UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549


FORM
10-Q





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





For the
quarterly period ended SEPTEMBER 30,
2009





OR





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





For the
transition period from   to





Commission
File Number 001-33806





OSG
AMERICA 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)
      209-0600Registrant’s
      telephone number, including area code





NoneFormer
      name, former address and former fiscal year, if changed since last
      report





Indicate
by check mark whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.


Yes x    No   ̈





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Webs site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files).


Yes   ̈    No  ̈




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




Large
      accelerated filer  ̈
            Accelerated
      filer xNon-accelerated
      filer  ̈
            Smaller
      reporting company  ̈





Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).


Yes   ̈    No  x





APPLICABLE
ONLY TO CORPORATE ISSUERS:


Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.




Common
units outstanding as of November 6, 2009 –  15,004,500.


Subordinated
units outstanding as of November 6, 2009
–  15,000,000.





TABLE OF
CONTENTS




PagePART
      I.
                  FINANCIAL
      INFORMATIONItem.
      1.
                  Consolidated
      Financial Statements
                  3Item
      2.
                  Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                  18Item
      3.
                  Qualitative
      and Quantitative Disclosures About Market Risk
                  29Item
      4(T).
                  Controls
      and Procedures
                  29PART
      II.
                  OTHER
      INFORMATIONItem
      1.
                  Legal
      Proceedings
                  30Item
      1A.
                  Risk
      Factors
                  30Item
      2.
                  Unregistered
      Sales of Equity Securities and Use of Proceeds
                  31Item
      6.
                  Exhibits
                  31SIGNATURES
                  
                  33




2


PART
I – FINANCIAL INFORMATION




ITEM
      1.
            CONSOLIDATED
      FINANCIAL STATEMENTS




PageConsolidated
      Balance Sheets at September 30, 2009 and December 31, 2008
                4Consolidated
      Statements of Operations for the three months and nine months ended
      September 30, 2009 and 2008
                5Consolidated
      Statements of Cash Flows for the nine months ended September 30, 2009 and
      2008
                6Consolidated
      Statement of Changes in Partners’ Capital for the nine months ended
      September 30, 2009 and 2008
                7Notes
      to Consolidated Financial Statements
                8


3


OSG
AMERICA L.P.


CONSOLIDATED
BALANCE SHEETS


DOLLARS
IN THOUSANDS





As of
                  September 30, 2009
                
                
                As of
                  December 31, 2008(Unaudited)ASSETSCurrent
      Assets:Cash
      and cash equivalents
                
                $
                11,379
                
                
                $
                10,529Voyage
      receivables, including unbilled of $6,939 and $6,186
                
                
                19,025
                
                
                
                18,900Other
      receivables
                
                
                4,550
                
                
                
                4,129Inventory
                
                
                2,989
                
                
                
                1,855Prepaid
      expenses and other current assets
                
                
                5,655
                
                
                
                4,770Total
      current assets
                
                
                43,598
                
                
                
                40,183Vessels,
      less accumulated depreciation of $121,612 and $85,819
                
                
                377,154
                
                
                
                404,462Vessel
      held for sale
                
                
                —
                
                
                
                1,310Deferred
      drydock expenditures, net
                
                
                18,563
                
                
                
                26,536Investment
      in Alaska Tanker Company, LLC
                
                
                2,051
                
                
                
                5,382Intangible
      assets, less accumulated amortization of $13,033 and
$9,583
                
                
                78,967
                
                
                
                82,417Other
      assets
                
                
                18,735
                
                
                
                14,271Total
      assets
                
                $
                539,068
                
                
                $
                574,561LIABILITIES
      AND PARTNERS’ CAPITALCurrent
      Liabilities:Accounts
      payable, accrued expenses and other current liabilities
                
                $
                30,625
                
                
                $
                19,282Advances
      from affiliated companies
                
                
                14,190
                
                
                
                12,586Current
      portion of debt
                
                
                3,144
                
                
                
                3,007Total
      current liabilities
                
                
                47,959
                
                
                
                34,875Long-term
      debt, less current portion
                
                
                71,371
                
                
                
                88,746Other
      non-current liabilities
                
                
                9,700
                
                
                
                7,994Total
      liabilities
                
                
                129,030
                
                
                
                131,615Partners’
      Capital
                
                
                410,038
                
                
                
                442,946Total
      liabilities and partners’ capital
                
                $
                539,068
                
                
                $
                574,561





See
notes to consolidated financial statements.


4


OSG
AMERICA L.P.


CONSOLIDATED
STATEMENTS OF OPERATIONS


DOLLARS
IN THOUSANDS, EXCEPT PER UNIT AMOUNTS


(UNAUDITED)





Three Months Ended
                      September 30,
                    
                    
                    Nine Months Ended
                      September 30,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Shipping
      Revenues:Time
      and bareboat charter revenues (including $8,974 and $8,127, respectively,
      from OSG for the three months ended September 30, 2009 and 2008, and
      $26,242 and $12,697, respectively, from OSG for the nine months ended
      September 30, 2009 and 2008)
                    
                    $
                    47,774
                    
                    
                    $
                    43,193
                    
                    
                    $
                    138,620
                    
                    
                    $
                    112,291Voyage
      charter revenues
                    
                    
                    23,347
                    
                    
                    
                    31,019
                    
                    
                    
                    76,066
                    
                    
                    
                    97,18171,121
                    
                    
                    
                    74,212
                    
                    
                    
                    214,686
                    
                    
                    
                    209,472Operating
      Expenses:Voyage
      expenses
                    
                    
                    6,629
                    
                    
                    
                    10,509
                    
                    
                    
                    18,526
                    
                    
                    
                    33,447Vessel
      expenses
                    
                    
                    25,606
                    
                    
                    
                    24,857
                    
                    
                    
                    76,344
                    
                    
                    
                    70,825Charter
      hire expenses (including $1,058 and $1,791, respectively, to OSG for the
      three months ended September 30, 2009 and 2008, and $3,140 and $4,720,
      respectively, to OSG for the nine months ended September 30, 2009 and
      2008)
                    
                    
                    17,547
                    
                    
                    
                    11,385
                    
                    
                    
                    46,718
                    
                    
                    
                    30,230Depreciation
      and amortization
                    
                    
                    12,759
                    
                    
                    
                    12,902
                    
                    
                    
                    38,379
                    
                    
                    
                    39,602General
      and administrative allocated from OSGM
                    
                    
                    5,910
                    
                    
                    
                    4,857
                    
                    
                    
                    17,151
                    
                    
                    
                    15,862Severance
      and relocation costs
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    2,100
                    
                    
                    
                    —Loss
      on sale or impairment of vessels
                    
                    
                    12,500
                    
                    
                    
                    19,319
                    
                    
                    
                    13,198
                    
                    
                    
                    19,319Total
      operating expenses
                    
                    
                    80,951
                    
                    
                    
                    83,829
                    
                    
                    
                    212,416
                    
                    
                    
                    209,285(Loss)/Income
      from vessel operations
                    
                    
                    (9,830
                    )
                    
                    
                    (9,617
                    )
                    
                    
                    2,270
                    
                    
                    
                    187Equity
      in income of affiliated companies
                    
                    
                    877
                    
                    
                    
                    1,127
                    
                    
                    
                    2,015
                    
                    
                    
                    2,750Operating
      (loss)/income
                    
                    
                    (8,953
                    )
                    
                    
                    (8,490
                    )
                    
                    
                    4,285
                    
                    
                    
                    2,937Other income
                    
                    
                    14
                    
                    
                    
                    87
                    
                    
                    
                    17
                    
                    
                    
                    208(8,939
                    )
                    
                    
                    (8,403
                    )
                    
                    
                    4,302
                    
                    
                    
                    3,145Interest
      expense
                    
                    
                    1,143
                    
                    
                    
                    1,295
                    
                    
                    
                    3,516
                    
                    
                    
                    4,153Net
      (loss)/income
                    
                    $
                    (10,082
                    )
                    
                    $
                    (9,698
                    )
                    
                    $
                    786
                    
                    
                    $
                    (1,008
                    )General
      partner’s interest in net (loss)/income
                    
                    $
                    (202
                    )
                    
                    $
                    (194
                    )
                    
                    $
                    16
                    
                    
                    $
                    (20
                    )Limited
      partners’ interest:Net
      (loss)/income
                    
                    $
                    (9,880
                    )
                    
                    $
                    (9,504
                    )
                    
                    $
                    770
                    
                    
                    $
                    (988
                    )Net
      (loss)/income per unit – basic and diluted
                    
                    $
                    (0.33
                    )
                    
                    $
                    (0.32
                    )
                    
                    $
                    0.03
                    
                    
                    $
                    (0.03
                    )Cash
      distribution declared per unit
                    
                    $
                    —
                    
                    
                    $
                    0.375
                    
                    
                    $
                    0.750
                    
                    
                    $
                    1.125Weighted
      average units outstanding  - basic and diluted
                    
                    
                    30,004,500
                    
                    
                    
                    30,002,250
                    
                    
                    
                    30,004,500
                    
                    
                    
                    30,002,250





See
notes to consolidated financial statements.


5





OSG
AMERICA L.P.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


DOLLARS
IN THOUSANDS


(UNAUDITED)





Nine Months Ended
                        September 30, 2009
                      
                      
                      Nine Months Ended
                        September 30, 2008Cash
      Flows from Operating Activities:Net income/(loss)
                      
                      $
                      786
                      
                      
                      $
                      (1,008
                      )Items
      included in net income/(loss) not affecting cash flows:Depreciation
      and amortization
                      
                      
                      38,379
                      
                      
                      
                      39,602Decrease
      in undistributed earnings of affiliated companies, net of
      distributions
                      
                      
                      3,331
                      
                      
                      
                      2,994Other
      – net
                      
                      
                      2,265
                      
                      
                      
                      1,261Loss
      on sale or impairment of vessels
                      
                      
                      13,198
                      
                      
                      
                      19,319Payments
      for drydocking
                      
                      
                      (3,663
                      )
                      
                      
                      (21,923
                      )Changes
      in operating assets and liabilities:(Increase)/decrease in
      receivables
                      
                      
                      (547
                      )
                      
                      
                      8,958Increase
      in other assets
                      
                      
                      (2,033
                      )
                      
                      
                      (906
                      )Increase
      in accounts payable, accrued expenses and other
liabilities
                      
                      
                      13,785
                      
                      
                      
                      3,757Net
      cash provided by operating activities
                      
                      
                      65,501
                      
                      
                      
                      52,054Cash
      Flows from Investing Activities:Expenditures
      for vessels
                      
                      
                      (15,199
                      )
                      
                      
                      (40,087
                      )Proceeds
      from sale of vessel
                      
                      
                      626
                      
                      
                      
                      —Net
      cash used in investing activities
                      
                      
                      (14,573
                      )
                      
                      
                      (40,087
                      )Cash
      Flows from Financing Activities:Net
      (repayments on)/proceeds from borrowings under revolving credit
      facility
                      
                      
                      (15,000
                      )
                      
                      
                      78,000Payments
      on debt and obligations under capital leases
                      
                      
                      (2,238
                      )
                      
                      
                      (32,331
                      )Cash
      distributions paid
                      
                      
                      (34,444
                      )
                      
                      
                      (28,700
                      )Payments
      for initial public offering transaction costs
                      
                      
                      —
                      
                      
                      
                      (241
                      )Payments
      for deferred financing costs
                      
                      
                      —
                      
                      
                      
                      (143
                      )Change
      in advances from affiliates
                      
                      
                      1,604
                      
                      
                      
                      1,163Net
      cash (used in)/provided by financing activities
                      
                      
                      (50,078
                      )
                      
                      
                      17,748Net
      increase in cash and cash equivalents
                      
                      
                      850
                      
                      
                      
                      29,715Cash
      and cash equivalents at beginning of period
                      
                      
                      10,529
                      
                      
                      
                      3,380Cash
      and cash equivalents at end of period
                      
                      $
                      11,379
                      
                      
                      $
                      33,095





See
notes to consolidated financial statements.


6


OSG
AMERICA L.P.


CONSOLIDATED
STATEMENT OF CHANGES IN PARTNERS’ CAPITAL


DOLLARS
AND UNITS IN THOUSANDS


(UNAUDITED)





Limited
      Partners
                  
                  
                  
                  
                  
                  Accumulated
                    OtherCommon
      Units
                  
                  
                  Subordinated Units
                  
                  
                  General
                  
                  
                  ComprehensiveUnits
                  
                  
                  Amount
                  
                  
                  Units
                  
                  
                  Amount
                  
                  
                  Partner
                  
                  
                  Income/(Loss)
                  
                  
                  TotalBalance
      at December 31, 2008
                  
                  
                  15,004
                  
                  
                  $
                  216,743
                  
                  
                  
                  15,000
                  
                  
                  $
                  220,058
                  
                  
                  $
                  8,982
                  
                  
                  $
                  (2,837
                  )
                  
                  $
                  442,946Net
      income
                  
                  
                  
                  
                  
                  
                  385
                  
                  
                  
                  
                  
                  
                  
                  385
                  
                  
                  
                  16
                  
                  
                  
                  
                  
                  
                  
                  786Effect
      of derivative instruments
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  735
                  
                  
                  
                  735Comprehensive
      income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  1,521
                  *Amortization
      of restricted units awards
                  
                  
                  
                  
                  
                  
                  15
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  15Distributions
      to members
                  
                  
                  
                  
                  
                  
                  (16,880
                  )
                  
                  
                  
                  
                  
                  
                  (16,875
                  )
                  
                  
                  (689
                  )
                  
                  
                  
                  
                  
                  
                  (34,444
                  )Balance
      at September 30, 2009
                  
                  
                  15,004
                  
                  
                  $
                  200,263
                  
                  
                  
                  15,000
                  
                  
                  $
                  203,568
                  
                  
                  $
                  8,309
                  
                  
                  $
                  (2,102
                  )
                  
                  $
                  410,038Balance
      at December 31, 2007
                  
                  
                  15,002
                  
                  
                  $
                  263,368
                  
                  
                  
                  15,000
                  
                  
                  $
                  266,453
                  
                  
                  $
                  10,876
                  
                  
                  $
                  —
                  
                  
                  $
                  540,697Net
      income
                  
                  
                  
                  
                  
                  
                  (494
                  )
                  
                  
                  
                  
                  
                  
                  (494
                  )
                  
                  
                  (20
                  )
                  
                  
                  
                  
                  
                  
                  (1,008
                  )Effect
      of derivative instruments
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (609
                  )
                  
                  
                  (609
                  )Comprehensive
      income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (1,617
                  )*Costs
      associated with issuance of units pursuant to initial public
      offering
                  
                  
                  
                  
                  
                  
                  (241
                  )
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (241
                  )Amortization
      of restricted units awards
                  
                  
                  
                  
                  
                  
                  11
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  11Distributions
      to members
                  
                  
                  
                  
                  
                  
                  (14,064
                  )
                  
                  
                  
                  
                  
                  
                  (14,062
                  )
                  
                  
                  (574
                  )
                  
                  
                  
                  
                  
                  
                  (28,700
                  )Balance
      at September 30, 2008
                  
                  
                  15,002
                  
                  
                  $
                  248,580
                  
                  
                  
                  15,000
                  
                  
                  $
                  251,897
                  
                  
                  $
                  10,282
                  
                  
                  $
                  (609
                  )
                  
                  $
                  510,150





*  Comprehensive
loss for the three month periods ended September 30, 2009 and 2008 was $10,347
and $10,223, respectively.





See
notes to consolidated financial statements.


7




Notes
to Consolidated and Financial Statements




Note A—Organization:




On
May 14, 2007, Overseas Shipholding Group, Inc. (“OSG) formed OSG America L.P. a
Delaware Limited Partnership (the “Partnership”) to acquire from OSG a fleet of
18 vessels (ten product carriers, seven ATBs, and one conventional tug-barge
unit) and to accept the assignment from OSG of the bareboat charter-in
agreements for six product carriers being constructed by Aker Philadelphia
Shipyard, Inc. On November 15, 2007, the Partnership completed its initial
public offering of 7,500,000 common units representing a 24.5% limited partner
interest in the Partnership and, in connection therewith, issued to OSG
7,500,000 common units and 15,000,000 subordinated units, representing a 73.5%
limited partner interest in the Partnership. The Partnership’s general partner,
OSG America LLC (the “General Partner”), which is a wholly-owned indirect
subsidiary of OSG, received a 2% general partner interest.




OSG,
through its wholly-owned subsidiary OSG Ship Management Inc., (“OSGM”) provides
commercial, technical, and administrative services to the Partnership in
accordance with related agreements.




On July
29, 2009, OSG announced its intention to tender for all of the outstanding
publicly held common units of the Partnership, for $8.00 in cash per
unit.  As of September 30, 2009, OSG effectively owns 77.1% of the
Partnership.  The tender offer will be conditioned upon, among other
things, more than 4,003,166 common units being tendered such that OSG would
thereupon own at least 80% of the outstanding common units of the
Partnership.  Following the completion of the tender offer, OSG
expects to acquire any remaining units not tendered through the exercise of a
repurchase right contained in the Partnership agreement. OSG currently owns
8,000,435 units of the 15,000,000 total common units outstanding.




On August
6, 2009, legal counsel to the conflicts committee of the Board of Directors of
the Partnership’s general partner sent a letter to OSG expressing the informal
sense of the conflicts committee that, were OSG to proceed with the proposed
tender offer at $8.00 per unit, the conflicts committee would recommend that
common unitholders reject the offer and not tender their units pursuant to the
offer.




On
September 24, 2009, OSG announced an increase in its intended offer price to
$10.25 per unit, an increase of 28% over the original proposed offer price of
$8.00 per unit.




Note B —Summary of Significant Accounting
Policies:




Basis of Presentation and
Description of Business.The Partnership. is engaged in
providing marine transportation services through the ownership and operation of
a fleet of tankers and ATBs.  Of the 23 vessels in the operating fleet
as of September 30, 2009, 21 operate in the Jones Act trade and two operate in
the international market under the U.S. flag while participating in the Maritime
Security Program.  These two tankers are not eligible for Jones Act
trading because they were not built in the United States.  The
management of the Partnership has determined that it operates in one reportable
segment. In addition, the Partnership owns a 37.5% ownership interest in a joint
venture, Alaska Tanker Company, LLC.




The
accompanying unaudited consolidated financial statements have been prepared in
accordance with U.S. generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X.  They do not include all of the information and
footnotes required by generally accepted accounting principles.  In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been
included.  Operating results for the three and nine months ended
September 30, 2009 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2009.  The consolidated
financial statements include the assets and liabilities of the Partnership and
its wholly-owned subsidiaries.  All significant intercompany balances
and transactions have been eliminated in consolidation. Investments in 50% or
less owned affiliated companies, in which the Partnership exercises significant
influence, but is not the primary beneficiary, are accounted for by the equity
method.


8


Note
B — Summary of Significant Accounting Policies (continued):




The
consolidated balance sheet as of December 31, 2008 has been derived from the
audited financial statements at that date, but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.




For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Partnership’s Annual Report on Form 10-K for
the year ended December 31, 2008.




The
Partnership evaluated events and transactions occurring after the balance sheet
date and through the day the financial statements were issued.  The
date of issuance of the financial statements was November 6, 2009.




Vessels, deferred drydocking
expenditures and other property.Vessels are recorded at cost and are
depreciated to their estimated salvage value on the straight-line basis over the
lives of the vessels, which range from 20 to 25 years. Each vessel’s
salvage value is equal to the product of its lightweight tonnage and an
estimated scrap rate $300 per lightweight ton.




On June
25, 2008, the Partnership purchased the Overseas New Orleans and the
Overseas Philadelphia,
each of which had been previously operated under capital leases. The useful
lives of these vessels was determined based on their OPA retirement dates. In
the third quarter of 2008, the Partnership effected a change in estimate related
to the useful lives of the Overseas Galena Bay and the
Overseas Puget Sound to
extend their useful lives to match their OPA retirement dates. As a result,
depreciation expense decreased by approximately $1,400,000, or $0.04 per common
unit, for the nine months ended September 30, 2009 compared with the nine months
ended September 30, 2008.




Newly
Issued Accounting Standards




In May
2009, the Financial Accounting Standards Board established principles and
requirements for disclosure of events that occur after the balance sheet date
but before financial statements are issued or are available to be
issued.  This statement introduces the concept of when financial
statements are considered issued or are available to be issued.  The
statement is effective for interim or annual financial periods ending after June
15, 2009, and shall be applied prospectively.  The adoption of this
statement did not have an impact on the Partnership’s consolidated financial
statements.




In June
2009, the Financial Accounting Standards Board amended the consolidation
guidance for variable-interest entities (“VIEs”). The amended guidance requires
companies to qualitatively assess the determination of the primary beneficiary
of a VIE based on whether the entity (1) has the power to direct the activities
of the VIE that most significantly impact the entity’s economic performance and
(2) has the obligation to absorb losses of the entity that could potentially be
significant to the VIE or the right to receive benefits from the entity that
could potentially be significant to the VIE. It also requires additional
disclosures for any enterprise that holds a variable interest in a VIE. The new
accounting and disclosure requirements become effective for the Partnership on
January 1, 2010. The Partnership is in the process of evaluating the effect of
these requirements on its consolidated financial statements.




Note
C —Net Income Per Limited Partner and General Partner Unit:




The
Partnership adopted accounting guidance applicable to Master Limited
Partnerships for the calculation of net income per unit effective January 1,
2009.  As required by the guidance, the general partner’s interest in
net income is calculated as if all net income for the 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 provide for the distribution of net income; rather, it provides for the
distribution of available cash, a contractually defined term that generally
means all cash on hand at the end of each quarter after provisions for certain
cash requirements.




The
general partner’s incentive distribution rights entitle it to receive an
increasing percentage of distributions when the quarterly cash distribution
exceeds $0.43125 per unit.  Under accounting guidance applicable to
Master Limited Partnerships, the Partnership must calculate the general
partner’s share of net income under the assumption that such net income was
distributable.  Since net income did not exceed $0.43125 per unit for
the three months ended September 30, 2009 or 2008, the Partnership did not use
any increased percentages in calculating the general partner’s interest in net
income.


9


Note
C —Net Income Per Limited Partner and General Partner Unit
(continued):




The
formula for distributing available cash as defined in the partnership agreement
follows:




Total Quarterly
                        Distribution
                      
                      
                      Marginal Percentage Interest
                          in DistributionsTarget Amount
                      
                      
                      Unitholders
                      
                      
                      General PartnerMinimum
      Quarterly Distribution
                      
                      $0.37500
                      
                      
                      
                      98
                      %
                      
                      
                      2
                      %First
      Target Distribution
                      
                      up
      to $0.43125
                      
                      
                      
                      98
                      %
                      
                      
                      2
                      %Second
      Target Distribution
                      
                      above $0.43125 up to $0.46875
                      
                      
                      
                      85
                      %
                      
                      
                      15
                      %Third
      Target Distribution
                      
                      above
      $0.46875 up to $0.56250
                      
                      
                      
                      75
                      %
                      
                      
                      25
                      %Thereafter
                      
                      above
      $0.56250
                      
                      
                      
                      50
                      %
                      
                      
                      50
                      %




The
calculation of net (loss)/income per limited partner unit follows:




Three Months Ended
                              September 30,
                            
                            
                            Nine Months Ended
                              September 30,In thousands, except units and per unit amounts
                            
                            2009
                            
                            
                            2008
                            
                            
                            2009
                            
                            
                            2008Net
      (loss)/income
                            
                            $
                            (10,082
                            )
                            
                            $
                            (9,698
                            )
                            
                            $
                            786
                            
                            
                            $
                            (1,008
                            )Less
      distributions earned:Distributed
      earnings to general partner (2%)
                            
                            
                            —
                            
                            
                            
                            (230
                            )
                            
                            
                            (459
                            )
                            
                            
                            (689
                            )Distributed
      earnings to limited partners (98%)
                            
                            
                            —
                            
                            
                            
                            (11,253
                            )
                            
                            
                            (22,504
                            )
                            
                            
                            (33,755
                            )Total
      distributed earnings
                            
                            
                            —
                            
                            
                            
                            (11,483
                            )
                            
                            
                            (22,963
                            )
                            
                            
                            (34,444
                            )Overdistributed
      earnings
                            
                            $
                            (10,082
                            )
                            
                            $
                            (21,181
                            )
                            
                            $
                            (22,177
                            )
                            
                            $
                            (35,452
                            )Limited
      partners’ basic and diluted earnings per unit:Distributed
      earnings per unit
                            
                            $
                            —
                            (1)
                            
                            $
                            0.38
                            (1)
                            
                            $
                            0.75
                            (1)
                            
                            $
                            1.13
                            (1)Overdistributed earnings per
      unit
                            
                            $
                            (0.33
                            )
      (2)
                            
                            $
                            (0.70
                            )(2)
                            
                            $
                            (0.72
                            )
      (2)
                            
                            $
                            (1.16
                            )(2)Net
      (loss)/income per limited partner unit
                            
                            $
                            (0.33
                            )
                            
                            $
                            (0.32
                            )
                            
                            $
                            0.03
                            
                            
                            $
                            (0.03
                            )Weighted
      average units outstanding – basic and diluted
                            
                            
                            30,004,500
                            
                            
                            
                            30,002,250
                            
                            
                            
                            30,004,500
                            
                            
                            
                            30,002,250





(1)
            Equal
      to the total distributed earnings (98%) to limited partners divided by the
      weighted average number of limited partner units outstanding for the
      period.




(2)
            Equal
      to the limited partners’ share (98%) of overdistributed earnings divided
      by the weighted average number of limited partner units outstanding for
      the period.




Note
D —Alaska Tanker Company, LLC:




In the
first quarter of 1999, OSG, BP Oil Shipping Company USA, Inc. (“BP”) and
Keystone Alaska, LLC formed Alaska Tanker Company, LLC (“ATC”) to manage the
vessels carrying Alaskan crude oil for BP. ATC, 37.5% of which is now owned by
the Partnership, provides marine transportation services in the environmentally
sensitive Alaskan crude oil trade.  Each member of ATC is entitled to
receive its respective share of any incentive charter hire payable by BP to
ATC.  The Partnership is not the primary beneficiary as defined in
accounting guidance for the consolidation of variable-interest-entities with
regard to ATC and accounts for its 37.5% interest in ATC according to the equity
method.  The Partnership’s share of the net income of ATC is
classified as equity in income of affiliated companies in the accompanying
statements of operations.




A
condensed summary of the results of operations of ATC follows:




Three Months Ended
                                September 30,
                              
                              
                              Nine Months Ended
                                September 30,In thousands
                              
                              2009
                              
                              
                              2008
                              
                              
                              2009
                              
                              
                              2008Time
      charter equivalent revenues
                              
                              $
                              33,877
                              
                              
                              $
                              35,069
                              
                              
                              $
                              99,991
                              
                              
                              $
                              103,524Ship
      operating expenses
                              
                              
                              (31,540
                              )
                              
                              
                              (32,062
                              )
                              
                              
                              (94,621
                              )
                              
                              
                              (96,187
                              )$
                              2,337
                              
                              
                              $
                              3,007
                              
                              
                              $
                              5,370
                              
                              
                              $
                              7,337


10


Note
E — Fair Value of Financial Instruments, Derivatives and Fair Value
Disclosures:




The
following methods and assumptions were used to estimate the fair value of each
class of financial instrument:




Cash and cash
equivalents.  The carrying amounts reported in the consolidated
balance sheets for interest-bearing deposits approximate their fair
value.




Debt.  The fair
values of the Partnership’s debt are estimated using discounted cash flow
analyses, based on the rates currently available for debt with similar terms and
remaining maturities.




Interest rate
swaps.  The fair value of interest rate swaps is the estimated
amount that the Partnership would receive or pay to terminate the swaps at the
reporting date.




The
estimated fair values of the Partnership’s financial instruments at September
30, 2009, other than derivatives, follow:





In thousands
                      
                      Carrying Amount
                      
                      
                      Fair ValueFinancial
      assets (liabilities)Cash
      and cash equivalents
                      
                      $
                      11,379
                      
                      
                      $
                      11,379Debt
                      
                      
                      (74,515
                      )
                      
                      
                      (69,000
                      )





Derivatives
and Interest Rate Risk




The
Partnership is exposed to interest rate risk relating to its ongoing business
operations.  The Partnership uses interest rate swaps for the
management of interest rate risk exposure.  The interest rate swaps
effectively convert a portion of the Partnership’s debt from a floating to a
fixed rate and are designated and qualify as cash flow hedges.  The
Partnership is a party to floating-to-fixed interest rate swaps with two major
financial institutions covering notional amounts aggregating $30,000,000 at
September 30, 2009 pursuant to which it pays fixed rates averaging 4.35% and
receives floating rates based on three-month London interbank offered rate
(“LIBOR”) (approximately 0.3% as of September 30, 2009). These agreements
contain no leverage features and mature in 2012.




Tabular
disclosure of derivatives location




At March
31, 2009, the Partnership changed its presentation of the derivative instruments
on the balance sheet to correspond with additional disclosure requirements that
became effective in 2009.  Derivatives are recorded in the balance
sheet on a net basis by counterparty when a legal right of setoff
exists.  The following tables present information with respect to the
fair values of derivatives reflected in the balance sheet on a gross basis by
transaction.  The tables also present information with respect to
gains and losses on derivative positions reflected in the statement of
operations or in the balance sheet, as a component of accumulated other
comprehensive income/(loss).




Fair
Values of Derivative Instruments Designated as Hedging Instruments:





In thousands at September 30, 2009
                                
                                Liability DerivativesBalance Sheet Location
                                
                                Amount of LossInterest
      rate swaps:Current
      portion
                                
                                Accounts
      payable, accrued expenses and other current liabilities
                                
                                $
                                1,033Long-term
      portion
                                
                                Other
      liabilities
                                
                                
                                1,069Total
      derivatives designated as hedging instruments
                                
                                $
                                2,102




11


Note
E — Fair Value of Financial Instruments, Derivatives and Fair Value Disclosures
(continued):




The
effect of cash flow hedging relationships on the balance sheet as of September
30, 2009 and the statement of operations for the nine months ended September 30,
2009 are as follows:





Balance Sheet
                          
                          Statement of OperationsEffective PortionIn thousands
                          
                          Gain/(Loss) In or Reclassified from Accumulated Other
                            Comprehensive LossLocation
                          
                          AmountInterest
      rate swaps
                          
                          $
                          (2,102
                          )
                          Interest
      expense
                          
                          $
                          (748
                          )Total
                          
                          $
                          (2,102
                          )
                          
                          
                          $
                          (748
                          )





The
amount reclassified from accumulated other comprehensive loss to earnings for
the three months ended September 30, 2009 related to interest rate swaps was
$(289,000).




Fair
Value Hierarchy




The
following table presents the fair values for liabilities measured on a recurring
basis as of September 30, 2009:




In thousands
                    Description
                  
                  Fair Value
                  
                  
                  Level 2:
                    Significant other
                    observable inputsLiabilities:Interest
      rate swaps
                  
                  $
                  2,102
                  
                  
                  $
                  2,102





The
following table summarizes the fair values of items measured on a nonrecurring
basis as of September 30, 2009:




In thousands
                  Description
                
                Level 3:
                  Significant
                  unobservable inputs
                
                
                Fair Value
                
                
                Total LossesAssets:Vessel
      impairment - Vessels held for use
                
                $
                7,672
                (1)
                
                $
                7,672
                
                
                $
                (12,500
                )




(1)
            A
      pre-tax impairment charge of $12,500,000 was recorded in the third quarter
      of 2009 related to two vessels.  The fair value measurement used
      to determine the impairment was based upon the income approach which
      utilized cash flow projections consistent with the most recent projections
      of the Partnership, and a discount rate equivalent to a market
      participant’s weighted average cost of
capital.




Note
F—Accounts Payable and Accrued Expenses:




Accounts
payable and accrued expenses consist of the following:




In thousands
                          
                          As of September 30, 2009
                          
                          
                          As of December 31, 2008Trade
      payables
                          
                          $
                          3,064
                          
                          
                          $
                          2,430Fuel
      accruals
                          
                          
                          1,802
                          
                          
                          
                          1,983Deferred
      revenues
                          
                          
                          16,661
                          
                          
                          
                          6,983Drydock
      accruals
                          
                          
                          535
                          
                          
                          
                          —Insurance
      premiums
                          
                          
                          807
                          
                          
                          
                          2,796Payroll
      and benefits
                          
                          
                          2,957
                          
                          
                          
                          869Customs
      and duty
                          
                          
                          337
                          
                          
                          
                          3,048Accrued
      interest expense
                          
                          
                          306
                          
                          
                          
                          327Derivative
      liabilities
                          
                          
                          1,033
                          
                          
                          
                          —Other
                          
                          
                          3,123
                          
                          
                          
                          846$
                          30,625
                          
                          
                          $
                          19,282




12




Note
G—Advances From Affiliated Companies:




Advances
from affiliated companies represent the funding of operating expenses pursuant
to the Partnership’s administrative agreement with OSGM and are non-interest
bearing.  These advances are repaid monthly.




Note
H—Long-Term Debt:




In
November 2007, OSG America Operating Company LLC, a wholly owned subsidiary of
the Partnership, entered into a $200,000,000, five-year, non-amortizing, Senior
Secured Revolving Credit Facility with a group of banks (the “Lenders”). The
facility may be extended by 24 months subject to approval of the
Lenders.  Borrowings under this facility bear interest at a rate equal
to LIBOR plus a margin (70 basis points per year until the fifth anniversary of
the closing date and, if the extension option is exercised, 75 basis points per
year thereafter).  As of September 30, 2009, $30,000,000 was
outstanding under the facility at a weighted average interest rate of 5.05%,
taking into account related interest rate swaps. The Partnership has
$170,000,000 available under this facility at September 30, 2009.




Borrowings
under the Senior Secured Revolving Credit Facility are secured by, among other
things, first preferred mortgages on certain owned vessels, and are guaranteed
by the Partnership and certain of its subsidiaries.




The
Senior Secured Revolving Credit Facility prevents the Partnership from declaring
or making distributions if any event of default, as defined, exists or would
result from such payments. In addition, the Senior Secured Revolving Credit
Facility requires the Partnership to adhere to certain financial covenants,
including minimum net worth of at least $200,000,000, maximum net debt to total
capital of 50%, maximum net debt to EBITDA (as defined in the agreement) of 4.0
times, and minimum EBITDA to net interest expense of 4.5 times.  The
Partnership was in compliance with all of the financial covenants contained in
our debt agreements as of September 30, 2009.




On June
25, 2008, the Partnership purchased the Overseas New Orleans and the
Overseas Philadelphia,
each of which had been previously operated under capital leases, for a total of
$30,923,000. This acquisition was funded with borrowings under the Senior
Secured Revolving Credit Facility.




At
September 30, 2009, all but one of the Partnership’s vessels were pledged as
collateral under either the Senior Secured Revolving Credit Facility or various
fixed-rate, amortizing, secured term loans maturing through 2014.  As
of September 30, 2009, borrowings outstanding under secured term loans were
$44,515,000.




Interest
paid, excluding capitalized interest, for the nine months ended September 30,
2009 and 2008 amounted to $3,288,000 and $3,655,000, respectively.




Note
I—Taxes:




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




Note
J — Leases:




Charters-in:




As of
September 30, 2009, the Partnership had commitments to bareboat charter in eight
vessels from subsidiaries of American Shipping Company ASA (“AMSC”) and to
bareboat charter in one vessel from OSG, all of which are accounted for as
operating leases or will be once the vessels are delivered.


13




Note
J — Leases (continued):




The
future minimum commitments under the bareboat charters-in are as
follows:




Dollars in thousands
                        
                        As of September 30, 20092009
                        
                        $
                        14,1472010
                        
                        
                        60,5102011
                        
                        
                        64,3312012
                        
                        
                        64,3062013
                        
                        
                        64,225Thereafter
                        
                        
                        87,898Total
                        
                        $
                        355,417





Future
minimum commitments under the bareboat charter in from OSG are as
follows:




Dollars in thousands
                            
                            As of September 30,
    20092009
                            
                            $
                            1,047Total
                            
                            $
                            1,047





In June
2005, OSG signed agreements to bareboat charter in ten Jones Act Product Tankers
to be constructed by Aker Philadelphia Shipyard Inc (“APSI”). The order was
increased to 12 ships in October 2007. The bareboat charter agreements for eight
such vessels were assigned to the Partnership at the time of its IPO. Following
construction, APSI sells the vessels to leasing subsidiaries of AMSC, which will
charter eight vessels to the Partnership for initial terms of five or seven
years. The Partnership has extension options for the lives of the vessels. The
bareboat charters provide for profit sharing with AMSC. Seven of these
vesselshave
delivered from the shipyard as follows:







Vessel
                      
                      Delivery DateOverseas
      Houston
                      
                      February
      2007Overseas
      Long Beach
                      
                      June 2007Overseas
      Los Angeles
                      
                      November
      2007Overseas
      New York
                      
                      April
      2008Overseas
      Texas City
                      
                      September
      2008Overseas
      Boston
                      
                      February
      2009Overseas
      Nikiski
                      
                      June
      2009




The
remaining vessel (to be named Overseas Anacortes) is
scheduled to be delivered by APSI in June 2010. The bareboat charter will
commence upon delivery of the vessel.




AMSC, the Partnership and OSG are
continuing to negotiate a number of outstanding issues between AMSC, on the one
hand, and us and OSG on the other, including, among other things, settlement of
the arbitration proceeding described in our Annual Report on Form 10-K for 2008
and our Quarterly Reports on Form 10-Q for the periods ended March 31, 2009 and
June 30, 2009, under Risk Factors.  On August 31, 2009, AMSC, APSI,
and OSG (collectively the “parties”) signed a nonbinding settlement proposal
(the “proposal”) intended to resolve certain liquidity issues previously
disclosed by AMSC and APSI, so as to allow APSI to complete construction of the
remaining five vessels in the 12-ship program.  All 12 vessels have
been chartered out to OSG or OSG America.  The proposal also provides
for the dismissal with prejudice of all the claims in the arbitration among the
parties and contains a number of provisions materially altering the prior
agreements among the parties.  The proposal is nonbinding and there
can be no assurance that definitive agreements will be entered
into.  In addition, the proposal is subject to certain conditions
precedent, including the receipt of third party approvals from various lenders
and governmental authorities, the execution and delivery of satisfactory
definitive documentation and the completion of satisfactory due
diligence.


14




Note
J — Leases (continued):




Charters-out:




The
future minimum revenues, before reduction for brokerage commissions, expected to
be received on noncancelable time charters are as follows:





Dollars in thousands
                        
                        As of September 30, 20092009
                        
                        $
                        43,9512010
                        
                        
                        137,1072011
                        
                        
                        108,5462012
                        
                        
                        64,7342013
                        
                        
                        43,987Thereafter
                        
                        
                        24,393Total
                        
                        $
                        422,718





The
future minimum revenues expected to be received on time charters out to OSG are
as follows:




Dollars in thousands
                      
                      As of September 30, 20092009
                      
                      $
                      9,482Total
                      
                      $
                      9,482





Revenues
from time charters are not received when vessels are off-hire, which includes
time required for normal periodic maintenance. In arriving at the minimum future
charter revenues, an estimate of off-hire has been deducted.




Note
K — Vessels:




On March
13, 2009, the Partnership canceled the contract with Bender Shipbuilding &
Repair Co., Inc., for the construction of two 8,000 horsepower tug boats to be
named OSG Courageous
and OSG Endurance
because of repeated delivery delays, Bender’s request for substantial price
increases to complete construction, and the Partnership’s concern about Bender’s
financial viability.




By the
terms of the termination agreement, the Partnership received title to the tugs
and agreed to pay Bender for the costs associated with positioning the tugs for
transportation to an alternative shipyard.  In addition, the
Partnership agreed to pay certain vendors for work already performed and to
assume certain specified obligations related to material ordered to complete the
units. No agreement yet exists with an alternative yard. The tugs were moved out
of Bender’s yard in June 2009. The Partnership estimates that the future cost to
complete the units is approximately $19,257,000.




Note
L — Impairment and Sale of Vessels:




During
the third quarter of 2009, events and circumstances indicated that the
Partnership’s four single-hulled product carriers (Overseas Philadelphia, Overseas Galena Bay, Overseas New Orleans and
Overseas Puget Sound),
which have limited remaining lives due to OPA regulations that mandate their
retirement between 2012 and 2013, and one 1977-built double-hulled product
carrier (the Overseas
Diligence), which has a less-efficient gas turbine engine, might be
impaired.




In
September 2009, the charterer of the Overseas
Philadelphia informed the Partnership that they would not be renewing the
time charter upon its expiry in January 2010, which caused the Partnership to
evaluate the vessel’s future employment possibilities in light of its
approaching May 2010 drydock. Also in September, two customers that are
currently utilizing the Overseas
Diligence according to contracts of affreightment to perform lightering
services in Delaware Bay, announced restructurings of their refinery operations,
which could reduce lightering volumes, causing the Partnership to evaluate
the possibility of removing the vessel from lightering service prior
to its required June 2010 drydock. These
facts, combined with continued weak market conditions, caused the partnership to
review all five vessels, which had an aggregate book value of $45,602,000 as of
September 30, 2009, for impairment. The estimates of undiscounted cash flows for
the Overseas
Philadelphia and the Overseas
Diligence did not support recovery of the assets’ carrying value.Accordingly, the Partnership recorded an impairment charge of $12,500,000
to write down the carrying value of these two vesselsto
their estimated fair value of $7,700,000. Fair value was calculated
using a discounted cash flow model, which included the Partnership’s estimates
of future charter rates, ship operating expenses and
drydocking costs.


15




Note
L — Impairment and Sale of Vessels (continued):




During
the third quarter of 2008, the Partnership decided to forego the scheduled
drydocking of one of the older product carriers, which was a requirement for her
to continue operating.  The vessel ceased operations and was placed in
lay-up during the fourth quarter of 2008.  Accordingly, the
Partnership recorded a charge of $19,319,000 in the third quarter of 2008 and
$1,783,000 in the fourth quarter of 2008 to write down the vessel’s carrying
amount to her estimated net fair value as of December 31, 2008. This vessel was
classified as held for sale at December 31, 2008.  This vessel was
sold in June 2009 resulting in a loss on the sale of $698,000.  Net
proceeds received were $626,000.




Note
M — Related Party Transactions:




Effective
April 1, 2008, the Partnership entered into time charter agreements to charter
out five vessels to OSG (two ATBs, the OSG 242/OSG Columbia and the
OSG 243/OSG
Independence, and three product carriers, the Overseas New Orleans,the
Overseas Philadelphia
and Overseas Puget
Sound).  All five of these charter-out agreements are at fixed
daily rates for terms commencing either on April 1, 2008 or upon the expiry of
such vessel’s then current charter and ending on or about December 31,
2009.  The charter out of the Overseas Philadelphia to OSG has not
started because its current charter was extended.





Vessel
                    
                    Start
      DateOSG
      242/OSG Columbia
                    
                    April
      1, 2008Overseas
      New Orleans
                    
                    April
      1, 2008OSG
      243/OSG Independence
                    
                    April
      24, 2008Overseas
      Puget Sound
                    
                    March
      3, 2009Overseas
      Philadelphia
                    
                    N/A




At the
time of the agreement, management believed that the fixed daily rates in the
charter out agreements were at rates that approximated market
rates.




OSG, as
the charterer, has the option, after consultation with the Partnership, to
require the Partnership to lay up the vessels at a safe place nominated by OSG,
in which case the hire to be paid under this charter is to be adjusted to
reflect any net increases in expenditure reasonably incurred or any net savings
realized by the Partnership as a result of such lay up.  OSG may
exercise this option any number of times during the charter
period.  In March 2009, OSG exercised its right to request that the
Partnership lay up the Overseas Puget Sound, which
remained in lay up until August 1, 2009.  In April 2009, OSG exercised
its right to lay up the Overseas New Orleans, which
remains in lay up.  In July 2009, OSG exercised its right to lay up
the Overseas Galena
Bay, which remained in lay up until mid-September 2009.




Effective
April 1, 2008, the Partnership entered into time charter agreements with OSG for
the charter in at fixed daily rates of the M300/Liberty and the OSG 400/OSG Constitution, two
ATBs working in the Delaware Bay lightering business.  Simultaneously,
OSG assigned the Contracts of Affreightment on these two ATBs to the
Partnership.  On October 10, 2008, the Partnership converted the time
charter in agreement with OSG on the OSG 400/OSG Constitution to a
bareboat charter in agreement. The bareboat charter commenced with the
completion of theOSG
Constitution’s shipyard period on November 22, 2008. The term of the
bareboat charter ends December 31, 2009. In December 2008, the M300/Liberty’s time charter
agreement with OSG ended.




Note
N — Severance and Relocation Costs:




During
the quarter ended March 31, 2009, OSGM entered into agreements in connection
with the termination of certain Tampa-based employees dedicated to providing
commercial, technical, and administrative services to the Partnership, including
one of its senior officers. The agreements provide for payments aggregating
approximately $1,600,000 to be made in accordance with OSG’s amended and
restated Severance Protection Plan, which was effective January 1,
2009.  The Partnership recognized $1,500,000 of the expense in the
first quarter of 2009.  In addition, OSGM recognized approximately
$500,000 of relocation expense related to certain employees who have agreed as
of March 31, 2009 to move to the Tampa, Florida office.




16




Note
O — Subsequent Events:




On
October 29, 2009, the Board of Directors of OSG America LLC, approved, in a
four-to-three vote, the suspension of the quarterly $0.375 distribution to both
common and subordinated unitholders.  The three independent board
members voted against the suspension of distributions to the common
unitholders.  There will be no dividend paid in connection with the
third quarter 2009 results.





On
November 5, 2009, OSG filed a prospectus with the Securities and Exchange
Commission (SEC) to initiate a tender offer for all of the publicly held common
units of OSG America L.P., for $10.25 cash per unit.  On November 5,
2009, the committee of independent directors of OSG America L.P. filed a
Schedule 14D-9 with the SEC advising unitholders of its determination with
respect to the tender price of $10.25.  The tender offer will be
conditioned upon, among other things, more than 4,003,166 common units being
tendered such that OSG would thereupon own at least 80% of the outstanding
common units of OSG America L.P.


17


ITEM
2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS




Overview




We are
the largest operator, based on barrel-carrying capacity, of U.S. flag vessels
transporting refined petroleum products. We were formed in May 2007 by Overseas
Shipholding Group, Inc. (“OSG”) a market leader in providing global energy
transportation services, to acquire a fleet of U.S. Flag vessels from
OSG.




On
November 15, 2007, upon completion of our initial public offering, OSG
contributed to us entities owning or operating a fleet of ten product carriers,
seven articulated tug barges (“ATBs”) and one conventional tug/barge unit, with
an aggregate carrying capacity of approximately 4.9 million barrels, as well as
a 37.5% ownership interest in Alaska Tanker Company, LLC, (“ATC”) a joint
venture that transports crude oil from Alaska to the continental United States
using a fleet of four modern crude-oil tankers. In exchange for its
contribution, OSG received common and subordinated units representing a 73.5%
interest in us.  Through an open-market purchase of units by OSG in
2008, that percentage increased.  As of September 30, 2009, OSG owned
a 77.1% interest in us, including a 2% interest through our general partner,
which OSG wholly owns and controls. Our membership interests in our operating
subsidiaries represent our only cash-generating assets.




Recent
Developments




On July
29, 2009, OSG announced its intention to tender for all of the outstanding
publicly held common units of OSG America L.P., for $8.00 in cash per
unit.  Following the completion of the tender offer, OSG expects to
acquire any remaining units not tendered through the exercise of a repurchase
right contained in OSG America’s partnership agreement.




On August
6, 2009, legal counsel to the conflicts committee of the Board of Directors of
OSG America L.P.’s general partner sent a letter to OSG expressing the informal
sense of the conflicts committee that, were OSG to proceed with the proposed
tender offer at $8.00 per unit, the conflicts committee would recommend that
common unitholders reject the offer and not tender their units pursuant to the
offer.  On September 24, 2009, OSG announced that it had increased the
price that it intends to offer from $8.00 to $10.25 per unit in
cash.




On
November 5, 2009, OSG filed a prospectus with the Securities and Exchange
Commission (SEC) to initiate a tender offer for all of the publicly held common
units of OSG America L.P, for $10.25 cash per unit.  On November 5,
2009, the committee of independent directors of OSG America L.P. filed a
Schedule 14D-9 with the SEC advising unitholders of its determination with
respect to the tender price of $10.25.  The tender offer will be
conditioned upon, among other things, more than 4,003,166 common units being
tendered such that OSG would thereupon own at least 80% of the outstanding
common units of OSG America L.P.




Operations




Our
market is protected from direct foreign competition by the Merchant Marine Act
of 1920 (“Jones Act”), which mandates that all vessels transporting 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 by U.S. organized companies
that are controlled and at least 75% owned by U.S. citizens. Twenty-one of the
twenty-three vessels in our operating fleet at September 30, 2009 are operated
in the U.S. coastwise trade in accordance with the Jones Act.




In June
2005, OSG signed agreements to bareboat charter-in ten Jones Act product
carriers from subsidiaries of American Shipping Company (“AMSC”). In February
2007, OSG agreed in principle to charter up to six additional Jones Act product
carriers from AMSC, which eventually resulted in OSG concluding agreements to
charter two vessels. The charters on eight of these twelve vessels have been
assigned to us by OSG, and we have options to acquire from OSG the charters on
the remaining four vessels. We have committed to charter five of the eight
vessels for initial terms of seven years and the other three vessels for initial
terms of five years. We have extension options for the remaining lives of these
vessels.  Seven of these vessels have delivered from the shipyard as
follows:




Vessel
                      
                      Delivery DateOverseas
      Houston
                      
                      February
      2007Overseas
      Long Beach
                      
                      June 2007Overseas
      Los Angeles
                      
                      November
      2007Overseas
      New York
                      
                      April
      2008Overseas
      Texas City
                      
                      September
      2008Overseas
      Boston
                      
                      February
      2009Overseas Nikiski
                      
                      June
2009




18





The
remaining vessel (to be named Overseas Anacortes) that we
have committed to bareboat charter in is scheduled to be delivered from the
shipyard in June 2010.




We
have options to purchase from OSG up to two ATBs currently under construction,
which we estimate will be delivered by the yard to OSG in December 2009 and
September 2010. We also have options to acquire from OSG the right to bareboat
charter in four of the remaining vessels from AMSC, which are to be completed by
Aker Philadelphia Shipyard Inc. (“APSI”) between late 2009 and early
2011.




On June
25, 2008, the Partnership purchased the Overseas New Orleans and the
Overseas Philadelphia,
each of which had been previously operated under capital leases, for a total of
$30.9 million. This acquisition was funded with borrowings under our senior
secured revolving credit facility.




AMSC, we
and OSG are continuing to negotiate a number of outstanding issues between AMSC,
on the one hand, and us and OSG, on the other, including, among other things,
settlement of the arbitration proceeding described in our Annual Report on Form
10-K for 2008 under Risk Factors.  On August 31, 2009, AMSC, APSI and
OSG (collectively the “parties”) signed a nonbinding settlement proposal (the
“proposal”) intended to resolve certain liquidity issues previously disclosed by
APSI, so as to allow APSI to complete construction of the remaining five vessels
in the 12-ship program.  All 12 vessels have been chartered out to OSG
or OSG America.  The proposal also provides for the dismissal with
prejudice of all the claims in the arbitration among the parties and contains a
number of provisions materially altering the prior agreements among the
parties.  The proposal is nonbinding and there can be no assurance
that definitive agreements will be entered into.  In addition, the
proposal is subject to certain conditions precedent, including the receipt of
third party approvals from various lenders and governmental authorities, the
execution and delivery of satisfactory definitive documentation and the
completion of satisfactory due diligence.




Industry
Overview




The table
below shows the daily TCE rates that prevailed in markets in which our vessels
operated for the periods indicated. It is important to note that the spot market
is quoted in AR rates. AR is a list of freight rates for specific voyage
itineraries for a standard size vessel, as defined.  The conversion of
AR rates to the following TCE rates required us 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 us in the period indicated because of the
actual length of voyages, waiting time between voyages, and the portion of
revenue generated from long-term charters.




U.S.
Flag Jones Act Product Carriers




Average Spot Market TCE Rates for Jones Act Product Carriers and
                              Articulated Tug/Barges (ATBs)Three Months Ended September 30,
                            
                            
                            Nine Months Ended September 30,2009
                            
                            
                            2008
                            
                            
                            2009
                            
                            
                            200840,000
      dwt Product Carriers
                            
                            $
                            33,100
                            
                            
                            $
                            39,700
                            
                            
                            $
                            37,200
                            
                            
                            $
                            57,50030,000 dwt ATBs
                            
                            $
                            23,000
                            
                            
                            $
                            23,900
                            
                            
                            $
                            25,200
                            
                            
                            $
                            37,400




The rates
for Jones Act Product Carriers and ATBs averaged $33,100 per day and $23,000 per
day, respectively, during the third quarter of 2009, approximately 17% and 3%
below their respective third quarter 2008 rates.  Rates for both
vessel types were, however, approximately 4% above their second quarter 2009
rates.




The
decline in rates relative to 2008 primarily reflected weaker demand for products
in 2009 that resulted in reduced spot tanker requirements and longer waiting
times for cargoes.  U.S. Gulf Coast refinery utilization levels in
2009 have been consistently below those of one year ago.




Tanker
and ATB freight rates during the third quarter of 2009 compared with the
second quarter were somewhat buoyed by maintenance activities at Irving Oil’s
New Brunswick refinery in Canada, which resulted in a reduction in exports of
gasoline and middle distillates from that facility to East Coast
markets.




The
Delaware Bay lightering business transported an average of 230,000 b/d during
the third quarter of 2009, down about 3% from the third quarter of
2008.  Third quarter volumes were the highest quarterly lightering
volumes so far this year due to low water levels at a customer’s refinery that
necessitated additional lightering.  Lightering volumes during the
first nine months of 2009 were approximately 16% lower than last year reflecting
a decline in East Coast refining utilization rates to 73% from 82% in the first
nine months of 2008.


19




One Jones
Act vessel was delivered in the third quarter of 2009, resulting in 68 vessels
that were available for trading in the Jones Act coastwise market at the end of
the quarter.  There were nine Jones Act vessels in lay-up or awaiting
cargo at the end of the third quarter of 2009.




At the
end of the third quarter of 2009 there were 19 tankers and barges in the 160,000
to 420,000 barrel size range on order and one additional barge scheduled for
conversion to double hull.  There are 17 vessels that will be phased
out in accordance with OPA 90 regulations and four additional double hull
vessels that will likely be retired in the next 9 to 24 months due to commercial
obsolescence.




Freight
rates remain highly sensitive to severe weather and geopolitical
events.  Hurricanes in the Gulf of Mexico could have a pronounced
effect on freight rates for both crude oil and product movements depending on
the extent to which upstream and downstream facilities are
affected.




Update
on Critical Accounting Policies




Our
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States (“U.S. GAAP”), which require us to make
estimates in the application of our accounting policies based on the best
assumptions, judgments, and opinions of management. For a description of our
significant accounting policies, see Note B to our consolidated financial
statements included in our Annual Report on Form 10-K for the year ended
December 31, 2008.




Newly
Issued Accounting Standards




In May
2009, the Financial Accounting Standards Board established principles and
requirements for disclosure of events that occur after the balance sheet date
but before financial statements are issued or are available to be
issued.  This statement introduces the concept of when financial
statements are considered issued or are available to be issued.  The
statement is effective for interim or annual financial periods ending after June
15, 2009, and shall be applied prospectively.  The adoption of this
statement did not have an impact on the Partnership’s consolidated financial
statements.




In June
2009, the Financial Accounting Standards Board amended the consolidation
guidance for variable-interest entities (“VIEs”). The amended guidance requires
companies to qualitatively assess the determination of the primary beneficiary
of a VIE based on whether the entity (1) has the power to direct the activities
of the VIE that most significantly impact the entity’s economic performance and
(2) has the obligation to absorb losses of the entity that could potentially be
significant to the VIE or the right to receive benefits from the entity that
could potentially be significant to the VIE. It also requires additional
disclosures for any enterprise that holds a variable interest in a VIE. The new
accounting and disclosure requirements become effective for the Company on
January 1, 2010. The Company is in the process of evaluating the effect of these
requirements on its consolidated financial statements.




Vessel
Lives and Impairment




The
carrying value of each of our vessels represents its original cost at the time
it was delivered or purchased less depreciation calculated using an estimated
useful life of 25 years from the date that such vessel was originally
delivered from the shipyard or 20 years from the date our ATBs were
rebuilt.




The
carrying values of our vessels may not represent the fair market value at any
point in time since the market prices of second-hand vessels tend to fluctuate
with changes in charter rates and the cost of
newbuildings.  Historically, both charter rates and vessel values tend
to be cyclical. We record impairment losses only when events occur that cause us
to believe that the future cash flows for any individual vessel will be less
than its carrying value. The carrying amounts of vessels held and used are
reviewed for potential impairment whenever events or changes in circumstances
indicate that the carrying amount of a particular vessel may not be fully
recoverable.  In such instances, an impairment charge would be
recognized if the estimate of the future cash flows expected to result from the
use of the vessel and its eventual disposition is less than the vessel’s
carrying amount.  This assessment is made at the individual vessel
level since separately identifiable cash flow information for each vessel is
available.


20


In
developing estimates of future cash flows, we must make assumptions about future
charter rates, ship operating expenses, and the estimated remaining useful lives
of the vessels.  These assumptions are based on historical trends as
well as future expectations.  Although management believes that the
assumptions used to evaluate potential impairment are reasonable and
appropriate, such assumptions are highly subjective.




During
the third quarter of 2009, events and circumstances indicated that our four
single-hulled product carriers (Overseas Philadelphia, Overseas Galena Bay, Overseas New Orleans and
Overseas Puget Sound),
which have limited remaining lives due to OPA regulations that mandate their
retirement between 2012 and 2013, and one 1977-built double-hulled product
carrier (the Overseas
Diligence), which has a less-efficient gas turbine engine, might be
impaired.




In
September 2009, the charterer of the Overseas Philadelphia
informed us that they would not be renewing the time charter upon its expiry in
January 2010, which caused us to evaluate the vessel’s future employment
possibilities in light of its approaching May 2010 drydock. Also in September,
two customers that are currently utilizing the Overseas Diligence according
to contracts of affreightment to perform lightering services in Delaware Bay,
announced restructurings of their refinery operations, which could reduce
lightering volumes causing us to evaluate the possibility of removing the
vessel from lightering service prior to its required June 2010
drydock. These
facts, combined with continued weak market conditions, caused us to review all
five vessels, which had an aggregate book value of $45.6 million as of September
30, 2009, for impairment. The estimates of undiscounted cash flows for the Overseas Philadelphiaand the
Overseas Diligencedid
not support recovery of the assets’ carrying value. Accordingly, we
recorded an impairment charge of $12.5 million to write down their carrying
values to their estimated fair values as of September 30, 2009, using
estimates of discounted future cash flows for each of the
vessels.




Our
estimates of undiscounted cash flows for each of the remaining three
single-hulled vessels indicated that their carrying amounts were recoverable.
Nonetheless, it is reasonably possible that the estimate of undiscounted cash
flows may change in the future resulting in the need to write down one or
more of the three single-hulled product carriers.




During
the third quarter of 2008, we decided to forego the scheduled drydocking of one
of our older product carriers, which was a requirement for her to continue
operating.  The vessel ceased operations and was placed in lay up
during the fourth quarter of 2008. Accordingly, we recorded impairment charges
aggregating $21.1 million to write down the carrying amount of this vessel to
her estimated net fair value as of December 31, 2008. We classified this vessel
as held for sale at December 31, 2008.   We sold this vessel in
June 2009, receiving net proceeds of $0.6 million and recording a loss on the
sale of $0.7 million.




On June
25, 2008, the Partnership purchased the Overseas New Orleans and the
Overseas Philadelphia,
each of which had been previously operated under capital leases. The useful
lives of these vessels were determined based on their OPA retirement dates. In
the third quarter of 2008, the Partnership effected a change in estimate related
to the useful lives of the Overseas Galena Bay and the
Overseas Puget Sound to
extend their useful lives to match their OPA retirement dates. As a result,
depreciation expense decreased by approximately $1.4 million for the nine months
ended September 30, 2009 compared with the same 2008 period.




Income
from Vessel Operations





Time
Charter Equivalent Revenues




The
following table reconciles TCE revenues to shipping revenues, as reported in the
consolidated statements of operations:





In thousands
              
              Three Months Ended
                September 30,
              
              
              Nine Months Ended
                September 30,2009
              
              
              2008
              
              
              2009
              
              
              2008TCE
      Revenues
              
              $
              64,492
              
              
              $
              63,703
              
              
              $
              196,160
              
              
              $
              176,025Voyage Expenses
              
              
              6,629
              
              
              
              10,509
              
              
              
              18,526
              
              
              
              33,447Shipping Revenues
              
              $
              71,121
              
              
              $
              74,212
              
              
              $
              214,686
              
              
              $
              209,472





Consistent
with general practice in the shipping industry, we use TCE revenues, which
represent shipping revenues less voyage expenses, as a measure to compare
revenues generated from voyage charters to revenues generated from time
charters. TCE revenues, a non-U.S. GAAP measure, provides additional meaningful
information in conjunction with shipping revenues, the most directly comparable
U.S. GAAP measure, because it assists management in making decisions regarding
the deployment and use of our vessels and in evaluating their financial
performance.


21


The
following table provides information with respect to average daily TCE rates
earned and revenue days for the three months and nine months ended September 30,
2009 and 2008:




Three Months Ended
                    September 30,
                  
                  
                  Nine Months Ended
                    September 30,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Revenue
      Days:Jones
      Act ATBs
                  
                  
                  702
                  
                  
                  
                  776
                  
                  
                  
                  2,236
                  
                  
                  
                  2,172Jones
      Act Product Carriers
                  
                  
                  1,031
                  
                  
                  
                  906
                  
                  
                  
                  2,970
                  
                  
                  
                  2,496Non-Jones
      Act Product Carriers
                  
                  
                  181
                  
                  
                  
                  184
                  
                  
                  
                  541
                  
                  
                  
                  4841,914
                  
                  
                  
                  1,866
                  
                  
                  
                  5,747
                  
                  
                  
                  5,152Average
      Daily TCE Rates:Jones
      Act ATBs
                  
                  $
                  30,566
                  
                  
                  $
                  30,227
                  
                  
                  $
                  30,712
                  
                  
                  $
                  31,713Jones
      Act Product Carriers
                  
                  $
                  38,716
                  
                  
                  $
                  35,212
                  
                  
                  $
                  38,086
                  
                  
                  $
                  34,597Non-Jones
      Act Product Carriers
                  
                  $
                  17,232
                  
                  
                  $
                  45,353
                  
                  
                  $
                  26,571
                  
                  
                  $
                  42,957




Effective
April 1, 2008, we entered into time charter agreements with OSG for the charter
in of the M300/Liberty
and the OSG 400/OSG
Constitution, two ATBs working in the Delaware Bay lightering business,
at fixed daily rates.  Simultaneously, OSG assigned the contracts of
affreightment on these two ATBs to us.  On October 10, 2008, we
converted the time-charter-in agreement on the OSG 400/OSG Constitution to a
bareboat-charter-in agreement. The bareboat charter commenced with the
completion of theOSG
Constitution’s shipyard period on November 22, 2008. The term of the
bareboat charter ends December 31, 2009.  In December 2008, the M300/Liberty’s time charter
agreement with OSG ended.




During
the third quarter of 2009, TCE revenues increased by $0.8 million, or 1%, to
$64.5 million from $63.7 million in the three months ended September 30, 2008.
The increase in TCE revenues resulted primarily from an increase in revenue days
and higher daily TCE rates earned by the three Jones Act product carriers that
were delivered during and since the third quarter of 2008. The delivery of the
Overseas Texas City,
Overseas Boston, and
Overseas Nikiski in
September 2008, February 2009 and June 2009, respectively, added $13.8 million
in TCE revenues in the third quarter of 2009 compared with the same quarter in
2008.  Offsetting these increases were (i) lay ups during the third
quarter of 2009 of the Overseas New Orleans, Overseas Puget
Sound, Overseas Galena BayandOSG 214/OSG Honour that reduced
TCE  revenues by $8.5 million compared with the third quarter of 2008,
and (ii) lower daily TCE rates earned by the two non-Jones Act product carriers
which resulted in a $5.2 million reduction in TCE revenues.




During
the nine months ended September 30, 2009, TCE revenues increased by $20.1
million, or 11%, to $196.2 million from $176.0 million for the nine months ended
September 30, 2008.  The increase in TCE revenues resulted primarily
from an increase in revenue days and higher daily TCE rates earned by four new
Jones Act product carriers that have entered the fleet since April 2008, which
added $34.3 million in the first nine months compared with the same period in
2008. In addition, in April 2008, the OSG 243 re-entered service
following completion of her double hull conversion which kept her out of service
for 13 months.  Partially offsetting these increases was the lay up of
the Overseas New Orleans,
Overseas Puget Sound, Overseas Galena Bay and the
OSG 214/OSG Honour, as
noted above, plus lower daily TCE rates earned by the two non-Jones Act product
carriers.




The
Overseas Integrity ceased operations in December 2008 and was sold in June 2009.
The resulting loss of revenue days and TCE revenue for the three and nine month
periods ended September 30, 2009 were largely compensated for by improved
utilization rates in 2009 on other Jones Act product carriers in the first half
of 2009 such as the Overseas
New Orleans and Overseas Puget Sound, which
underwent drydockings during the same period in 2008, and the Overseas Diligence which has
operated in the lightering fleet since mid-April 2008 after having had an
extended idle period during the first half of 2008.




The two
non-Jones Act product carriers operate on a government contract of affreightment
that takes up slightly more than 50% of their combined capacity. The remainder
of their capacity is exposed to the international product carrier market, which
has been negatively impacted by a combination of reduced worldwide demand and
increase tonnage, thereby lowering utilization and adversely impacting daily TCE
rates.


22


Vessel
Expenses




The
following table provides information with respect to average daily vessel
expenses and operating days for the three months and nine months ended September
30, 2009 and 2008:





Three Months Ended
                  September 30,
                
                
                Nine Months Ended
                  September 30,2009
                
                
                2008
                
                
                2009
                
                
                2008Operating
      Days:Jones
      Act ATBs
                
                
                828
                
                
                
                840
                
                
                
                2,457
                
                
                
                2,444Jones
      Act Product Carriers
                
                
                1,104
                
                
                
                931
                
                
                
                3,066
                
                
                
                2,650Non-Jones
      Act Product Carriers
                
                
                184
                
                
                
                184
                
                
                
                546
                
                
                
                5482,116
                
                
                
                1,955
                
                
                
                6,069
                
                
                
                5,642Average
      Daily Vessel Expenses:Jones
      Act ATBs
                
                $
                8,906
                
                
                $
                8,333
                
                
                $
                9,247
                
                
                $
                8,099Jones
      Act Product Carriers
                
                $
                14,602
                
                
                $
                17,878
                
                
                $
                15,685
                
                
                $
                17,265Non-Jones
      Act Product Carriers
                
                $
                11,473
                
                
                $
                11,304
                
                
                $
                10,137
                
                
                $
                13,358




During
the third quarter of 2009, vessel expenses increased $0.7 million, or 3%, to
$25.6 million from $24.9 million for the three months ended September 30,
2008.  The increase in vessel expenses resulted primarily from a net
increase of 161 operating days. These additional days were attributable to the
delivery of the Overseas Texas
City, Overseas BostonandOverseas Nikiski, which
added 264 operating days and $4.2 million in 2009 compared with the same period
in 2008, and the operation of the OSG 400/OSG Constitutionas a
bareboat charter from OSG, which added $1.4 million of expense.  These
increases were partially offset by the Overseas Integrity, which
ceased operations during the fourth quarter of 2008, and by the lay up of the
OSG 214/OSG Honour, Overseas New Orleans, Overseas Galena Bay and Overseas Puget
Sound.




During
the nine months ended September 30, 2009, vessel expenses increased $5.5
million, or 8%, to $76.3 million from $70.8 million for the nine months ended
September 30, 2008. The increase resulted primarily from a net increase of 427
operating days.  These additional days were attributable to the
delivery of the Overseas New
York, Overseas Texas
City, Overseas BostonandOverseas Nikiski, which
added 697 operating days and $11.3 million and the operation of the OSG 400/OSG Constitutionas a
bareboat charter from OSG, which added 203 days and $4.2 million of expense in
2009 compared with 2008.  These increases were partially offset by the
Overseas Integrity ceasing operations and the lay-up of the OSG 214/OSG Honour, Overseas New Orleans, Overseas Galen Bay and Overseas Puget
Sound.




Vessel
expenses for the non-Jones Act product carriers for the three months and nine
months ended September 30, 2009 decreased compared with the 2008 periods as a
result of an increase in the subsidy received under the MSP program and lower
spares, repairs, and customs-duty expenses.




Charter
Hire Expenses




During
the third quarter of 2009, charter hire expenses increased by $6.1 million to
$17.5 million from $11.4 million for the three months ended September 30, 2008
due to the deliveries from AMSC of the Overseas Texas City, Overseas
Boston, and Overseas
Nikiski, which resulted in additional charter hire expense of $6.9
million, partially offset by decreases in charter hire expense resulting from
redelivery of the M300/Libertyto OSGin
December 2008.




During
the first nine months of 2009, charter hire expenses increased by $16.5 million
to $46.7 million from $30.2 million for the nine months ended September 30, 2008
due to the deliveries of the Overseas New York, Overseas Texas
City, Overseas Boston and Overseas
Nikiski.  These increases were partially offset by a decrease
resulting from redelivery of the M300/Liberty to OSG in
December 2008.


23


Depreciation
and Amortization




Depreciation
and amortization remained relatively flat at $12.8 million for the three months
ended September 30, 2009 compared with $12.9 million for the three months ended
September 30, 2008.  For the nine months ended September 30, 2009,
depreciation and amortization decreased $1.2 million, or 3%, to $38.4 million
from $39.6 million for the nine months ended September 30, 2008. The decrease
for the nine month period was primarily due the removal of the Overseas
Integrity from service in the fourth quarter of 2008, and the extension of the
useful lives of our single hull tankers to match their OPA retirement dates in
the second quarter of 2008 after purchasing the Overseas New Orleans and
Overseas Philadelphia,
which had previously operated under capital lease.  These decreases
were partially offset by increased amortization of costs incurred on the eight
vessels that completed drydockings in 2008.




General
and Administrative Expenses and Severance and Relocation Costs




For the
three months ended September 30, 2009, general and administrative expenses
increased $1.0 million to $5.9 million compared with $4.9 million for the three
months ended September 30, 2008.  For the nine months ended September
30, 2009, general and administrative expenses increased $1.3 million to $17.2
million from $15.9 million for the nine months ended September 30,
2008.  The increases reflect increased legal costs incurred in
conjunction with terminating shipbuilding contracts with Bender and Bender’s
subsequent bankruptcy, and the incurrence of consulting fees associated with
OSG’s announcement to initiate a tender for the Partnership’s publicly held
units. These increases were partially offset by lower employee compensation
costs associated with the headcount reductions described below and general
spending curtailment.




During
the first quarter ended March 31, 2009, OSGM terminated the employment of
certain employees, including one of its senior officers, and relocated others.
For the nine months ended September 30, 2009, the Partnership recorded expense
aggregating $1.6 million for payments to be made in accordance with OSG’s
Severance Protection Plan, and $0.5 million for relocation costs related to
certain employees who agreed to move to the Tampa, Florida
office.




Equity
in Income of Affiliated Companies




On a
quarterly basis, we recognize our share of the estimated incentive charter hire
from ATC that has been deemed earned through the reporting date that is not
reversible subsequent thereto.  ATC fully distributes its net income
for each year by making a distribution in the first quarter of the following
year.  The portion of incentive hire that is based on annual targets
is not recognized until the fourth quarter when deemed earned.  Equity
income for the three months and nine months ended September 30, 2009 were $0.9
million and $2.0 million, respectively, compared with $1.1 million and $2.7
million, respectively, for the three months and nine months ended September 30,
2008.  The decreases reflect a reduction by two in the number of
vessels that ATC manages.




Interest
Expense




Interest
expense of $1.1 million for the three months ended September 30, 2009 decreased
$0.2 million compared with the three months ended September 30, 2008, reflecting
lower borrowings outstanding under the Secured Revolving Credit Facility and
lower interest rates on those borrowings.  Interest capitalized in
connection with vessel construction totaled $0.1 million and $0.2 million for
the three months ended September 30, 2009 and 2008, respectively.




Interest
expense decreased $0.6 million, or 15%, from $4.1 million for the nine months
ended September 30, 2008 to $3.5 million for the same period in
2009.  In June 2008, the Partnership also purchased the Overseas New Orleans and the
Overseas Philadelphia,
which had been previously operated under capital leases, for a total of $30.9
million. This acquisition was funded with borrowings under the Senior Secured
Revolving Credit Facility resulting in lower interest expense in the nine months
ended September 30, 2009 compared with the same period in
2008.  Interest capitalized in connection with vessel construction
totaled $0.4 million and $0.9 million for the nine months ended September 30,
2009 and 2008, respectively.





EBITDA




EBITDA
represents net income plus interest expense, provision for income taxes, and
depreciation and amortization expense. EBITDA is presented to provide investors
with meaningful additional information that management uses to monitor ongoing
operating results and evaluate trends over comparative periods.


24


EBITDA
assists management and investors by increasing the comparability of our
fundamental performance from period to period and against the fundamental
performance of other companies in our industry that provide EBITDA information.
This increased comparability is achieved by excluding the potentially disparate
effects between periods or companies of interest expense, taxes, depreciation or
amortization, which items may significantly affect net income between periods
and are affected by various and possibly changing financing methods, capital
structure and historical cost basis. We believe that including EBITDA as a
financial and operating measure benefits investors in (a) selecting between
investing in us and other investment alternatives and (b) monitoring our
ongoing financial and operational strength and health in assessing whether to
continue to hold common units.




EBITDA
allows us to assess the ability of assets to generate cash sufficient to service
debt, make distributions and undertake capital expenditures. By eliminating the
cash flow effect resulting from our existing capitalization and other items such
as drydocking expenditures and working capital changes (which may vary
significantly from period to period), EBITDA provides a consistent measure of
our ability to generate cash over the long term. Management uses this
information as a significant factor in determining (a) our proper
capitalization (including assessing how much debt to incur and whether changes
to the capitalization should be made) and (b) whether to undertake material
capital expenditures and how to finance them, all in light of existing cash
distribution commitments to unitholders. Use of EBITDA as a liquidity measure
also permits investors to assess our fundamental ability to generate cash
sufficient to meet cash needs, including distributions on our common
units.




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




The
following table reconciles net income, as reflected in our statements of
operations, to EBITDA:





In
      thousands
                    
                    Three
      Months Ended September 30,
                    
                    
                    Nine
      Months Ended September 30,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Net
      (loss)/income
                    
                    $
                    (10,082
                    )
                    
                    $
                    (9,698
                    )
                    
                    $
                    786
                    
                    
                    $
                    (1,008
                    )Interest
      expense
                    
                    
                    1,143
                    
                    
                    
                    1,295
                    
                    
                    
                    3,516
                    
                    
                    
                    4,153Depreciation
      and amortization
                    
                    
                    12,759
                    
                    
                    
                    12,902
                    
                    
                    
                    38,379
                    
                    
                    
                    39,602EBITDA
                    
                    $
                    3,820
                    
                    
                    $
                    4,499
                    
                    
                    $
                    42,681
                    
                    
                    $
                    42,747




The
following table reconciles net cash provided by operating activities, as
reflected in our statements of cash flows, to EBITDA:





In
      thousands
                    
                    Nine
      Months Ended September 30,2009
                    
                    
                    2008Net
      cash provided by operating activities
                    
                    $
                    65,501
                    
                    
                    $
                    52,054Payments
      for drydocking
                    
                    
                    3,663
                    
                    
                    
                    21,923Interest
      expense
                    
                    
                    3,516
                    
                    
                    
                    4,153Undistributed
      earnings from affiliated companies
                    
                    
                    (3,331
                    )
                    
                    
                    (2,994
                    )Loss
      on sale or impairment of vessels
                    
                    
                    (13,198
                    )
                    
                    
                    (19,319
                    )Changes
      in operating assets and liabilities
                    
                    
                    (11,205
                    )
                    
                    
                    (11,809
                    )Other
                    
                    
                    (2,265
                    )
                    
                    
                    (1,261
                    )EBITDA
                    
                    $
                    42,681
                    
                    
                    $
                    42,747




Liquidity
and Sources of Capital




Working
capital at September 30, 2009 was a deficiency of $4.4 million compared with
capital of $5.3 million at December 31, 2008. We operate in a capital
intensive industry. In addition to distributions on our partnership units, our
primary liquidity requirements relate to our operating expenses, including
payments under our management and administrative services agreements, drydocking
expenditures, and payments of interest and principal under our senior secured
revolving credit facility and secured term loans. Our long-term liquidity needs
primarily relate to capital expenditures for the purchase or construction of
vessels.


25


Our exposure
to the spot market, which is expected to increase to 41% of 2010 estimated
revenue days, contributes to fluctuations in cash flows from operating
activities.  Any decrease in the average TCE rates earned by our
vessels in quarters subsequent to September 30, 2009, compared with the actual
TCE rates achieved during the first nine months of 2009, will have a negative
comparative impact on the amount of cash provided by operating
activities.  Recent deterioration of the Jones Act market resulting
from lower U.S. oil demand and suspended or cancelled refinery expansion
projects present near- and medium-term challenges for us.  In
addition, five vessels in our operating fleet will come off term charters
by the end of 2009 and another in January 2010, all of which are expected to
enter the spot market.




The amount of available
cash we need to pay the minimum quarterly distributions for four quarters on our
common units, subordinated units and general partner interest is $45.9 million.
Our revised forecast indicates that future distributable cash flow will be
materially below that needed to cover our minimum quarterly distributions on all
of our units.  On October 29, 2009, the Board of Directors approved
the suspension of the quarterly $0.375 distribution to all
unitholders.  We and
the Board of Directors will continue to carefully evaluate our financial
condition and capital needed to drydock our vessels and possibly exercise
our options to acquire vessels from
OSG.




We were
in compliance with all of the financial covenants contained in our debt
agreements as of September 30, 2009.  The Senior Secured Revolving
Credit Facility will prevent us from declaring or making distributions if any
event of default, as defined in the Senior Secured Revolving Credit agreement,
exists or would result from such payments. In addition, the Senior Secured
Revolving Credit Facility imposes certain operating restrictions and requires us
to adhere to certain minimum financial covenants including minimum net worth of
at least $200 million, maximum net debt to total capital of 50%, maximum net
debt to EBITDA (as defined in the agreement) of 4.0 times, and minimum EBITDA to
net interest expense of 4.5 times. Our failure to comply with any of the
covenants in the agreements could result in a default, which would permit
lenders to accelerate the maturity of the debt and to foreclose upon collateral
securing the debt. Under those circumstances, we might not have sufficient funds
or other resources to satisfy our remaining obligations.




We
anticipate that our primary sources of funds for our short-term liquidity needs
will be cash flows from operations. We believe that cash flows from operations
and bank borrowings from our Senior Secured Revolving Credit Facility referred
to below will be sufficient to meet our existing short-term liquidity needs for
the next 12 months, taking into consideration the suspension of the
dividends referred to above.




In
November 2007, we entered into a $200 million five-year Senior Secured Revolving
Credit Facility.  Borrowings under the Senior Secured Revolving Credit
Facility are due and payable five years after the date that the facility
agreement was signed (the “closing date”), subject to a 24-month extension
period which may be requested by us on or after the second anniversary of the
closing date and which may be approved by the lenders. Drawings under the
facility are available on a revolving basis until the earlier of one month prior
to the applicable maturity date or the date on which the facility is permanently
reduced to zero and the lenders are no longer required to make advances. As of
September 30, 2009, $30.0 million was outstanding under the
facility.




As of
September 30, 2009, $44.5 million was outstanding under various secured term
loans maturing through 2014.




Cash
Flows




Operating  cash
flows.  Net cash flow provided by operating activities was
$65.5 million and $52.1 million for the nine months ended September 30,
2009 and 2008, respectively. The increase of $13.4 million was primarily
attributable to a decrease in payments for drydocking, and the increase in
liabilities partially offset by higher receivables compared with the same period
in 2008.




Net cash
flow from operating activities depends upon the timing and amount of drydocking
expenditures, repairs and maintenance activity, changes in interest rates,
fluctuations in working capital balances and spot market freight rates. The
number of vessel drydockings varies from year to year.




Investing cash
flows.  Net cash used in investing activities was $14.6 million
and $40.1 million for the nine months ended September 30, 2009 and 2008,
respectively. Vessel expenditures for the nine months ended September 30, 2009
primarily related to construction costs for the two new tugs and start-up costs
associated with the AMSC tankers.  Investing activities was net of
$0.6 million in net proceeds from the sale of the Overseas
Integrity.  Vessel expenditures for the same period in 2008
related primarily to the double hulling of one barge (OSG 243) and progress
payments for the two new tugs under construction.




Financing cash flows. Net
cash used in financing activities was $50.1 million for the nine months ended
September 30, 2009 compared with cash provided by financing activities of $17.7
million for the nine months ended September 30, 2008.  During the nine
months ended September 30, 2009, we repaid $15.0 million that had been borrowed
under the Senior Secured Revolving Credit Facility compared with borrowing $78.0
million under this facility in the same period of 2008.  Repayments of
debt represent regularly scheduled installments under secured term loans, and in
2008, capital lease obligations.  Distributions to unitholders during
the nine months ended September 30, 2009 and 2008 were $34.4 million and $28.7
million, respectively, with the amount paid in the first quarter of 2008
covering the partial period from November 15, 2007 until December 31,
2007.


26


Ongoing
Capital Expenditures




Marine
transportation of crude oil and refined petroleum products is a
capital-intensive business, which requires significant investment to maintain an
efficient fleet and stay in regulatory compliance.




Over the
next three years, we estimate that we will spend an average of approximately $10
to $20 million per year for drydocking and classification society surveys. We
drydock our vessels twice in every five-year period and, as our fleet matures
and expands, our drydocking expenses will likely increase. Ongoing costs for
compliance with environmental regulations are primarily included as part of our
drydocking and classification society survey costs or are a component of our
operating expenses. In addition, vessels may have to be drydocked in the event
of accidents or other unforeseen damage. Periodically, we also incur
expenditures to acquire or construct additional product carriers and barges
and/or to upgrade vessels in order to comply with statutory regulations. We are
not aware of any regulatory changes or environmental liabilities that will have
a material impact on our current or future operations.




Following suspension of distributions,
we believe that our cash flow from charters out will be sufficient to cover the
interest and principal payments under our debt agreements, amounts due under the
administrative services and management agreements, other general and
administrative expenses, and other working capital requirements for the short
and medium term. To the extent we exercise our options to acquire vessels
from OSG, we expect to finance any such commitments from existing long-term
credit facilities and additional long-term debt as required. The amounts of
working capital and cash generated from operations that may, in the future, be
utilized to finance vessel commitments are dependent on the rates at which we
can charter out our vessels, which can be volatile, especially as existing
charters expire in the near term and spot market exposure increases in
2010.





Aggregate
Contractual Obligations





A summary
of our long-term contractual obligations as of September 30, 2009
follows:




In thousands
                      
                      Balance of
                          2009
                      
                      
                      2010
                      
                      
                      2011
                      
                      
                      2012
                      
                      
                      2013
                      
                      
                      Beyond
                          2013
                      
                      
                      TotalLong-term debt(1)
                      
                      $
                      1,813
                      
                      
                      $
                      7,040
                      
                      
                      $
                      7,040
                      
                      
                      $
                      36,902
                      
                      
                      $
                      18,575
                      
                      
                      $
                      16,465
                      
                      
                      $
                      87,835Operating lease
      obligations (chartered-in vessels)(2)
                      
                      
                      14,147
                      
                      
                      
                      60,510
                      
                      
                      
                      64,331
                      
                      
                      
                      64,306
                      
                      
                      
                      64,225
                      
                      
                      
                      87,898
                      
                      
                      
                      355,417Operating lease
      obligations with OSG (chartered-in vessels)(3)
                      
                      
                      1,047
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      1,047Construction
      installments(4)
                      
                      
                      —
                      
                      
                      
                      18,617
                      
                      
                      
                      640
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      19,257Total
                      
                      $
                      17,007
                      
                      
                      $
                      86,167
                      
                      
                      $
                      72,011
                      
                      
                      $
                      101,208
                      
                      
                      $
                      82,800
                      
                      
                      $
                      104,363
                      
                      
                      $
                      463,556





(1)
            Amounts
      shown include contractual interest obligations.  The interest
      obligations for floating rate debt of $30,000,000 as of September 30,
      2009, have been estimated based on the fixed rates stated in related
      floating-to-fixed interest rate swaps.  We are party to
      floating-to-fixed interest rate swaps covering notional amounts
      aggregating approximately $30,000,000 at September 30, 2009 that
      effectively convert our interest rate exposure from a floating rate based
      on LIBOR to an average fixed rate of
4.35%.


(2)
            As
      of September 30, 2009, we had charter-in commitments for eight vessels on
      leases that are accounted for as operating leases, or will be once the
      vessels are delivered.  These leases provide us with various
      renewal options.


(3)
            Represents
      charter-in commitment for one vessel from
OSG.


(4)
            Represents
      the estimated cost to complete the construction of two 8,000 horsepower
      tug boats previously under construction at Bender Shipbuilding &
      Repair for which the contracts were terminated March 13,
    2009.




The
Partnership has used interest rate swaps to convert a portion of its debt from a
floating rate to a fixed rated based on management’s interest-rate outlook at
various times.  These agreements contain no leverage features and
mature in 2012.


27


Senior
Secured Revolving Credit Facility




On
November 15, 2007, our wholly owned subsidiary OSG America Operating Company LLC
entered into a $200 million Senior Secured Revolving Credit
Facility.  As of September 30, 2009, $30.0 million was outstanding
under the facility, at a weighted average interest rate of 5.05% taking into
account the related interest rate swaps.  The amount available under
this facility at September 30, 2009 was $170.0 million.




Borrowings
under the Senior Secured Revolving Credit Facility are due and payable five
years after the date that the facility agreement was signed (the “closing
date”), subject to a 24-month extension period which may be requested by us on
or after the second anniversary of the closing date and which may be approved by
the lenders. Drawings under the facility are available on a revolving basis
until the earlier of one month prior to the applicable maturity date or the date
on which the facility is permanently reduced to zero and the lenders are no
longer required to make advances.




Borrowings
under the Senior Secured Revolving Credit Facility are secured by first
preferred mortgages on certain owned vessels, and are guaranteed by the
Partnership.




OSG
America Operating Company LLC may, at its option, prepay all loans under our
senior secured revolving credit facility at any time without penalty (other than
customary breakage costs).  The outstanding loans under the Senior
Secured Revolving Credit Facility bear interest at a rate equal to LIBOR plus a
margin (70 basis points per year until the fifth anniversary of the closing date
and, if the extension option is exercised, 75 basis points per year
thereafter).




The
Senior Secured Revolving Credit Facility prevents us from declaring or making
distributions if any event of default, as defined in the senior secured
revolving credit agreement, exists or would result from such payments. The
Senior Secured Revolving Credit Facility requires us to adhere to certain
financial covenants.  As of September 30, 2009, we were in compliance
with these covenants.




Off
Balance Sheet Arrangements




We do not
currently have any liabilities, contingent or otherwise, that we consider to be
off balance sheet arrangements.


28




ITEM
      3.
            QUALITATIVE
      AND QUANTITATIVE DISCLOSURES ABOUT MARKET
RISK




Interest
Rate Risk





We are
exposed to the impact of interest rate changes primarily through any unhedged
floating-rate borrowings. Significant increases in interest rates could
adversely affect our operating margins, results of operations and our ability to
service our debt. From time to time, we may use interest rate swaps to reduce
our exposure to market risk from changes in interest rates. The principal
objective of these contracts would be to minimize the risks and costs associated
with our floating-rate debt. We use such derivative financial instruments as
risk management tools and not for speculative or trading purposes. As of
September 30, 2009, interest rate swaps effectively convert our interest rate
exposure on $30.0 million from a floating rated based on LIBOR to a fixed rate
of 4.35%.




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




Foreign
Currency Risk




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




Report of Independent
Registered Public Accounting Firm on Review of Interim Financial
Information




The
consolidated financial statements as of September 30, 2009 and for the three
months ended September 30, 2009 and 2008 are unaudited; however, such financial
statements have been reviewed by our independent registered public accounting
firm.




Available
Information




The
Partnership makes available free of charge through our website (www.osgamerica.com),
our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K and amendments to  these reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the
“Exchange Act”), as amended, as soon as reasonably practicable after those
reports and other information are electronically filed with or furnished to the
Securities and Exchange Commission.




The
Partnership also makes available on our website, our corporate governance
guidelines, our code of business conduct, and charters of the Audit Committee,
Compensation Committee and Corporate Governance and Nominating Committee of the
Board of Directors.




ITEM
      4.
            CONTROLS
      AND PROCEDURES




As of the
end of the period covered by this Quarterly Report on Form 10-Q, an evaluation
was performed under the supervision and with the participation of the
Partnership’s management, including the Chief Executive Officer (“CEO”) and
Chief Financial Officer (“CFO”), of the effectiveness of the design and
operation of the Company’s disclosure controls and procedures pursuant to Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange
Act”).  Based on that evaluation, the Partnership’s management,
including the CEO and CFO, concluded that the Partnership’s current disclosure
controls and procedures are effective to ensure that information required to be
disclosed by the Partnership in the reports the Partnership files or submits
under the Exchange Act is (i) recorded, processed, summarized and reported,
within the time periods specified in the Securities and Exchange Commission’s
rules and forms and (ii) accumulated and communicated to the Partnership’s
management, including the CEO and CFO, as appropriate to allow timely decisions
regarding required disclosure.  There have been no material changes in
the Partnership’s internal controls or in other factors that could materially
affect these controls during the period covered by this Quarterly
Report.


29


PART
II – OTHER INFORMATION




ITEM
      1.
            LEGAL
      PROCEEDINGS




Following
the announcement of OSG’s intent to make an offer to purchase all of the
outstanding publicly held common units of OSG America L.P. (the “Offer”), two
purported class action complaints on behalf of unitholders have been filed
separately by an individual and an entity each claiming to be a unitholder of
OSG America L.P. (the “Partnership”). The first-filed complaint, filed on
September 28, 2009 in the Supreme Court of the State of New York, County of New
York, is captioned Cornelius
P. Dukelow v. OSG America, L.P., et al. (the “Dukelow Complaint”). The
second-filed complaint, filed on October 8, 2009 in the Circuit Court of the
13th
Judicial District, in and for Hillsborough County, Florida, is captioned Balanced Beta Fund v. Morten
Arntzen, et al. (the “Balanced Beta Fund
Complaint”). Both complaints name as defendants OSG, the Partnership and each of
the individual board members of the Partnership’s general partner (and, in the
Balanced Beta FundComplaint, the general partner). Both complaints purport to assert claims
for breaches of fiduciary duties (against the individual defendants in the Dukelow Complaint and against
all defendants in the Balanced
Beta Fund Complaint); the Dukelow Complaint also
purports to assert a claim for aiding and abetting the alleged breaches of
fiduciary duties (against OSG). Both complaints allege, among other things, that
the Offer price is unfair and inadequate, and that the Offer involves a process
that is alleged to be either unfair or inadequate. The DukelowComplaint seeks,
among other relief, to enjoin the Offer and subsequent exercise of the
repurchase right or, alternatively, seeks damages in an unspecified amount in
the event the proposed transactions occur. The Balanced Beta Fund Complaint
seeks, among other relief, a declaratory judgment and compensatory and/or
rescissory damages. The defendants believe that the claims made in these
complaints are without merit and intend to vigorously defend against these
actions.




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 by insurance, subject to applicable policy
deductibles that are not material as to any type of insurance coverage. We
provide on a current basis for amounts we expect to pay.




ITEM
      1A.
            RISK
      FACTORS




There
have been no material changes in the Partnership’s risk factors from those
disclosed in our Annual  Report on Form 10-K for the year ended
December 31, 2008and
the Partnership’s Quarterly Reports on Form 10-Q for the periods ended March 31,
2009 and June 30, 2009, other than to the risk factors shown below:




American
Shipping Company ASA, formerly known as Aker American Shipping ASA (“AMSC"), we
and OSG have signed a nonbinding proposal to settle all outstanding commercial
disagreements between them, including settlement of their arbitration
proceeding, but no assurance can be given that such nonbinding proposal may be
implemented.





As of
August 15, 2009, AMSC, we and OSG signed a nonbinding proposal (the “Nonbinding
Proposal”) to settle outstanding commercial disagreements between
them.  The Nonbinding Proposal is intended to resolve certain
liquidity issues affecting AMSC and Aker Philadelphia Shipyard ASA (“AKPS”)
described in our Quarterly Report on Form 10-Q for the period ended June 30,
2009 under Risk Factors which description is incorporated herein by
reference.  Resolution of such issues is expected to enable AKPS to
continue its 12 ship newbuild program.  All 12 vessels have been
chartered to OSG, with the bareboat charter agreements for eight such vessels
assigned to the Partnership at the time of its IPO, seven of which have
delivered and are trading in the Jones Act market.  The Nonbinding
Proposal provides for the dismissal with prejudice of all claims in the
arbitration proceeding among the parties described in our Annual Report on Form
10-K for 2008 under Risk Factors which description is incorporated herein by
reference.  The Nonbinding Proposal also contains a number of
provisions materially altering the prior agreements among the parties, including
providing for the sale to OSG of two newbuild vessels that were to be bareboat
chartered to OSG.





Implementation
of the Nonbinding Proposal is subject to certain conditions precedent, including
the receipt of third party approvals from various lenders and government
authorities, the execution and delivery of satisfactory definitive documentation
and the completion of satisfactory due diligence.  No assurance can be
given that the Nonbinding Proposal will be implemented.  In connection
with the matters at issue in the arbitration, as described in our Form 10-K for
2008, we and OSG do not admit and continue vigorously to deny any triggering of
charter extensions, any breach of contract, and any wrongdoing whatsoever in
connection with its dealings with AMSC and the arbitration may be resumed by
either party at any time.


30





ITEM
      2.
            UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS




None.




ITEM
      6.
            EXHIBITS




See
Exhibit Index on page 34.


31





REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




The Board
of Directors and Unitholders of OSG America L.P.




We have
reviewed the consolidated balance sheet of OSG America L.P. as of September 30,
2009, and the related consolidated statements of operations for the three-month
and nine-month periods ended September 30, 2009 and 2008, and the consolidated
statements of cash flows and the consolidated statements of changes in partners’
capital for the nine-month periods ended September 30, 2009 and 2008. 
These financial statements are the responsibility of the Partnership's
management.




We
conducted our review in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting
matters.  It is substantially less in scope than an audit conducted in
accordance with the standards of the Public Company Accounting Oversight Board,
the objective of which is the expression of an opinion regarding the financial
statements taken as a whole.  Accordingly, we do not express such an
opinion.




Based on
our review, we are not aware of any material modifications that should be made
to the consolidated financial statements referred to above for them to be in
conformity with U.S. generally accepted accounting principles.




We have
previously audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet of
OSG America L.P as of December 31, 2008, and the related consolidated statements
of operations, cash flows and changes in partners’ capital for the year then
ended not presented herein, and in our report dated March 4, 2009, we expressed
an unqualified opinion on those consolidated financial statements.  In
our opinion, the information set forth in the accompanying consolidated balance
sheet as of December 31, 2008, is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been
derived.




/s/  Ernst
& Young LLP




Certified
Public Accountants




Tampa,
Florida




November
6, 2009




32





SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.





OSG AMERICA L.P.(Registrant)by
      OSG America LLC, its general partnerDate:
                                    November
      6, 2009
                                    
                                    /s/ Myles R. ItkinMyles
      R. ItkinPresident
      and Chief Executive OfficerDate:
                                    November
      6, 2009
                                    
                                    /s/
      Henry P. FlinterHenry
      P. FlinterChief
      Financial
Officer


33


EXHIBIT
INDEX





15
              
              Letter
      from Ernst & Young LLP.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.


34