                                                                                                                                                                    |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|       |       | Consolidated Statement  of Cash Flows for the period November 15, 2007 to December 31, 2007  and Predecessor Combined Carve-Out Statements of Cash Flows for the period  January 1, 2007 to November 14, 2007 and the years ended  December 31, 2006 and 2005.                                                                                                                                                                    |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|       |       | Consolidated Statement  of Changes in Partners’ Capital for the period November 15, 2007 to  December 31, 2007 and Predecessor Combined Carve-Out Statements of  Changes in Stockholders’ Deficiency for the period January 1, 2007 to  November 14, 2007 and the years ended December 31, 2006 and 2005.                                                                                                               |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|       |       | Notes to Consolidated  and Predecessor Combined Carve-Out Financial Statements.                                                                                                                                                                                                                                                                                                                                                                            |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| (a)(2)     |       | Schedules of the  Partnership have been omitted since they are not applicable or are not  required.                                                                                                                                                                                                                                                                                                                                                        |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| (a)(3)     |       | The following exhibits  are included in response to Item 15(b):                                                                                                                                                                                                                                                                                                                                                                                       |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 1.1        |       | Underwriting  Agreement dated as of November 8, 2007 by and between OSG America LLC,  OSG Bulk Ships, Inc., OSGAMLP One Percent Interest Corporation, OSG Ship  Management, Inc., and Overseas Shipholding Group, Inc, and the  Underwriters party thereto (filed as Exhibit 1.1 to the Registrant’s  Current Report on Form 10-Q for the quarter ended September 30,  2007 and incorporated herein by reference). |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 3.1        |       | Amended and  Restated Certificate of Limited Partnership of OSG America L.P. dated  August 9, 2007 (incorporated by reference to Exhibit 3.1 to the  Partnership’s Registration Statement on Form S-1 (Registration  No. 333-145341), as filed on August 10, 2007 and amended thereafter  (the “Registration Statement”)).                                                                                         |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 3.2        |       | Amended and  Restated Agreement of Limited Partnership of OSG America L.P. dated as of  November 15, 2007 (filed as Exhibit 3.2 to the Registrant’s Current  Report on Form 10-Q for the quarter ended September 30, 2007 and  incorporated herein by reference).                                                                                                                                                                 |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 3.3        |       | Certificate of  Formation of OSG America LLC dated May 14, 2007 (incorporated by  reference to Exhibit 3.3 to the Registration Statement).                                                                                                                                                                                                                                                                                                       |

 

108

----

 
| 3.4     |   | Amended and Restated  Limited Liability Company Agreement of OSG America LLC dated as of  November 15, 2007 (filed as Exhibit 3.4 to the Registrant’s Current  Report on Form 10-Q for the quarter ended September 30, 2007 and  incorporated herein by reference).                                                                                                                                                                                                                                                                                                                            |
|---------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.1    |   | Senior Secured  Revolving Credit Facility Agreement dated as of November 15, 2007 among  OSG America Operating Company LLC, the Registrant, the other subsidiaries of  the Registrant party thereto as guarantors, the lenders party thereto, ING  Bank N.V., London Branch as facility agent, security trustee and issuing  lender and ING Bank N.V., London Branch and DnB NOR Bank ASA as mandated lead  arrangers and bookrunners (filed as Exhibit 10.1 to the Registrant’s  Current Report on Form 10-Q for the quarter ended September 30,  2007 and incorporated herein by reference). |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.2    |   | Amended and Restated  Contribution, Conveyance and Assumption Agreement dated as of  November 15, 2007 among OSG Bulk Ships, Inc., OSG Ship  Management, Inc., OSGAMLP One Percent Interest Corporation, OSG America  LLC, the Registrant and OSG America Operating Company LLC (filed as  Exhibit 10.2 to the Registrant’s Current Report on Form 10-Q for  the quarter ended September 30, 2007 and incorporated herein by  reference).                                                                                                                                            |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.3    |   | Omnibus Agreement dated  as of November 15, 2007 among Overseas Shipholding Group, Inc., OSG  America LLC and the Registrant (filed as Exhibit 10.3 to the  Registrant’s Current Report on Form 10-Q for the quarter ended  September 30, 2007 and incorporated herein by reference).                                                                                                                                                                                                                                                                                                     |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.4    |   | Management Agreement  dated as of November 15, 2007 among OSG Ship Management, Inc., the  Registrant and the subsidiaries of the Registrant party thereto (filed as  Exhibit 10.4 to the Registrant’s Current Report on Form 10-Q for  the quarter ended September 30, 2007 and incorporated herein by  reference).                                                                                                                                                                                                                                                                       |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.5    |   | Administrative Services  Agreement dated as of November 15, 2007 between OSG Ship  Management, Inc. and the Registrant (filed as Exhibit 10.5 to the  Registrant’s Current Report on Form 10-Q for the quarter ended  September 30, 2007 and incorporated herein by reference).                                                                                                                                                                                                                                                                                                           |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| *10.6.1 |   | Director and Officer  Indemnity Agreement – Morten Arntzen dated May 14, 2007 (filed as  Exhibit 10.6.1 to the Registrant’s Current Report on Form 10-Q for  the quarter ended September 30, 2007 and incorporated herein by  reference).                                                                                                                                                                                                                                                                                                                                                 |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| *10.6.2 |   | Director and Officer  Indemnity Agreement – Jonathan P. Whitworth dated May 14, 2007 (filed as  Exhibit 10.6.2 to the Registrant’s Current Report on Form 10-Q for  the quarter ended September 30, 2007 and incorporated herein by  reference).                                                                                                                                                                                                                                                                                                                                          |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| *10.6.3 |   | Director and Officer  Indemnity Agreement – Myles R. Itkin dated May 14, 2007 (filed as  Exhibit 10.6.3 to the Registrant’s Current Report on Form 10-Q for  the quarter ended September 30, 2007 and incorporated herein by  reference).                                                                                                                                                                                                                                                                                                                                                 |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| *10.6.4 |   | Director and Officer  Indemnity Agreement – Robert E. Johnston dated May 14, 2007 (filed as  Exhibit 10.6.4 to the Registrant’s Current Report on Form 10-Q for  the quarter ended September 30, 2007 and incorporated herein by  reference).                                                                                                                                                                                                                                                                                                                                             |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| *10.6.5 |   | Director and Officer  Indemnity Agreement – Kathleen C. Haines dated November 9, 2007 (filed  as Exhibit 10.6.5 to the Registrant’s Current Report on Form 10-Q  for the quarter ended September 30, 2007 and incorporated herein by  reference).                                                                                                                                                                                                                                                                                                                                         |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| *10.6.6 |   | Director and Officer  Indemnity Agreement – James G. Dolphin dated November 9, 2007 (filed as  Exhibit 10.6.6 to the Registrant’s Current Report on Form 10-Q for  the quarter ended September 30, 2007 and incorporated herein by  reference).                                                                                                                                                                                                                                                                                                                                           |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| *10.6.7 |   | Director and Officer  Indemnity Agreement – Steven T. Benz dated November 9, 2007 (filed as  Exhibit 10.6.7 to the Registrant’s Current Report on Form 10-Q for  the quarter ended September 30, 2007 and incorporated herein by  reference).                                                                                                                                                                                                                                                                                                                                             |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| *10.7   |   | OSG America L.P. 2007  Omnibus Incentive Compensation Plan (filed as Exhibit 10.7 to the                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |

 

109

----

 
|   |   | Registrant’s Current  Report on Form 10-Q for the quarter ended September 30, 2007 and  incorporated herein by reference).                                                                                                                                                                                             |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| **21   |   | List  of subsidiaries of the registrant.                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| **23   |   | Consent  of Independent Registered Public Accounting Firm of the registrant.                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| **23.1 |   | Consent  of Independent Registered Public Accounting Firm of Alaska Tanker Company,  LLC.                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| **31.1 |   | Certification  of Chief Executive Officer pursuant to Rule 13a-14(a) and  15d-14(a), as amended.                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| **31.2 |   | Certification  of Chief Financial Officer pursuant to Rule 13a-14(a) and  15d-14(a), as amended.                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| **32   |   | Certification  of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| NOTE:  |   | Instruments authorizing  long-term debt of the Registrant and its subsidiaries, where the amounts  authorized thereunder do not exceed 10% of total assets of the Registrant on  a consolidated basis, are not being filed herewith. The Registrant agrees to  furnish a copy of each such instrument to the Commission upon request. |

 

----

| (1)    |   | The  Exhibits marked with one asterisk (*) are a management contract or a  compensatory plan or arrangement required to be filed as an exhibit. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                            |
| (2)    |   | The  Exhibits which have not previously been filed or listed are marked with two  asterisks (**).                                               |

 

110

----

 

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the Registrant has duly caused this reportto be signed on its behalf by the undersigned, thereunto duly authorized.

 
|   | OSG  AMERICA L.P.                        |
|--------|------------------------------------------|
|   |                                     |
|   | by  OSG America LLC, its general partner |
|   |                                     |
|   | /s/  Jonathan P. Whitworth               |
|   |                                     | Jonathan  P. Whitworth |
|   |                                     | President,  Chief Executive Officer |

 

Pursuant to the requirements of the Securities Exchange Act of 1934,this report has been signed by the following persons in the capacities and onthe dates indicated:

 

 
| **Name**                                          | ** ** | **Date**            |
|---------------------------------------------------|------------|---------------------|
|                                              |       |                |
| /s/ Morten Arntzen                                |       | March 12, 2008 |
| Morten Arntzen                                    |       |                |
| Chairman of the Board                             |       |                |
|                                              |       |                |
| /s/ Jonathan P. Whitworth                         |       | March 12, 2008 |
|      Jonathan P. Whitworth    |       |                |
| Principal Executive Officer and Director          |       |                |
|                                              |       |                |
| /s/ Myles R. Itkin                                |       | March 12, 2008 |
|       Myles R. Itkin     |       |                |
| Principal Financial Officer,                      |       |                |
| Principal Accounting Officer and Director         |       |                |
|                                              |       |                |
| /s/ Robert E. Johnston                            |       | March 12, 2008 |
|       Robert E. Johnston |       |                |
| Director                                          |       |                |
|                                              |       |                |
| /s/ Kathleen C. Haines                            |       | March 12, 2008 |
|       Kathleen C. Haines |       |                |
| Director                                          |       |                |
|                                              |       |                |
| /s/ James G. Dolphin                              |       | March 12, 2008 |
|       James G. Dolphin   |       |                |
| Director                                          |       |                |
|                                              |       |                |
| /s/ Steven T. Benz                                |       | March 12, 2008 |
|       Steven T. Benz     |       |                |
| Director                                          |       |                |

 

111

----

 

**EXHIBITINDEX**

** **
| 1.1    |   | Underwriting Agreement  dated as of November 8, 2007 by and between OSG America LLC, OSG Bulk  Ships, Inc., OSGAMLP One Percent Interest Corporation, OSG Ship  Management, Inc., and Overseas Shipholding Group, Inc, and the Underwriters  party thereto (filed as Exhibit 1.1 to the Registrant’s Current Report  on Form 10-Q for the quarter ended September 30, 2007 and  incorporated herein by reference).                                                                                                                                                              |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 3.1    |   | Amended  and Restated Certificate of Limited Partnership of OSG America L.P. dated  August 9, 2007 (incorporated by reference to Exhibit 3.1 to the  Partnership’s Registration Statement on Form S-1 (Registration  No. 333-145341), as filed on August 10, 2007 and amended thereafter  (the “Registration Statement”)).                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 3.2    |   | Amended  and Restated Agreement of Limited Partnership of OSG America L.P. dated as of  November 15, 2007 (filed as Exhibit 3.2 to the Registrant’s Current  Report on Form 10-Q for the quarter ended September 30, 2007 and  incorporated herein by reference).                                                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 3.3    |   | Certificate  of Formation of OSG America LLC dated May 14, 2007 (incorporated by  reference to Exhibit 3.3 to the Registration Statement).                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 3.4    |   | Amended  and Restated Limited Liability Company Agreement of OSG America LLC dated as  of November 15, 2007 (filed as Exhibit 3.4 to the Registrant’s  Current Report on Form 10-Q for the quarter ended September 30,  2007 and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.1   |   | Senior  Secured Revolving Credit Facility Agreement dated as of November 15,  2007 among OSG America Operating Company LLC, the Registrant, the other  subsidiaries of the Registrant party thereto as guarantors, the lenders party  thereto, ING Bank N.V., London Branch as facility agent, security trustee and  issuing lender and ING Bank N.V., London Branch and DnB NOR Bank ASA as  mandated lead arrangers and bookrunners (filed as Exhibit 10.1 to the  Registrant’s Current Report on Form 10-Q for the quarter ended  September 30, 2007 and incorporated herein by reference). |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.2   |   | Amended  and Restated Contribution, Conveyance and Assumption Agreement dated as of  November 15, 2007 among OSG Bulk Ships, Inc., OSG Ship  Management, Inc., OSGAMLP One Percent Interest Corporation, OSG America  LLC, the Registrant and OSG America Operating Company LLC (filed as  Exhibit 10.2 to the Registrant’s Current Report on Form 10-Q for  the quarter ended September 30, 2007 and incorporated herein by  reference).                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.3   |   | Omnibus  Agreement dated as of November 15, 2007 among Overseas Shipholding  Group, Inc., OSG America LLC and the Registrant (filed as  Exhibit 10.3 to the Registrant’s Current Report on Form 10-Q for  the quarter ended September 30, 2007 and incorporated herein by  reference).                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.4   |   | Management  Agreement dated as of November 15, 2007 among OSG Ship  Management, Inc., the Registrant and the subsidiaries of the Registrant  party thereto (filed as Exhibit 10.4 to the Registrant’s Current Report  on Form 10-Q for the quarter ended September 30, 2007 and  incorporated herein by reference).                                                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.5   |   | Administrative  Services Agreement dated as of November 15, 2007 between OSG Ship  Management, Inc. and the Registrant (filed as Exhibit 10.5 to the  Registrant’s Current Report on Form 10-Q for the quarter ended  September 30, 2007 and incorporated herein by reference).                                                                                                                                                                                                                                                                                                           |

 

112

----

 
| *10.6.1 |   | Director and Officer  Indemnity Agreement – Morten Arntzen dated May 14, 2007 (filed as  Exhibit 10.6.1 to the Registrant’s Current Report on Form 10-Q for  the quarter ended September 30, 2007 and incorporated herein by  reference).                                                                |
|---------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                                                                                                                                                                                                                   |
| *10.6.2 |   | Director  and Officer Indemnity Agreement – Jonathan P. Whitworth dated May 14,  2007 (filed as Exhibit 10.6.2 to the Registrant’s Current Report on  Form 10-Q for the quarter ended September 30, 2007 and incorporated  herein by reference).                                                         |
|    |   |                                                                                                                                                                                                                                                                                                                                   |
| *10.6.3 |   | Director  and Officer Indemnity Agreement – Myles R. Itkin dated May 14, 2007  (filed as Exhibit 10.6.3 to the Registrant’s Current Report on  Form 10-Q for the quarter ended September 30, 2007 and incorporated  herein by reference).                                                                |
|    |   |                                                                                                                                                                                                                                                                                                                                   |
| *10.6.4 |   | Director  and Officer Indemnity Agreement – Robert E. Johnston dated May 14, 2007  (filed as Exhibit 10.6.4 to the Registrant’s Current Report on  Form 10-Q for the quarter ended September 30, 2007 and incorporated  herein by reference).                                                            |
|    |   |                                                                                                                                                                                                                                                                                                                                   |
| *10.6.5 |   | Director  and Officer Indemnity Agreement – Kathleen C. Haines dated November 9,  2007 (filed as Exhibit 10.6.5 to the Registrant’s Current Report on  Form 10-Q for the quarter ended September 30, 2007 and incorporated  herein by reference).                                                        |
|    |   |                                                                                                                                                                                                                                                                                                                                   |
| *10.6.6 |   | Director  and Officer Indemnity Agreement – James G. Dolphin dated November 9,  2007 (filed as Exhibit 10.6.6 to the Registrant’s Current Report on  Form 10-Q for the quarter ended September 30, 2007 and incorporated  herein by reference).                                                          |
|    |   |                                                                                                                                                                                                                                                                                                                                   |
| *10.6.7 |   | Director  and Officer Indemnity Agreement – Steven T. Benz dated November 9, 2007  (filed as Exhibit 10.6.7 to the Registrant’s Current Report on  Form 10-Q for the quarter ended September 30, 2007 and incorporated  herein by reference).                                                            |
|    |   |                                                                                                                                                                                                                                                                                                                                   |
| *10.7   |   | OSG  America L.P. 2007 Omnibus Incentive Compensation Plan (filed as  Exhibit 10.7 to the Registrant’s Current Report on Form 10-Q for  the quarter ended September 30, 2007 and incorporated herein by  reference).                                                                                               |
|    |   |                                                                                                                                                                                                                                                                                                                                   |
| **21    |   | List of subsidiaries of the registrant.                                                                                                                                                                                                                                                                                                |
|    |   |                                                                                                                                                                                                                                                                                                                                   |
| **23    |   | Consent of Independent Registered Public Accounting  Firm of the registrant.                                                                                                                                                                                                                                                           |
|    |   |                                                                                                                                                                                                                                                                                                                                   |
| **23.1  |   | Consent of Independent Registered Public Accounting  Firm of Alaska Tanker Company, LLC.                                                                                                                                                                                                                                               |
|    |   |                                                                                                                                                                                                                                                                                                                                   |
| **31.1  |   | Certification of Chief Executive Officer pursuant to  Rule 13a-14(a) and 15d-14(a), as amended.                                                                                                                                                                                                                              |
|    |   |                                                                                                                                                                                                                                                                                                                                   |
| **31.2  |   | Certification of Chief Financial Officer pursuant to  Rule 13a-14(a) and 15d-14(a), as amended.                                                                                                                                                                                                                              |
|    |   |                                                                                                                                                                                                                                                                                                                                   |
| **32    |   | Certification of Chief Executive Officer and Chief  Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                             |
|    |   |                                                                                                                                                                                                                                                                                                                                   |
| NOTE:   |   | Instruments  authorizing long-term debt of the Registrant and its subsidiaries, where the  amounts authorized thereunder do not exceed 10% of total assets of the  Registrant on a consolidated basis, are not being filed herewith. The  Registrant agrees to furnish a copy of each such instrument to the Commission  upon request. |

 

113

----

 

----

| (1)    |   | The  Exhibits marked with one asterisk (*) are a management contract or a  compensatory plan or arrangement required to be filed as an exhibit. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                            |
| (2)    |   | The  Exhibits which have not previously been filed or listed are marked with two  asterisks (**).                                               |

 

114

----