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 JUNE 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 August 6, 2009 –  15,004,500.


Subordinated
units outstanding as of August 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
                16Item
      3.
                Qualitative
      and Quantitative Disclosures About Market Risk
                26Item
      4(T).
                Controls
      and Procedures
                26PART
      II.
                OTHER
      INFORMATIONItem
      1.
                Legal
      Proceedings
                27Item
      1A.
                Risk
      Factors
                27Item
      2.
                Unregistered
      Sales of Equity Securities and Use of Proceeds
                29Item
      6.
                Exhibits
                29SIGNATURES
                
                31


2


PART
I – FINANCIAL INFORMATION




ITEM
      1.
            CONSOLIDATED
      FINANCIAL STATEMENTS





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


3


OSG
AMERICA L.P.


CONSOLIDATED
BALANCE SHEETS


DOLLARS
IN THOUSANDS





Asof
                                  June30,2009
                                
                                
                                Asof
                                  December31,2008(Unaudited)ASSETSCurrent
      Assets:Cash
      and cash equivalents
                                
                                $
                                13,339
                                
                                
                                $
                                10,529Voyage
      receivables, including unbilled of $4,968 and $6,186
                                
                                
                                12,960
                                
                                
                                
                                18,900Other
      receivables
                                
                                
                                4,010
                                
                                
                                
                                4,129Inventory
                                
                                
                                2,192
                                
                                
                                
                                1,855Prepaid expenses and other current
      assets
                                
                                
                                5,967
                                
                                
                                
                                4,770Total
      current assets
                                
                                
                                38,468
                                
                                
                                
                                40,183Vessels,
      less accumulated depreciation of $101,305 and $85,819
                                
                                
                                397,709
                                
                                
                                
                                404,462Vessel
      held for sale
                                
                                
                                —
                                
                                
                                
                                1,310Deferred
      drydock expenditures, net
                                
                                
                                18,914
                                
                                
                                
                                26,536Investment
      in Alaska Tanker Company, LLC
                                
                                
                                1,175
                                
                                
                                
                                5,382Intangible
      assets, less accumulated amortization of $11,883 and
$9,583
                                
                                
                                80,117
                                
                                
                                
                                82,417Other assets
                                
                                
                                18,901
                                
                                
                                
                                14,271Total assets
                                
                                $
                                555,284
                                
                                
                                $
                                574,561LIABILITIES
      AND PARTNERS’ CAPITALCurrent
      Liabilities:Accounts
      payable, accrued expenses and other current liabilities
                                
                                $
                                28,203
                                
                                
                                $
                                19,282Advances
      from affiliated companies
                                
                                
                                11,592
                                
                                
                                
                                12,586Current portion of debt
                                
                                
                                3,098
                                
                                
                                
                                3,007Total
      current liabilities
                                
                                
                                42,893
                                
                                
                                
                                34,875Long-term
      debt, less current portion
                                
                                
                                72,174
                                
                                
                                
                                88,746Other non-current
    liabilities
                                
                                
                                8,356
                                
                                
                                
                                7,994Total
      liabilities
                                
                                
                                123,423
                                
                                
                                
                                131,615Partners’ Capital
                                
                                
                                431,861
                                
                                
                                
                                442,946Total liabilities and partners’
      capital
                                
                                $
                                555,284
                                
                                
                                $
                                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 June 30,
                                    
                                    
                                    Six Months Ended June 30,2009
                                    
                                    
                                    2008
                                    
                                    
                                    2009
                                    
                                    
                                    2008Shipping
      Revenues:Time
      and bareboat charter revenues (including $8,382 and $4,570, respectively,
      from OSG for the three months ended June 30, 2009 and 2008, and $17,268
      and $4,570, respectively, from OSG for the six months ended June 30, 2009
      and 2008)
                                    
                                    $
                                    45,679
                                    
                                    
                                    $
                                    36,592
                                    
                                    
                                    $
                                    90,846
                                    
                                    
                                    $
                                    69,098Voyage charter revenues
                                    
                                    
                                    23,778
                                    
                                    
                                    
                                    35,636
                                    
                                    
                                    
                                    52,719
                                    
                                    
                                    
                                    66,16269,457
                                    
                                    
                                    
                                    72,228
                                    
                                    
                                    
                                    143,565
                                    
                                    
                                    
                                    135,260Operating
      Expenses:Voyage
      expenses
                                    
                                    
                                    5,249
                                    
                                    
                                    
                                    12,298
                                    
                                    
                                    
                                    11,897
                                    
                                    
                                    
                                    22,938Vessel
      expenses
                                    
                                    
                                    24,294
                                    
                                    
                                    
                                    23,534
                                    
                                    
                                    
                                    50,738
                                    
                                    
                                    
                                    45,968Charter
      hire expenses (including $1,178 and $2,929, respectively, to OSG for the
      three months ended June 30, 2009 and 2008, and $2,082 and $2,939,
      respectively, to OSG for the six months ended June 30, 2009 and
      2008)
                                    
                                    
                                    15,556
                                    
                                    
                                    
                                    12,169
                                    
                                    
                                    
                                    29,171
                                    
                                    
                                    
                                    18,845Depreciation
      and amortization
                                    
                                    
                                    13,026
                                    
                                    
                                    
                                    13,679
                                    
                                    
                                    
                                    25,620
                                    
                                    
                                    
                                    26,700General
      and administrative allocated from OSGM
                                    
                                    
                                    5,332
                                    
                                    
                                    
                                    5,119
                                    
                                    
                                    
                                    11,241
                                    
                                    
                                    
                                    11,005Severance
      and relocation costs
                                    
                                    
                                    74
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    2,100
                                    
                                    
                                    
                                    —Loss on sale of vessel
                                    
                                    
                                    698
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    698
                                    
                                    
                                    
                                    —Total operating expenses
                                    
                                    
                                    64,229
                                    
                                    
                                    
                                    66,799
                                    
                                    
                                    
                                    131,465
                                    
                                    
                                    
                                    125,456Income
      from vessel operations
                                    
                                    
                                    5,228
                                    
                                    
                                    
                                    5,429
                                    
                                    
                                    
                                    12,100
                                    
                                    
                                    
                                    9,804Equity in income of affiliated
      companies
                                    
                                    
                                    573
                                    
                                    
                                    
                                    1,030
                                    
                                    
                                    
                                    1,138
                                    
                                    
                                    
                                    1,623Operating
      income
                                    
                                    
                                    5,801
                                    
                                    
                                    
                                    6,459
                                    
                                    
                                    
                                    13,238
                                    
                                    
                                    
                                    11,427Other (expense)/income
                                    
                                    
                                    (13
                                    )
                                    
                                    
                                    60
                                    
                                    
                                    
                                    3
                                    
                                    
                                    
                                    1215,788
                                    
                                    
                                    
                                    6,519
                                    
                                    
                                    
                                    13,241
                                    
                                    
                                    
                                    11,548Interest expense
                                    
                                    
                                    1,122
                                    
                                    
                                    
                                    1,594
                                    
                                    
                                    
                                    2,373
                                    
                                    
                                    
                                    2,858Net income
                                    
                                    $
                                    4,666
                                    
                                    
                                    $
                                    4,925
                                    
                                    
                                    $
                                    10,868
                                    
                                    
                                    $
                                    8,690General
      partner’s interest in net income
                                    
                                    $
                                    94
                                    
                                    
                                    $
                                    99
                                    
                                    
                                    $
                                    218
                                    
                                    
                                    $
                                    174Limited
      partners’ interest:Net
      income
                                    
                                    $
                                    4,572
                                    
                                    
                                    $
                                    4,826
                                    
                                    
                                    $
                                    10,650
                                    
                                    
                                    $
                                    8,516Net
      income per unit – basic and diluted
                                    
                                    $
                                    0.16
                                    
                                    
                                    $
                                    0.16
                                    
                                    
                                    $
                                    0.36
                                    
                                    
                                    $
                                    0.28Cash
      distribution declared per unit
                                    
                                    $
                                    0.375
                                    
                                    
                                    $
                                    0.375
                                    
                                    
                                    $
                                    0.750
                                    
                                    
                                    $
                                    0.750Weighted 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)





SixMonthsEnded
                                      June30,2009
                                    
                                    
                                    SixMonthsEnded
                                      June30,2008Cash
      Flows from Operating Activities:Net income
                                    
                                    $
                                    10,868
                                    
                                    
                                    $
                                    8,690Items
      included in net income not affecting cash flows:Depreciation
      and amortization
                                    
                                    
                                    25,620
                                    
                                    
                                    
                                    26,700Decrease
      in undistributed earnings of affiliated companies, net of
      distributions
                                    
                                    
                                    4,207
                                    
                                    
                                    
                                    4,121Other
      – net
                                    
                                    
                                    1,400
                                    
                                    
                                    
                                    785Loss
      on sale of vessel
                                    
                                    
                                    698
                                    
                                    
                                    
                                    —Payments
      for drydocking
                                    
                                    
                                    (213
                                    )
                                    
                                    
                                    (17,082
                                    )Changes
      in operating assets and liabilities:Decrease in
      receivables
                                    
                                    
                                    6,059
                                    
                                    
                                    
                                    8,173Increase
      in other assets
                                    
                                    
                                    (1,548
                                    )
                                    
                                    
                                    (944
                                    )Increase in accounts payable, accrued expenses and
      other liabilities
                                    
                                    
                                    10,283
                                    
                                    
                                    
                                    959Net cash provided by operating
      activities
                                    
                                    
                                    57,374
                                    
                                    
                                    
                                    31,402Cash
      Flows from Investing Activities:Expenditures
      for vessels
                                    
                                    
                                    (14,752
                                    )
                                    
                                    
                                    (32,329
                                    )Proceeds from sale of
vessel
                                    
                                    
                                    626
                                    
                                    
                                    
                                    —Net cash used in investing
      activities
                                    
                                    
                                    (14,126
                                    )
                                    
                                    
                                    (32,329
                                    )Cash
      Flows from Financing Activities:Net
      (repayments on)/proceeds from borrowings under revolving credit
      facility
                                    
                                    
                                    (15,000
                                    )
                                    
                                    
                                    59,000Payments
      on debt and obligations under capital leases
                                    
                                    
                                    (1,481
                                    )
                                    
                                    
                                    (31,617
                                    )Cash
      distributions paid
                                    
                                    
                                    (22,963
                                    )
                                    
                                    
                                    (17,221
                                    )Payments
      for initial public offering transaction costs
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (241
                                    )Payments
      for deferred financing costs
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (143
                                    )Change in advances from
      affiliates
                                    
                                    
                                    (994
                                    )
                                    
                                    
                                    (2,608
                                    )Net cash (used in)/provided by financing
      activities
                                    
                                    
                                    (40,438
                                    )
                                    
                                    
                                    7,170Net
      increase in cash and cash equivalents
                                    
                                    
                                    2,810
                                    
                                    
                                    
                                    6,243Cash and cash equivalents at beginning of
      period
                                    
                                    
                                    10,529
                                    
                                    
                                    
                                    3,380Cash and cash equivalents at end of
      period
                                    
                                    $
                                    13,339
                                    
                                    
                                    $
                                    9,623





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 PartnersCommon Units
                          
                          
                          Subordinated Units
                          
                          
                          
                          
                          
                          Accumulated
                            OtherUnits
                          
                          
                          Amount
                          
                          
                          Units
                          
                          
                          Amount
                          
                          
                          General
                              Partner
                          
                          
                          Comprehensive
                              Income/(Loss)
                          
                          
                          TotalBalance
      at December 31, 2008
                          
                          
                          15,004
                          
                          
                          $
                          216,743
                          
                          
                          
                          15,000
                          
                          
                          $
                          220,058
                          
                          
                          $
                          8,982
                          
                          
                          $
                          (2,837
                          )
                          
                          $
                          442,946Net
      income
                          
                          
                          
                          
                          
                          
                          5,325
                          
                          
                          
                          
                          
                          
                          
                          5,325
                          
                          
                          
                          218
                          
                          
                          
                          
                          
                          
                          
                          10,868Effect
      of derivative instruments
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          1,000
                          
                          
                          
                          1,000Comprehensive
      income
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          11,868
                          *Amortization
      of restricted units awards
                          
                          
                          
                          
                          
                          
                          10
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          10Distributions
      to members
                          
                          
                          
                          
                          
                          
                          (11,254
                          )
                          
                          
                          
                          
                          
                          
                          (11,250
                          )
                          
                          
                          (459
                          )
                          
                          
                          
                          
                          
                          
                          (22,963
                          )Balance
      at June 30, 2009
                          
                          
                          15,004
                          
                          
                          $
                          210,824
                          
                          
                          
                          15,000
                          
                          
                          $
                          214,133
                          
                          
                          $
                          8,741
                          
                          
                          $
                          (1,837
                          )
                          
                          $
                          431,861Balance
      at December 31, 2007
                          
                          
                          15,002
                          
                          
                          $
                          263,368
                          
                          
                          
                          15,000
                          
                          
                          $
                          266,453
                          
                          
                          $
                          10,876
                          
                          
                          $
                          —
                          
                          
                          $
                          540,697Net
      income
                          
                          
                          
                          
                          
                          
                          4,258
                          
                          
                          
                          
                          
                          
                          
                          4,258
                          
                          
                          
                          174
                          
                          
                          
                          
                          
                          
                          
                          8,690Effect
      of derivative instruments
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (84
                          )
                          
                          
                          (84
                          )Comprehensive
      income
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          8,606
                          *Costs
      associated with issuance of units pursuant to initial public
      offering
                          
                          
                          
                          
                          
                          
                          (241
                          )
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (241
                          )Amortization
      of restricted units awards
                          
                          
                          
                          
                          
                          
                          7
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          7Distributions
      to members
                          
                          
                          
                          
                          
                          
                          (8,438
                          )
                          
                          
                          
                          
                          
                          
                          (8,438
                          )
                          
                          
                          (345
                          )
                          
                          
                          
                          
                          
                          
                          (17,221
                          )Balance
      at June 30, 2008
                          
                          
                          15,002
                          
                          
                          $
                          258,954
                          
                          
                          
                          15,000
                          
                          
                          $
                          262,273
                          
                          
                          $
                          10,705
                          
                          
                          $
                          (84
                          )
                          
                          $
                          531,848





*  Comprehensive
income for the three month periods ended June 30, 2009 and 2008 was $5,561 and
$4,841, 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.




Note B —Summary of Significant Accounting
Policies:




Basis of Presentation and
Description of Business.OSG America L.P. 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 June 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 OSG America L.P. has determined that it operates in one reportable
segment. In addition, OSG America L.P. 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 six months ended June
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.




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 valuated 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 August 10, 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 $700,000, or $0.02 per common
unit, for the three months ended June 30, 2009 compared with the three months
ended June 30, 2008, and $1,400,000, or $0.04 per common unit, for the six
months ended June 30, 2009 compared with the six months ended June 30,
2008.


8


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.




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




The
Partnership adopted the provisions of Emerging Issues Task Force (“EITF”) Issue
No. 07-4, “Application of the Two-Class Method under FASB Statement No. 128 to
Master Limited Partnerships” (“EITF no. 07-4”) effective January 1,
2009.  As required by EITF 03-6, “Participating Securities and the
Two-Class Method under FASB Statement No. 128, Earnings per Share” (“EITF
03-6”), the general partner’s interest in 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.  For purposes of EITF 03-6, 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 June 30, 2009 or 2008, the
Partnership did not use any increased percentages in calculating the general
partner’s interest in net income.  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 income per limited partner unit follows:




ThreeMonthsEnded
                                  June30,
                                
                                
                                SixMonthsEnded
                                  June30,In thousands, except units and per unit
      amounts
                                
                                2009
                                
                                
                                2008
                                
                                
                                2009
                                
                                
                                2008Net
      income
                                
                                $
                                4,666
                                
                                
                                $
                                4,925
                                
                                
                                $
                                10,868
                                
                                
                                $
                                8,690Less
      distributions earned:Distributed
      earnings to general partner (2%)
                                
                                
                                (229
                                )
                                
                                
                                (229
                                )
                                
                                
                                (459
                                )
                                
                                
                                (459
                                )Distributed earnings to limited partners
      (98%)
                                
                                
                                (11,253
                                )
                                
                                
                                (11,252
                                )
                                
                                
                                (22,504
                                )
                                
                                
                                (22,502
                                )Total distributed earnings
                                
                                
                                (11,482
                                )
                                
                                
                                (11,481
                                )
                                
                                
                                (22,963
                                )
                                
                                
                                (22,961
                                )Overdistributed earnings
                                
                                $
                                (6,816
                                )
                                
                                $
                                (6,556
                                )
                                
                                $
                                (12,095
                                )
                                
                                $
                                (14,271
                                )Limited
      partners’ basic and diluted earnings per unit:Distributed
      earnings per unit
                                
                                $
                                0.38
                                (1)
                                
                                $
                                0.38
                                (1)
                                
                                $
                                0.75
                                (1)
                                
                                $
                                0.75
                                (1)Overdistributed earnings per
      unit
                                
                                $
                                (0.22
                                )
      (2)
                                
                                $
                                (0.22
                                )(2)
                                
                                $
                                (0.39
                                )
      (2)
                                
                                $
                                (0.47
                                )(2)Net income per limited partner
      unit
                                
                                $
                                0.16
                                
                                
                                $
                                0.16
                                
                                
                                $
                                0.36
                                
                                
                                $
                                0.28Weighted 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 interests outstanding for the
      period.




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


9




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
FASB Interpretation 46(R) “Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51”) 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
                          June 30,
                        
                        
                        Six Months Ended
                          June 30,In thousands
                        
                        2009
                        
                        
                        2008
                        
                        
                        2009
                        
                        
                        2008Time
      charter equivalent revenues
                        
                        $
                        33,072
                        
                        
                        $
                        34,811
                        
                        
                        $
                        66,113
                        
                        
                        $
                        68,455Ship operating expenses
                        
                        
                        (31,541
                        )
                        
                        
                        (32,063
                        )
                        
                        
                        (63,080
                        )
                        
                        
                        (64,125
                        )$
                        1,531
                        
                        
                        $
                        2,748
                        
                        
                        $
                        3,033
                        
                        
                        $
                        4,330




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 June 30,
2009, other than derivatives, follow:





In thousands
                    
                    Carrying Amount
                    
                    
                    Fair ValueFinancial
      assets (liabilities)Cash
      and cash equivalents
                    
                    $
                    13,339
                    
                    
                    $
                    13,339Debt
                    
                    
                    (75,272
                    )
                    
                    
                    (67,414
                    )




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 June
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 0.6% as of June 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).


10




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




Fair
Values of Derivative Instruments Designated as Hedging Instruments:





In thousands at June 30, 2009
                        
                        Liability DerivativesBalance Sheet Location
                        
                        Amount of LossInterest
      rate swaps:Current
      portion
                        
                        Accounts
      payable, accrued expenses and other current liabilities
                        
                        $
                        942Long-term portion
                        
                        Other liabilities
                        
                        
                        895Total derivatives designated as hedging
      instruments
                        
                        $
                        1,837





The
effect of cash flow hedging relationships on the balance sheet as of June 30,
2009 and the statement of operations for the six months ended June 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
                      
                      $
                      (1,837
                      )
                      Interest expense
                      
                      $
                      (459
                      )Total
                      
                      $
                      (1,837
                      )
                      
                      
                      $
                      (459
                      )





The
amount reclassified from accumulated other comprehensive loss to earnings for
the three months ended June 30, 2009 related to interest rate swaps was
$(241,000).




Fair
Value Hierarchy




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




In thousands
                      Description
                    
                    Fair Value
                    
                    
                    Level 2:
                      Significant other
                      observable inputsLiabilities:Interest rate swaps
                    
                    $
                    1,837
                    
                    
                    $
                    1,837




Note
F—Accounts Payable and Accrued Expenses:




Accounts
payable and accrued expenses consist of the following:




In thousands
                    
                    As of June 30, 2009
                    
                    
                    As of December 31, 2008Trade
      payables
                    
                    $
                    6,283
                    
                    
                    $
                    2,430Fuel
      accruals
                    
                    
                    839
                    
                    
                    
                    1,983Deferred
      revenues
                    
                    
                    12,691
                    
                    
                    
                    6,983Insurance
      premiums
                    
                    
                    1,001
                    
                    
                    
                    2,796Payroll
      and benefits
                    
                    
                    2,594
                    
                    
                    
                    869Customs
      and duty
                    
                    
                    2,407
                    
                    
                    
                    3,048Accrued
      interest expense
                    
                    
                    309
                    
                    
                    
                    327Derivative
      liabilities
                    
                    
                    942
                    
                    
                    
                    —Other
                    
                    
                    1,137
                    
                    
                    
                    846$
                    28,203
                    
                    
                    $
                    19,282


11




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 June 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 June 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.  The Partnership was in compliance with all of the
financial covenants contained in our debt agreements as of June 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 June
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 June 30,
2009, borrowings outstanding under secured term loans were
$45,272,000.




Interest
paid, excluding capitalized interest, for the six months ended June 30, 2009 and
2008 amounted to $2,224,000 and $2,629,000, 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
June 30, 2009, the Partnership had commitments to bareboat charter in eight
vessels from subsidiaries of American Shipping Company (“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.


12




Note
J — Leases (continued):




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




Dollars in thousands
                      
                      As of June 30, 20092009
                      
                      $
                      28,2952010
                      
                      
                      60,5092011
                      
                      
                      64,3312012
                      
                      
                      64,3062013
                      
                      
                      64,225Thereafter
                      
                      
                      87,898Total
                      
                      $
                      369,564





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




Dollars in thousands
                      
                      As of June 30, 20092009
                      
                      $
                      2,093Total
                      
                      $
                      2,093





In June
2005, OSG signed agreements to bareboat charter in ten Jones Act Product Tankers
to be constructed by Aker Philadelphia Shipyard ASA (“AKPS”). 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, AKPS 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 is scheduled to be delivered by AKPS 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 under Risk Factors. On February 12, 2009, AMSC and
OSG signed a nonbinding agreement in principle, (the “Nonbinding Agreement”) to
settle such issues, the implementation of which was subject to negotiation and
signing of definitive agreements and certain other conditions which were
required to be satisfied on or before April 10, 2009. The parties continued to
negotiate after April 10, 2009 to implement the Nonbinding Agreement, but with
the passage of time and new developments, the Nonbinding Agreement terminated in
accordance with its terms. While the parties continue to seek to resolve their
outstanding commercial disagreements, which may involve materially altering the
prior agreements between the parties, no assurance can be given that AMSC, the
Partnership and OSG, will enter into definitive agreement to resolve such
issues.


13




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 June 30, 20092009
                      
                      $
                      88,8272010
                      
                      
                      137,1082011
                      
                      
                      108,5462012
                      
                      
                      64,7332013
                      
                      
                      43,987Thereafter
                      
                      
                      24,393Total
                      
                      $
                      467,594





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




Dollars in thousands
                      
                      As of June 30, 20092009
                      
                      $
                      18,800Total
                      
                      $
                      18,800





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.
The Partnership has agreed to pay Bender for the costs associated with
positioning the tugs for transportation to an alternative
shipyard.  In addition, the Partnership has 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 to Tampa in June 2009. The Partnership
estimates that the future cost to complete the units is approximately
$24,111,000.




Note
L — Impairment and Sale of Vessel:




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.


14




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 the then-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.




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.




Note
O — Subsequent Events:




On July
29, 2009, the Board of Directors of OSG America LLC, declared a quarterly
distribution to all unitholders in the amount of $0.375 per unit for the three
months ended June 30, 2009.  The distribution of approximately
$11,500,000 will be paid on August 14, 2009 to unitholders of record on August
7, 2009.





On July
29, 2009, OSG announced that it intends to initiate a tender for all of the
outstanding publicly held common units of OSG America L.P., for $8.00 in cash
per unit.  As of June 30, 2009, OSG effectively owns 77.1% of OSG
America L.P.  The tender offer, which is expected to commence in late
August, 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.  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. OSG currently owns 8,000,435 units of the 15,000,000
total common units outstanding.






15


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 June 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 that it intends to initiate a tender for all of the
outstanding publicly held common units of OSG America L.P., for $8.00 in cash
per unit.  As of June 30, 2009, OSG effectively owns 77.1% of the
Partnership.  The tender offer, which is expected to commence in late
August, 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 OSG America’s
partnership agreement. OSG currently owns 8,000,435 units of the 15,000,000
total common units outstanding.









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 June 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





The
remaining vessel 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 November 2009 and June
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., 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.


16




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 February 12, 2009, AMSC and OSG signed a
nonbinding agreement in principle, (the “Nonbinding Agreement”) to settle such
issues, the implementation of which was subject to negotiation and signing of
definitive agreements and certain other conditions which were required to be
satisfied on or before April 10, 2009. The parties continued to negotiate after
April 10, 2009 to implement the Nonbinding Agreement, but with the passage of
time and new developments, the Nonbinding Agreement terminated in accordance
with its terms. While the parties continue to seek to resolve their outstanding
commercial disagreements, which may involve materially altering the prior
agreements between the parties, no assurance can be given that AMSC, we and OSG,
will enter into definitive agreement to resolve such issues.




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 June 30,
                          
                          
                          Six Months Ended June 30,2009
                          
                          
                          2008
                          
                          
                          2009
                          
                          
                          200840,000
      dwt Product Carriers
                          
                          $
                          31,900
                          
                          
                          $
                          38,900
                          
                          
                          $
                          39,300
                          
                          
                          $
                          44,50030,000 dwt ATBs
                          
                          $
                          22,200
                          
                          
                          $
                          21,400
                          
                          
                          $
                          26,400
                          
                          
                          $
                          26,500




Rates for
Jones Act Product Carriers and ATBs during the second quarter of 2009 averaged
$31,900 per day and $22,200 per day, respectively.  Rates for the
Product Carriers were 18% below those in the second quarter of 2008 while the
ATB rates were 4% higher.  Second quarter 2009 rates for the Product
Tankers and ATBs were respectively 32% and 27% below first quarter 2009
rates.




Lower oil
demand in the U.S., especially for middle distillates, resulted in a decline in
refining utilization levels on the U.S. Gulf Coast.  Second quarter
2009 refining utilization rates averaged about 85.5% compared with 88.4% during
the second quarter of 2008, resulting in a reduction in seaborne movements of
approximately 250,000 barrels per day of clean product.  There was
also additional tonnage in the marketplace, as six vessels that were engaged in
the grain trade in 2008 now compete in the product spot market.  As a
result of lower demand and increased availability of suitable tonnage, Product
Tankers and ATBs had to wait longer for cargoes.  This resulted in
lower TCE rates for Product Tankers in the second quarter of 2009 relative to
both the first quarter of 2009 and second quarter of 2008.




ATB rates
in the second quarter of 2009 were slightly higher than those in the second
quarter of 2008 despite the fact that the ATB market was subject to the same
adverse market conditions as tankers.  This was largely due to a
significant decrease in the price of diesel fuel, which is the primary fuel used
to power ATBs.  A significant decrease in U.S. diesel demand is what
caused the cost of diesel fuel to fall so substantially.  Tankers, on
the other hand, typically run on fuel oil (bunkers), which increased in price
relative to crude oil.




Refinery
utilization rates on the U.S. East Coast during the second quarter of 2009 were
approximately 71%, down from 81% in the second quarter of 2008.  One
factor that contributed to the lower refining utilization rates and reduced
crude oil requirements was planned maintenance at the Delaware City
refinery.  The Delaware Bay lightering business transported an average
of 199,000 barrels per day during the second quarter, which was 28% below the
amount transported in the second quarter of 2008, but slightly above lightering
volumes in the first quarter of 2009.




Three
Jones Act vessels were delivered in the second quarter.  This resulted
in sixty-seven Jones Act vessels that were available for trading as of June 30,
2009.  Due to the reduction in transport requirements thus far in
2009, approximately 12% of the total Jones Act fleet was idle at the end of the
second quarter.




The June
30, 2009 Jones Act Product Carrier orderbook consisted of 20 tankers and barges
in the 160,000 to 420,000 barrel size range that are scheduled for delivery
through 2013, and one additional vessel scheduled for conversion, resulting in a
total orderbook of 21 vessels.  These additions will be partially
offset by deletions as there are 13 vessels that will be phased out in
accordance with OPA 90 regulations and an additional four double hull vessels
that are over 35 years old and will also likely be retired during this
period.


17




Freight
rates remain highly sensitive to severe weather and geopolitical
events.  Hurricanes in the Gulf of Mexico in the second half of 2009
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 all of
our material 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.




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.




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 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 $0.7 million and $1.4 million in
the quarter and six months ended June 30, 2009, respectively, compared with the
same 2008 periods.


18


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
                June 30,
              
              
              Six Months
      Ended
                June 30,2009
              
              
              2008
              
              
              2009
              
              
              2008TCE
      Revenues
              
              $
              64,208
              
              
              $
              59,930
              
              
              $
              131,668
              
              
              $
              112,322Voyage
      Expenses
              
              
              5,249
              
              
              
              12,298
              
              
              
              11,897
              
              
              
              22,938Shipping
      Revenues
              
              $
              69,457
              
              
              $
              72,228
              
              
              $
              143,565
              
              
              $
              135,260




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.




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





Three Months
      Ended
                  June 30,
                
                
                Six Months
      Ended
                  June 30,2009
                
                
                2008
                
                
                2009
                
                
                2008Revenue
      Days:Jones
      Act ATBs
                
                
                743
                
                
                
                801
                
                
                
                1,534
                
                
                
                1,396Jones
      Act Product Carriers
                
                
                1,011
                
                
                
                782
                
                
                
                1,939
                
                
                
                1,590Non-Jones
      Act Product Carriers
                
                
                180
                
                
                
                155
                
                
                
                360
                
                
                
                3001,934
                
                
                
                1,738
                
                
                
                3,833
                
                
                
                3,286Average
      Daily TCE Rates:Jones
      Act ATBs
                
                $
                30,416
                
                
                $
                32,764
                
                
                $
                30,778
                
                
                $
                32,539Jones
      Act Product Carriers
                
                $
                36,231
                
                
                $
                34,077
                
                
                $
                37,751
                
                
                $
                34,246Non-Jones
      Act Product Carriers
                
                $
                27,661
                
                
                $
                45,400
                
                
                $
                31,264
                
                
                $
                41,487




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 with OSG on the OSG 400/OSGConstitution 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 second quarter of 2009, TCE revenues increased by $4.3 million, or 7%, to
$62.4 million from $59.9 million in the three months ended June 30, 2008. The
increase in TCE revenues resulted primarily from an increase in revenue days and
higher daily TCE rates earned by the four Jones Act product carriers that were
delivered during and since the first quarter of 2008. The delivery of the Overseas New York, Overseas Texas City, Overseas Boston, and Overseas Nikiski in April
2008, September 2008, February 2009, and June 2009, respectively, added $10.6
million in TCE revenue in the second quarter of 2009 compared with the same
quarter in 2008.  In addition, the OSG 243 re-entered service on
April 24, 2008 after completing her double hull conversion. Partially offsetting
these increases was the lay up in April 2009 of the Overseas New Orleans, Overseas Puget
Sound, and OSG 214/OSG Honour, plus lower daily TCE
rates earned by the two non-Jones Act product carriers, and lower Delaware-Bay
lightering volumes, which negatively affected the daily TCE revenues earned by
two ATBs dedicated to that service.


19


During
the first six months of 2009, TCE revenues increased by $19.3 million, or 17%,
to $131.7 million from $112.3 million for the six months ended June 30,
2008.  The increase in TCE revenues resulted primarily from an
increase in revenue days and higher daily TCE rates earned by the four new Jones
Act product carriers as noted above, which added $20.6 million in the first six
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 and the OSG 400 was chartered in to
provide lightering services in Delaware Bay. Partially offsetting these
increases was the lay up in April 2009 of the Overseas New Orleans, Overseas Puget
Sound, 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 six month
periods ended June 30, 2009 were largely compensated for by improved utilization
rates in 2009 on other Jones Act product carriers such as the Overseas New
Orleans and Overseas Puget Sound, which underwent drydockings during the same
period in 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.




Vessel
Expenses




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





Three Months
      Ended
                  June 30,
                
                
                Six Months
      Ended
                  June 30,2009
                
                
                2008
                
                
                2009
                
                
                2008Operating
      Days:Jones
      Act ATBs
                
                
                819
                
                
                
                876
                
                
                
                1,629
                
                
                
                1,604Jones
      Act Product Carriers
                
                
                1,021
                
                
                
                900
                
                
                
                1,962
                
                
                
                1,719Non-Jones
      Act Product Carriers
                
                
                182
                
                
                
                182
                
                
                
                362
                
                
                
                3642,022
                
                
                
                1,958
                
                
                
                3,953
                
                
                
                3,687Average
      Daily Vessel Expenses:Jones
      Act ATBs
                
                $
                9,140
                
                
                $
                8,352
                
                
                $
                9,421
                
                
                $
                7,981Jones
      Act Product Carriers
                
                $
                14,531
                
                
                $
                16,627
                
                
                $
                16,294
                
                
                $
                16,932Non-Jones
      Act Product Carriers
                
                $
                10,835
                
                
                $
                13,681
                
                
                $
                9,459
                
                
                $
                14,398




During
the second quarter of 2009, vessel expenses increased $0.8 million, or 3%, to
$24.3 million from $23.5 million for the three months ended June 30,
2008.  The increase in vessel expenses resulted primarily from a net
increase of 64 operating days in the three months ended June 30, 2009 compared with the
same period in 2008. These additional days were attributable to the delivery of
the Overseas Texas City,
Overseas BostonandOverseas Nikiski, which added 202 operating days and $3.2 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 33 days and $1.4 million of
expense.  Expense 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, the Overseas New Orleans, and
Overseas Puget
Sound.




During
the first six months of 2009, vessel expenses increased $4.7 million, or 10%, to
$50.7 million from $46.0 million for the six months ended June 30, 2008. The
increase resulted primarily from a net increase of 266 operating days in the six
months ended June 30, 2009 compared with the six months ended June 30,
2008.  These additional days were attributable to the delivery of the
Overseas New York,
Overseas Texas City, Overseas
BostonandOverseas
Nikiski, which added 432 operating days and $7.0 million and the
operation of the OSG 400/OSG
Constitutionas a bareboat charter from OSG, which added 123 days and
$2.8 million of expense in 2009 compared with 2008, partially offset by the
Overseas Integrity ceasing operations and the lay-up of the OSG 214/OSG Honour, Overseas New Orleans, and
Overseas Puget
Sound.




Vessel
expenses for the non-Jones Act product carriers for the three months and six
months ended June 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.


20


Charter
Hire Expenses




During
the second quarter of 2009, charter hire expenses increased by $3.4 million to
$15.6 million from $12.2 million for the three months ended June 30, 2008 due to
the deliveries from AMSC of the Overseas New York, Overseas Texas
City, Overseas Boston, and Overseas Nikiski, which
resulted in additional charter hire expense of $5.5 million, partially offset by
a decrease in charter hire expense resulting from redelivery of the OSG 300/OSG Libertyto
OSGin December
2008 and the conversion of the charter-in on the OSG 400/OSG Constitution from
a time charter to a bareboat charter in November 2008.




During
the first six months of 2009, charter hire expenses increased by $10.4 million
from $18.8 million for the six months ended June 30, 2008 to $29.2 million for
the six months ended June 30, 2009 due to charter hire expense for the vessels
chartered in from AMSC increasing by $11.0 million for the 2009 period compared
with the same 2008 period primarily as a result of 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 OSG 300/OSG Liberty to OSG in
December 2008.




Depreciation
and Amortization




Depreciation
and amortization decreased $0.7 million, or 5%, from $13.7 million for the three
months ended June 30, 2008 to $13.0 million for the three months ended June 30,
2009.  For the six months ended June 30, 2009, depreciation and
amortization decreased $1.1 million, or 4%, to $25.6 million from $26.7 million
for the six months ended June 30, 2008. The decreases for the three month and
six month periods were primarily due to 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, and removal of the Overseas Integrity from
service in the fourth quarter of 2008.  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
second quarter of 2009, general and administrative expenses excluding severance
and relocation expenses, increased $0.2 million to $5.3 million from $5.1
million in the second quarter of 2008.  For the six months ended June
30, 2009, general and administrative expenses increased $0.2 million to $11.2
million from $11.0 million for the six months ended June 30,
2008.  The increases reflect increased legal costs incurred in
conjunction with terminating shipbuilding contracts with Bender and Bender’s
subsequent bankruptcy. 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 six months ended June 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 targetsisnotrecognizeduntilthe fourth quarterwhen deemed earned.Equity income for the three
months and six months ended June 30, 2009 were $0.6 million and $1.1 million,
respectively, compared with $1.1 million and $1.6 million, respectively, for the
three months and six months ended June 30, 2008.  The decreases
reflect a reduction by two in the number of vessels that ATC
manages.


21


Interest
Expense




Interest
expense of $1.1 million for the three months ended June 30, 2009 decreased $0.5
million compared with the three months ended June 30, 2008, reflecting lower
borrowings outstanding under the Secured Revolving Credit Facility and lower
interest rates on those borrowings.  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 three months ended
June 30, 2009 compared with the same period in
2008.  Interest  capitalized in connection with vessel
construction totaled $0.1 million and $0.2 million for the three months ended
June 30, 2009 and 2008, respectively.




Interest
expense decreased $0.5 million, or 17%, from $2.9 million for the six months
ended June 30, 2008 to $2.4 million for the same period in 2008.  The
decrease primarily reflects the purchase of the two vessels previously operated
under capital leases partially offset by lower capitalized
interest.  Interest capitalized in connection with vessel construction
totaled $0.3 million and $0.7 million for the six months ended June 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.




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 June
      30,
                
                
                Six Months Ended June
      30,2009
                
                
                2008
                
                
                2009
                
                
                2008Net
      income
                
                $
                4,666
                
                
                $
                4,925
                
                
                $
                10,868
                
                
                $
                8,690Interest
      expense
                
                
                1,122
                
                
                
                1,594
                
                
                
                2,373
                
                
                
                2,858Depreciation
      and amortization
                
                
                13,026
                
                
                
                13,679
                
                
                
                25,620
                
                
                
                26,700EBITDA
                
                $
                18,814
                
                
                $
                20,198
                
                
                $
                38,861
                
                
                $
                38,248


22


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





In
thousands
                
                Six Months Ended June
      30,2009
                
                
                2008Net
      cash provided by operating activities
                
                $
                57,374
                
                
                $
                31,402Payments
      for drydocking
                
                
                213
                
                
                
                17,082Interest
      expense
                
                
                2,373
                
                
                
                2,858Undistributed
      earnings from affiliated companies
                
                
                (4,207
                )
                
                
                (4,121
                )Loss
      on sale of vessel
                
                
                (698
                )
                
                
                —Changes
      in operating assets and liabilities
                
                
                (14,794
                )
                
                
                (8,188
                )Other
                
                
                (1,400
                )
                
                
                (785
                )EBITDA
                
                $
                38,861
                
                
                $
                38,248




Liquidity
and Sources of Capital




Working
capital at June 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 and
expenditures, 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.




Our
reliance on the spot market contributes to fluctuations in cash flows from
operating activities.  Any decrease in the average TCE rates earned by
our vessels in quarters subsequent to June 30, 2009, compared with the actual
TCE rates achieved during the first six 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, six vessels in our operating fleet will come off term charters by the
end of 2009 and 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 current forecast indicates that distributable
cash flow in the second half of 2009 through 2010 will be below that required to
cover our historical quarterly distribution on the common and subordinated
Partnership units.  We and the Board of Directors will continue to
carefully evaluate the appropriate level of future distributions based on our
financial condition, capital needed for future growth and earnings, and the
general economic and financial market environment.




We were
in compliance with all of the financial covenants contained in our debt
agreements as of June 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.




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
June 30, 2009, $30.0 million was outstanding under the facility.




As of
June 30, 2009, $45.3 million was outstanding under various secured term loans
maturing through 2014.


23




Cash
Flows




Operating  cash
flows.  Net cash flow provided by operating activities was
$57.4 million and $31.4 million for the six months ended June 30, 2009 and
2008, respectively. The increase of $26.0 million was primarily attributable to
a decrease in payments for drydocking, the increase in liabilities, and higher
operating earnings 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 $14.1 million
and $32.3 million for the six months ended June 30, 2009 and 2008, respectively.
Vessel expenditures for the six months ended June 30, 2009 primarily related to
start-up costs associated with the AMSC tankers and construction costs for the
two new tugs.  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 $40.4 million for the six months ended
June 30, 2009 compared with cash provided by financing activities of 7.2 million
for the six months ended June 30, 2008.  During the six months ended
June 30, 2009, we repaid $15.0 million that had been borrowed under the Senior
Secured Revolving Credit Facility compared with borrowing $59.0 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 six months ended June 30, 2009 and 2008 were $23.0 million and $17.2
million, respectively, with the amount paid in the first quarter of 2008
covering the partial period from November 15, 2007 until December 31,
2007.




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.




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 pursue other vessel acquisitions, 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.




Because
we distribute all of our cash on hand at the end of the quarter, less the amount
of cash reserves established by our general partner (which we refer to as
available cash), we may not grow as fast as companies that reinvest their
available cash. We expect that we will rely upon external financing sources,
including bank borrowings and the issuance of debt and equity securities, to
fund acquisitions and expansion capital expenditures. As a result, to the extent
we are unable to finance growth externally, our cash distribution policy could
significantly impair our ability to grow. To the extent we issue additional
units in connection with any acquisitions or expansion capital expenditures, the
payment of distributions on those additional units may increase the risk that we
will be unable to maintain or increase our per unit distribution level, which in
turn may affect the available cash that we have to distribute on each unit. Our
partnership agreement does not limit our ability to issue additional units,
including units ranking senior to our common units. The incurrence of additional
debt by us or our operating subsidiaries would result in increased interest
expense, which in turn may also affect the available cash that we have to
distribute to our unitholders.


24


Aggregate
Contractual Obligations





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




In
      thousands
                  
                  Balance
      of
                      2009
                  
                  
                  2010
                  
                  
                  2011
                  
                  
                  2012
                  
                  
                  2013
                  
                  
                  Beyond
                      2013
                  
                  
                  TotalLong-term debt(1)
                  
                  $
                  3,576
                  
                  
                  $
                  7,040
                  
                  
                  $
                  7,040
                  
                  
                  $
                  36,576
                  
                  
                  $
                  18,900
                  
                  
                  $
                  16,465
                  
                  
                  $
                  89,597Operating lease
      obligations (chartered-in vessels)(2)
                  
                  
                  28,295
                  
                  
                  
                  60,509
                  
                  
                  
                  64,331
                  
                  
                  
                  64,306
                  
                  
                  
                  64,225
                  
                  
                  
                  87,898
                  
                  
                  
                  369,564Operating lease
      obligations with OSG (chartered-in vessels) (3)
                  
                  
                  2,093
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  2,093Construction
      installments (4)
                  
                  
                  500
                  
                  
                  
                  21,904
                  
                  
                  
                  1,707
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  24,111Total
                  
                  $
                  34,464
                  
                  
                  $
                  89,453
                  
                  
                  $
                  73,078
                  
                  
                  $
                  100,882
                  
                  
                  $
                  83,125
                  
                  
                  $
                  104,363
                  
                  
                  $
                  485,365




(1)
                Amounts
      shown include contractual interest obligations.  The interest
      obligations for floating rate debt of $30,000,000 as of June 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 June 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 June 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.


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 June 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 June 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. In
addition, the Senior Secured Revolving Credit Facility requires us to adhere to
certain financial covenants. As of June 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.


25




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 June 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 June 30, 2009 and for the three months
ended June 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.


26


PART
II – OTHER INFORMATION




ITEM
1.        LEGAL PROCEEDINGS




We are
party to routine, marine related claims, lawsuits and labor arbitrations arising
in the ordinary course of our business. The claims made in connection with our
marine operations are covered 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,
2008, other than to the
risk factors shown below:




Termination of the contracts with Bender
Shipbuilding & Repair Co., Inc.’s (“Bender”) has, and may continue
to,  adversely affect us and OSG





In
March 2009, we, OSG and Bender terminated the construction agreements
pursuant to which Bender was building six articulated tug barges (“ATBs”) and
two tugs for OSG and us, respectively.  These agreements were terminated
because of Bender’s lack of performance under such agreements and its lack of
liquidity and poor financial condition.  We and OSG intend to complete two
of the six ATBs and two tugs at alternative yards.  We have the option
to purchase from OSG the two ATBs and we will own the two tugs.




In June 2009, certain creditors of
Bender filed an involuntary Chapter 7 bankruptcy petition against Bender
claiming that Bender was insolvent and raising questions about Bender’s
pre-petition transfer of assets, specifically transfers of the vessels to us in
connection with the termination of our contracts with Bender.  Bender
subsequently converted the involuntary proceeding into a voluntary Chapter 11
reorganization.  As creditors’ of Bender have raised questions
regarding our and OSG’s termination agreement transaction it is likely that the
transaction will be reviewed by authorized parties-in-interest in the bankruptcy
and possibly challenged.We and OSG believe that the termination
transaction was valid and for fair consideration andthatwe each havestrong and meritorious defenses in the
event of achallenge, but
no assurance can be given that the bankruptcy court will agree.  However, if the bankruptcy
court were to sustain any challenge tothetransaction,we couldbe required to pay Bender additional
sums for the partially completed tugs and related equipment that was transferred
to us in connection with the termination agreement transaction.  In such case, the payment
ofthe additional amountswould have an adverse effect onus.  No assurance can be given
thatourpositions with respect to the
termination agreement transactionwillbe upheld.





Weand OSG arecontinuing tonegotiatea number ofoutstandingissueswithAmerican Shipping Company ASA, formerly
known as Aker American Shipping ASA ("AMSC"), including settlement ofan ongoingarbitrationproceeding,but such negotiations have continued
for more than six months without anyresolutionand no assurance can be given that an
agreement will be reached.





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, which description is incorporated herein by
reference.On
February 12, 2009,AMSCand OSGsigned a nonbinding agreement in
principle (the “Nonbinding Agreement”) to settle such issues,theimplementation of which was subject to
negotiation and signing of definitive agreements and certain other conditions
which were required to be satisfied on or before April10, 2009.  The parties continued
to negotiate after April10, 2009 to implement the Nonbinding
Agreement,but with the passage of time and new
developments,the Nonbinding Agreementterminated in accordance with its
terms.  While the
parties continue to seek to resolve their outstanding commercial disagreements,
which may involve materially altering the prior agreements between the parties,
no assurance can be given that AMSC, weand OSG will enter into definitive
agreement to resolve such issues.  On August
4, 2009, AMSC reported, among other things, that it has not been able to arrange
financing for the two shuttle tankers which it has agreed to charter to OSG (we
have the option to purchase such charters from OSG), and has stated that if it
is unable to raise the required equity and debt financing in a timely manner
AMSC will be subject to delays or cancellations in the construction of those
vessels. AMSC has further reported that absent an agreement with OSG settling
their outstanding commercial disagreements, AMSC will need to raise additional
debt or equity financing in the near term in order to meet the required
liquidity needs of the business. AMSC reported that failure to raise additional
capital would in such event likely have a materially adverse impact on AMSC’s
financial position and operations. On August 5, 2009, Aker Philadelphia Shipyard
ASA (“AKPS”), which is constructing the vessels to be chartered to us or OSG (we
have the option to purchase such charters from OSG) by AMSC, reported, among
other things, that if financing for the shuttle tankers is not obtained by AMSC
or the parties do not reach a definitive settlement agreement in the near term,
then it may have a material adverse effect on AKPS’s financial position and
operations. Material adverse developments in AMSC’s and AKPS’s financial
position and operations could adversely affect us and OSG, including, but not
limited to, delays in or failures of delivery of the remaining five vessels
which AMSC has agreed to charter to us and OSG. In connection with the matters
at issue in the arbitration, as described in our Form 10-K for 2008,
weandOSG do not admit and
continuetovigorously deny any triggering of
charter extension, any breach of contract, and any wrongdoing whatsoever in
connection withourdealings with AMSC, and the arbitration
may be resumed byanyparty at any
time.


27




Delays
or cost overruns in deliveries of newbuild product carriers (including failure
to deliver new vessels) will affect our ability to grow and could harm our
operating results.




We are
scheduled to take delivery in early 2010 of one newbuild product carrier that we
have agreed to bareboat charter from AMSC and we have options to purchase from
OSG the right to bareboat charter from AMSC up to two newbuild product carriers
and up to two newbuild shuttle tankers, which are scheduled for delivery between
late 2009 and early 2011.




We also
have options to purchase from OSG up to two newbuild ATBs, which were partially
constructed at Bender and are being completed at other shipyards..




Delivery
of any of our vessels could be delayed or canceled or experience cost overruns
due to:




•
            in
      the case of the ATBs that we have options to purchase, the failure by OSG
      to make construction payments on a timely basis or otherwise comply with
      its construction contracts with the
shipbuilder;




•
            quality
      control or engineering problems;




•
            changes
      in governmental regulations or maritime self-regulatory organization
      standards;




•
            work
      stoppages or other labor disturbances at the
  shipyard;




•
            unanticipated
      cost increases;




•
            bankruptcy
      or other financial and liquidity difficulties of the
      shipbuilder;




•
            the
      outcome of negotiations with AMSC and
Bender;




•
            weather
      interference or catastrophic event, such as a major hurricane or
      fire;




•
            the
      shipbuilder failing to deliver the vessels in accordance with our vessel
      specifications;




•
            our
      requests for changes to the original vessel
  specifications;




•
            shortages
      of or delays in the receipt of necessary construction materials, such as
      steel;




•
            our
      inability to finance the acquisition of any vessels;
  or




•
            our
      inability to obtain requisite permits or
  approvals.




Significant
delays and cost overruns and failure to deliver new vessels, regardless of
whether we bareboat charter them or have the option to bareboat charter or
purchase them, could materially adversely effect our revenues, borrowing
capacity, results of operations and ability to grow. Furthermore, delays would
result in vessels being out of service for extended periods of time, and
therefore not earning revenue, which could have a material adverse effect on our
financial condition and results of operations. Our remedies for losses resulting
from shipyards’ failure to comply with their contractual commitments may be
limited by the relevant contracts, including by liquidated damages provisions,
such as those that limit the amount of monetary damages that may be claimed or
that limit our remedy to cancellation of the building contract. If a U.S.
shipyard fails to deliver a contracted vessel, our investment may be supported
only by our liens on the work in progress, which may result in a loss of part or
all of our investment.





Weakening
Market Conditions and Other Factors May Have an Effect on the Partnership’s
Current Cash Distribution Policy





Management’s current forecast indicates
that distributable cash flow of the Partnership in the second half of 2009
through 2010 will be below that required to cover the Partnership’s historical
quarterly distribution on the common and subordinated Partnership units.Management believes that
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 the
Partnership. In addition, six vessels in the Partnership’s operating fleet will
come off term charters by the end of 2009 and are expected to enter the spot
market.TheBoard of Directorsof the general partner of the
Partnershipwill continue
to carefully evaluate the appropriate level of future distributions based onthe
Partnership’sfinancial
condition, capital needed for future growth, and earnings and the general
economic and financial market environment.


28


We
are subject to certain credit risks with respect to its counterparties on
contracts and failure of such counterparties to meet their obligations could
cause us to suffer losses on such contracts, decreasing revenues and
earnings





We
charter our vessels to other parties, who pay us a daily rate of hire. We also
enter into Contracts of Affreightment (“COAs”) and Voyage Charters. As we
increase the portion of our revenues from time charters, such action increases
our reliance on the ability of time charterers to pay charter hire, especially
when spot market rates are less than previously agreed upon time charter rates.
Historically, we have not experienced any material problem collecting charter
hire but the global economic recession that commenced in 2008 may affect
charterers more severely than the prior recessions that have
occurred.  We also bareboat charter some of our vessels from other
parties and our continued use and operation of such vessels depend on the vessel
owner’s compliance with the terms of the bareboat charters.  In
addition, we enter into derivative contracts such as interest rate swaps. All of
these contracts subject us to counterparty credit risk, including the bankruptcy
of the counterparty. As a result, we are subject to credit risks at various
levels, including with charterers or cargo interests. If the counterparties fail
to meet their obligations, we could suffer losses on such contracts which would
decrease revenues and earnings.




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




None.




ITEM
6.        EXHIBITS




See
Exhibit Index on page 32.


29


REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




The Board of Directors andUnitholders of OSG America
L.P.




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




We conducted ourreviewin 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




August10, 2009


30





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:  August 10,
      2009
                          /s/
      Myles R. ItkinMyles
      R. ItkinPresident
      and Chief Executive OfficerDate:  August 10,
      2009
                          /s/
      Henry P. FlinterHenry
      P. FlinterChief
      Financial
Officer


31


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.


32